Early last year, The Economist called Malaysia “the world’s most important Islamic-finance centre”
By Wen Lim
Over the past decade, Malaysia has played a vital role in shaping the Islamic financial market and established itself as a thought leader in Islamic finance.
From its blueprint to promote Islamic banking and finance, the establishment of a Shariah Advisory Council within Bank Negara Malaysia, to the development of a higher institution of learning for Islamic Finance, the country’s efforts have won international acclaim.
Early last year, The Economist called Malaysia “the world’s most important Islamic-finance centre”, citing its dominance in the sukuk market as well as its role as home to the Islamic Financial Services Board, an international standard setting body for the industry.
While Malaysian sukuks had accounted for about 74% of the total global sukuk issuance for the period between January and September 2012, the country’s Islamic finance offerings beyond its borders were limited to international sukuk.
This picture is changing today, with Malaysian banks starting to offer Islamic mutual funds in foreign markets through cross-border partnerships and mutual recognition agreements between the Securities Commission Malaysia and foreign regulators.
In May this year, Public Mutual Berhad has announced the launch of its first Islamic unit trust fund in Hong Kong called the Public Ittikal Fund.
This is closely followed by RHB Banking Group’s fund management arm RHB Asset Management Sdn Bhd (RHBAM), which launched an Islamic balanced fund in June, named the RHB-OSK Islamic Regional Balanced Fund.
The RHB-OSK Islamic Regional Balanced Fund is the first fund that was launched under the 2009 mutual agreement between the Securities and Futures Commission (SFC) Hong Kong and the Securities Commission Malaysia (SC) to further develop the Islamic Capital Markets and Islamic Collective Investment Schemes in Hong Kong and Malaysia.
The fund, which is domiciled in Malaysia and regulated by the SC, offers investors two currency classes: the Ringgit Malaysia class and US dollars class. The USD class is offered for sale to Hong Kong investors, while both classes are available for sale in Malaysia.
“This expansion benefits Malaysia as Hong Kong is renowned for its strength as an international financial centre,” says RHB Asset Management CEO and regional head of group retail distribution Ho Seng Yee (pic).
“Malaysia which is well known for its Islamic capital market capabilities can thus facilitate this linkage between the two to showcase Malaysia’s Islamic capital market products.
“Interest in Islamic finance and Islamic investment products are surfacing in Hong Kong and this offers vast opportunities for Malaysian Islamic investment products to participate in the growth that is happening in Hong Kong,” he says.
Islamic product intermediation
The offering of Malaysian Islamic banking products in foreign markets like Hong Kong marks the start of increasing Islamic product intermediation – a process where regulators work with each other to develop their respective Islamic capital market through common platforms for cross-border offerings.
At a joint seminar in Hong Kong on Islamic funds in June, Securities Commission chairman Datuk Ranjit Singh describes the Hong Kong-Malaysia linkage as a potent combination.
In a June newsletter by the Malaysia International Islamic Financial Centre, Ranjit (pic) was quoted as saying, “While Hong Kong can leverage on Malaysia’s Islamic fund management capabilities, Malaysia, at the same time would benefit from Hong Kong’s strength as an international financial centre”.
In 2007, the SC has also signed a mutual recognition agreement with the Dubai Financial Services Authority (DFSA) that will allow cross-border marketing and distribution of Islamic funds in the Middle Eastern Islamic financial hub.
With Malaysia taking the leadership in fostering cross-border distribution of Islamic products, the industry could expect to see more similar arrangements between markets with Islamic finance ambitions.
However, investor buy-in is still an important factor particularly in non-traditional Islamic finance markets.
For promoters of Islamic capital market products, Islamic funds provide an avenue for investors of all faiths to engage in Shariah-compliant investing, which is often deemed as the more “responsible” way of investing due to the avoidance of investments in non-Shariah compliant industries such as those involved in weapons, alcohol, gambling and tobacco.
To investors who do not have such concerns, Islamic capital market products would need to prove that they are equal if not better than conventional products in generating the returns they seek.
In a 2010 review published in the Journal of King Abdulaziz University: Islamic Economics, researchers Hesham Merdad, M. Kabir Hassan and Yasser Alhenawi from the US University of New Orleans suggests that Islamic funds offer hedging opportunities for investors during economic downturns due to the restrictions imposed on their portfolio selection.
“We find that Islamic funds underperform Conventional funds during full period and bullish period, but they overperform conventional funds during bearish and financial crisis period. Such results are consistent with prior studies with other Islamic and conventional mutual funds,” they wrote in their abstract.
With this observation, it would appear that the relationship between Islamic and conventional capital market products may be more complementary than competitive – a situation that will bode well for both investors and promoters.