Given Malaysia's long-standing commitment to the deepening of the Islamic finance market, it seems appropriate that the 19th Meeting of the Council of the Islamic Financial Services Board (IFSB), the international standard-setting organisation, was held in Kuala Lumpur in November 2011. Malaysia is now a clear regional leader in Islamic finance and has set new benchmarks in Shari’a-compliant sukuk issuance; both in terms of issuance volume and as an innovator in Shari’a- compliant financing structures.
The year has seen a number of innovative transactions, led by Khazanah Nasional, the investment holding arm of the Malaysian government. Two transactions typify the trend. One is Khazanah’s recent ground-breaking CNY500m three-year renminbi-denominated sukuk, priced at 2.90%. It is the first Emas (Malay for “gold”) foreign currency sukuk issued in Malaysia, and the first sukuk denominated in renminbi.
The sukuk was issued under the Malaysia International Islamic Financial Centre (MIFC) initiative, and highlights Khazanah’s support of the expansion of Islamic finance through innovative securities structures. The sukuk was issued via a Malaysian incorporated special purpose vehicle, Danga Capital, under its official multi-currency Islamic securities programme and was listed on both Bursa Malaysia (in its Exempt Regime segment) and on the Labuan International Financial Exchange (LFX).
The second is Khazanah’s inaugural issue of five-year and ten-year sukuk, worth a combined SGD1.5bn. The deal was a milestone for a number of reasons. It was the largest and longest-termed Singapore dollar-denominated issue by a foreign issuer in Singapore under the same multi-currency securities programme registered in Malaysia. The transaction came in at the tightest end of price guidance, at 2.615% for the five-year sukuk and 3.725% for the ten-year sukuk, ultimately drawing demand of 4.3 times book size, enabling Khazanah to up the deal size from SGD1bn to SGD1.5bn.
At the time of the issue, Dr Zeti Akhtar Aziz, governor of Bank Negara Malaysia and chairman of the executive committee of the Malaysia International Islamic Financial Centre, noted: “This is a further step forward for our MIFC initiative to evolve Malaysia into a multi-currency issuance platform for sukuk.”
Also through 2011, the Kuala Lumpur-based International Islamic Liquidity Management Corporation (IILM), in which the central bank enjoys a founding role, which launched in autumn of 2010, has steadily prepared itself for a sustained issuance programme of short-term Shari’a-compliant paper beginning in 2012. IILM will facilitate more efficient liquidity management for institutions offering Islamic financial services and help support a growing number of cross-border transactions between them.
After a small pilot issue scheduled for early 2012, the IILM is likely to issue regularly in batches of $2bn short-term paper in multiple currencies, enhancing the ability of Islamic institutions to match their liabilities and meet the demands of global trade flows.
A pivotal role
Dr Zeti is a central figure in international Islamic finance initiatives, chairing special taskforces for the IFSB, the executive committee of the MIFC, and is also the chair of the governing board of the IILM and chancellor of the International Centre for Education in Islamic Finance (INCEIF), in Kuala Lumpur.
Her keen grasp of the complex Islamic finance segment has been honed over a 25-year career at the central bank, where she entered as a research analyst in 1985. Prior to joining the bank, Dr Zeti was attached to the South East Asian Research and Training Centre (SEACEN)—between 1979 and 1984—as a research economist specialising in financial policies and reform in the Southeast Asian region. Dr Zeti held a number of positions at the central bank before she was appointed assistant governor responsible for economics, reserve management, foreign and money market operations and exchange control.
She took over as acting governor of the bank on September 1st, 1998 during the height of the Asian financial crisis and led the Bank Negara Malaysia team to successfully introduce and implement selective exchange controls and a fixed exchange regime, which was subsequently lifted in 2005. During the Asian financial crises, Malaysia was faced with numerous challenges. “We had a very fragmented market with more than 75 financial institutions, many with multiple subsidiaries. There was a clear gap between the strength and quality of our domestic banks and their international peers,” she explains.
The crisis has provided Malaysia the opportunity to undertake institutional reforms that enabled the country to better withstand the recent financial crisis. Bank Negara Malaysia, she says, encouraged market-led consolidation by increasing capital funding requirements, discouraging certain financial activities and instigating new regulatory and reporting standards. “We wanted to refocus the financial sector away from the purely financial sector and refocus it on the main economy, diversifying the financial market into insurance and asset management as well as supporting the growth of Islamic financial institutions,” she adds.
Market liberalisation encouraged the entrance of foreign players, and helped to build up the local financial institutions segment, as well as institutionalise a more robust financial infrastructure. These have been key building blocks in creating a stronger and more dynamic financial marketplace, backed by a flexible exchange rate regime, holds Dr Zeti. Her success in stabilising the ringgit, and in introducing key financial and currency reforms and deregulation, made her appointment as permanent governor in the spring of 2000 a shoe-in. Now into her 12th year as governor, she is a consistent and driving force behind Malaysia’s leadership in the development of Islamic finance globally.
In that regard, Malaysia’s circumstances are now very different to what the central bank faced in 1998. Malaysia now has one of the most developed financial sectors among emerging economies. There have been obvious benefits flowing across both retail and business borrowing: “There has been no credit crisis here in Malaysia with a steady flow of credit to both the household sector and SMEs. Also, sukuk yields have tight spreads and often experience over-subscription than their conventional equivalents as the pool of potential investors is wider comprising both conventional and Shari’a-compliant parties while drawing comfort from the robust regulatory system governing capital raising in Malaysia,” she says.
Dr Zeti is quick to dispel the idea that Malaysia’s successes can be laid at the door of any one individual. “Take the MIFC initiative for example. The MIFC executive committee draws membership from key government ministries and agencies as well as the country’s Islamic financial institutions and other key regulators such as the Securities Commission with the objective to promote Malaysia as an international Islamic financial centre. It is about moving forward together in a sustainable way and creating an enabling the environment for Islamic finance activities to thrive. Certainly, without the central bank and the Securities Commission, there would be no regulatory structure to permit sukuk. However, without other government institutions undertaking seminal benchmark issues, or the exchange providing a venue for listing of sukuk, or the local Islamic banks supporting secondary trading of sukuk and a distribution capability, then it would all be for nothing. Everyone has a key role to play.”
Nonetheless, Dr Zeti has made a strong personal contribution to the establishment of specialist institutions that provide an infrastructural backbone for the Islamic finance industry. Contributing towards the creation of the IFSB, for example, remains one of Dr Zeti’s proudest achievements. Based in Kuala Lumpur, the organisation was officially inaugurated on November 3rd 2002 and began operations on March 10th the following year. It serves as an international standard-setting body of regulatory and supervisory agencies that have vested interest in ensuring the soundness and stability of the Islamic financial services industry, which is defined broadly to include banking, capital market and insurance. In advancing this mission, the IFSB promotes the development of a prudent and transparent Islamic financial services industry through introducing new, or adapting existing, international standards consistent with Shari’a principles, and recommends them for adoption.
To this end, the work of the IFSB complements that of the Basel Committee on Banking Supervision, the International Organisation of Securities Commissions and the International Association of Insurance Supervisors. As at November 2011, the 189 members of the IFSB comprised of 53 regulatory and supervisory authorities, eight international inter-governmental organisations and 128 market players, professional firms and industry associations operating in 42 jurisdictions. Malaysia, the host country of the IFSB, enacted a law known as the Islamic Financial Services Board Act 2002, which gives the IFSB the immunities and privileges that are usually granted to international organisations and diplomatic missions.
The private sector perspective
Equally, Dr Zeti highlights the role of the private sector in complementing official structures: both in the context of Islamic finance and the country’s traditional debt capital market. “The Malaysian market is one of only three (the others being Australia and Hong Kong) where private bond issuance exceeds that issued by the government or state institutions. The imminent award of two mega Islamic bank licenses is another indicator that Malaysia is keen to see the private sector’s role to expand even further, not only domestically but also internationally,” she says. It is a clear acknowledgement that both Islamic finance and the conventional financial system are now developing side by side in the country.
Dr Zeti explains that the mega Islamic banks will have primarily an overseas mandate and will not compete with the domestic institutions. Instead, they will leverage on expertise developed domestically and seek out international opportunities. Non-Muslim institutions (both public and private sector) have been forthcoming to issue sukuk in the country. There is precedence which suggests the strategy will work: Tesco, Shell, Nomura and even the World Bank have successfully issued sukuk in Malaysia, highlighting the growing price competitiveness of sukuk structures. There was perhaps a time, she admits, that there was a commercial disadvantage with Islamic banking and finance over conventional products. Sometimes this manifested itself in having to pay higher yields on sukuk or perhaps it meant fewer and more restrictive banking products. That is no longer the case and if anything Dr Zeti thinks it has reversed.
Malaysia has fortuitously found its natural niche in Islamic finance; and because of it enjoys a growing voice on the international stage. Trying to compete with the global financial centres is extremely difficult, holds Dr Zeti, not least because of the head start that places such as London and New York enjoy. “They have a critical mass which takes many decades or in some cases centuries to establish. With Islamic finance, however, it is a much more level playing field. We are all starting from the same place and if anything we have an advantage as a predominantly Muslim country located in Asia.”
Dr Zeti also anticipates that continued change in the financial markets will also play to Malaysia’s strength. “Already we see emerging markets becoming the anchor of global economic growth. Trade between emerging economies will soon begin to rival that between developed and developing nations. You can already see the massive growth in trade between countries such as Brazil and China or Russia and India, or between the large economic surpluses in places such as the GCC and the infrastructure investment requirements of somewhere like Indonesia. It doesn’t make sense any longer to direct those flows via centres such as London. Over time, we will see a network grow between smaller financial hubs in the developing markets that will support these economic and financial flows and mutually reinforce one another in supporting growth. It is a new Silk Road and Malaysia has a definite role to play in that,” she avers.
Malaysia certainly seems to be charting a more stable path than most with third-quarter growth rates of 5.8% and GDP growth rates of at least 5% predicted for 2011 and 5% for 2012. Nonetheless, Dr Zeti dismisses the idea that Malaysia is immune to any global slowdown. “We are a relatively open economy and so we are likely to be affected. However our stable domestic demand is likely to insulate us from the very worst.” She credits much of the current stability not to recent changes but to those that took place much earlier. “Policies need to be anticipatory not reactive. If you have to make changes or put regulation or structures in place to counteract a particular issue then in all likelihood it is already too late. The damage has often already taken place and all you can do is try and mitigate its impact. If however you can assess the likely risks and weaknesses ahead of time then you are more likely to be able to stop them.”
With four-and-a-half years still to run of her current five-year term, Dr Zeti gives little indication that she is ready to slow down her efforts. She thinks there is huge opportunity for even greater regional financial integration as well as the continued efforts in the development of Islamic finance. “We are not in competition with each other, we need to work together to make the pie bigger.”
The link between Islamic finance and the real economy is one that Dr Zeti continues to emphasise. “The support for Islamic finance in Malaysia has never been about financing for financing sake. It is about providing support and finance for real companies and real jobs. This and the very nature of Islamic finance with its link back to the underlying asset, makes it much more sustainable in the medium to longer term."