To replicate the success of the Islamic capital market in Malaysia on a global scale, Cagamas is using its strategic positioning to promote the benefits of increased sukuk issuance and further regulatory incentives.
A thriving Islamic finance industry
Islamic finance in Malaysia has made significant progress since its inception more than 30 years ago, and now constitutes a comprehensive and sophisticated market. Over the course of the past three decades, the country’s financial regulators, including its central bank, Bank Negara Malaysia, and the body responsible for regulating and developing its capital markets, the Securities Commission Malaysia, have implemented a series of infrastructural reforms to boost the growth of the sector and shape an environment conducive to progress. These efforts have included the introduction of measures that are key to the rise to prominence of Malaysian Islamic finance, for example the application of tax incentives and the creation of a harmonious legal and regulatory framework.
Islamic finance in Malaysia has reached a level of development in which minimal regulatory incentives are required to provide further impetus to the sector. The market itself is providing a form of incentivisation by enabling industry players to capitalise on the opportunities available. This is primarily due to the presence of the wider business ecosystem as well as multiple market players, including asset managers, takaful companies and Islamic banks.
Furthermore, the presence of this ecosystem and the magnitude of the players involved have the potential to incentivise issuers to consider issuing sukuk, especially considering the fact that issuance provides more favourable yields that are lower compared to conventional bonds. This differs from new markets, such as Morocco, Nigeria, Oman and South Africa, where sukuk issuance requires paying a slightly higher yield than conventional bonds.
Fostering capital market development
As Malaysia’s national mortgage corporation, Cagamas is mandated to promote home ownership and provide liquidity to financial institutions in the country. The company forms a key part of the Islamic finance ecosystem in Malaysia and is strategically placed to engender the growth of its Islamic capital market. In fact, it is one of the largest sukuk issuers in Malaysia, having issued both unsecured sukuk and Islamic Residential Mortgage-Backed Securities (IRMBS) totalling MYR46,485 billion, as of December 2015 (see fig.1).
Since 1994, Cagamas has helped to stimulate the growth of the sukuk market by creating and establishing a pricing benchmark for the private debt securities segment. It has also taken the lead in terms of innovation, through the use of crude palm oil as an acceptable underlying asset to facilitate sukuk issuance. In addition, the pioneering efforts of Cagamas in the sukuk space have bolstered the confidence of other issuers, encouraging them to further develop their offerings.
From the perspective of Cagamas as an issuer, the type of sukuk used for issuance purposes depends on investor demand, among other factors. Fundamentally, Cagamas matches its issuances with the assets it purchases. Thus, the issuance of sukuk depends on the assets that Cagamas plans to acquire.
To achieve its objective of strengthening the Islamic capital market in Malaysia, Cagamas prioritises innovation and continuously seeks to introduce sukuk structures that are viewed favourably by investors. This is exemplified by the introduction of the company’s first Islamic multicurrency medium-term note (MTN) initiative, the Islamic Euro MTN programme in 2014, valued at US$2.5 billion.
Additionally, the role of Cagamas in promoting home ownership is being facilitated by the development of affordable housing through linkage to the capital market, thus complementing the efforts of the main institutions financing these projects. To foster additional home ownership, Cagamas is exploring the possibility of utilising waqf land. Thus, the company is looking to help stimulate efforts to standardise rules regarding estate management by the distinct state religious councils, since such standardisation would facilitate the overall process.
Bolstering Islamic finance abroad
Cagamas is recognised internationally for its promotion of home ownership and the development of the Islamic capital market. As a result, it is frequently used as a point of reference by central banks from distinct countries interested in learning about its working model. The Cagamas model is well regarded by the World Bank as a successful secondary mortgage liquidity facility.
Cagamas’ advice has been sought by external parties regarding Islamic finance solutions in the area of Sharia-compliant investment. Through its activities in the Islamic finance sphere, including the publication of the textbook, Islamic Financial System: Principles & Operations, Cagamas has sought to promote the Malaysia International Islamic Financial Centre’s (MIFC) initiative of Malaysia as an international Islamic finance centre.
Consequently, there is significant potential for the establishment of Islamic financial services in a number of countries. Fulfilling this potential would enable additional Muslim communities and investors to access domestic-based Sharia-compliant products and services. In turn, the emergence of Islamic finance in these underserved markets would require the presence of adequate Sharia-compliant assets in order to facilitate sukuk issuances.
Despite the widespread lack of Islamic finance options in Muslim communities around the world, global Islamic banking assets continue to grow (see fig. 2) and governments are beginning to realise the importance of implementing Sharia-compliant alternatives to conventional finance.
Malaysia has an advanced Islamic finance sector as well as solid bond and sukuk markets. Nevertheless, its retail sukuk and bond space is relatively new and improvements therein will help the country contend with regional competitors, such as Thailand, which oversees a robust retail bond market. It is crucial that local regulators and market players address this matter to enhance the offerings available to individuals interested in sukuk investment.
At the international level, greater awareness and understanding of the needs of Muslim communities and investors is vital in order to foster greater access to and participation in the financial market. Increasing this participation could potentially help tackle the challenges of eliminating extreme poverty and expanding shared prosperity.
As a consequence, Cagamas envisions boosting Islamic finance education in countries that are neither financial centres nor have Muslim-majority populations. Efforts to increase knowledge of Islamic finance and the financial needs of Muslim communities will play a crucial role in the emergence of companies and institutions with a similar working model to Cagamas. With this scenario in place, all industry stakeholders will be better equipped to facilitate the consolidation and growth of the global Islamic capital market.
CHUNG CHEE LEONG
President & Chief Executive Officer
Level 32, The Gardens North Tower
Mid Valley City
Lingkaran Syed Putra
59200 Kuala Lumpur
+60 3 2262-1800