5 th CVM Seminar Financial and Capital Markets

5 th CVM Seminar : Financial and Capital Markets in the Islamic World Opportunities and Challenges 8 December 2008 The Asian Market: Malaysia’s Experience Nik Ramlah Mahmood Securities Commission Malaysia 1

The Development of Malaysia’s Islamic Capital Market – A Regulatory Perspective 2

The Malaysian capital market forms a significant component of the overall financial system… Total value of capital market (1990) USD 61. 5 billion Total value of capital market (nov-2008) USD 327 billion Equity USD 182 bn (56%) Equity USD 40. 6 bn (66%) Bonds USD 145 bn (44%) Bonds USD 20. 9 bn (34%) 3

…with Islamic securities forming a substantial portion Total value of capital market (Nov-2008): USD 327 billion Equity USD 182 bn (56%) Bonds USD 145 bn (44%) Islamic capital market value (Nov 2008): USD 171 billion Islamic equity US$117 bn (68%) Islamic Bonds/ sukuk US$54 bn (32%) 4

Islamic finance in Malaysia is relatively well diversified… • Malaysia inherited the British system of governance including the conventional financial services industry • The evolution of Islamic finance began from the setting up of the Pilgrims Fund Board - a savings mechanism under which funds for performing the Hajj were set aside to cover the costs of performing the annual pilgrimage • Government and regulatory bodies recognized the need to develop ICM in order to create a financial niche for Malaysia • The evolution of Islamic finance in Malaysia : 1969 : Establishment of Pilgrim Fund Board 1983 : Islamic Banking Act enacted and the establishment of first Islamic bank 1984 : Takaful Act enacted and the establishment of first takaful (Islamic insurance) entity 1993 : Securities Commission Act enacted providing SC with mandate to develop capital market 2007 : Capital Market Services Act To cater for domestic demand

…and has evolved to provide viable investment and financing alternatives for local institutions • An efficient conduit for mobilisation of funds for Malaysian corporates • long term fund raising and investment; enhances depth & resilience of Malaysian Islamic financial system and overall financial system • 55% of outstanding corporate bonds are structured using Shariah principles • 87% of companies on the stock exchange are Shariah compliant • Malaysian ICM products are accepted by both Islamic and non-Islamic local investors as well as investors across various jurisdictions • Conventional investors regard ICM products as a new asset class • Emergence of new demand from the Middle East, South-East Asia, South Asia and North Africa 6

Malaysia is now the leading Islamic capital market in the world… • Malaysia is regarded as the leading center for Islamic finance − Two thirds of global sukuk originates from Malaysia − Islamic unit trust is the fastest growing segment of the Islamic capital market − Leading international fund management companies establishing operations in Malaysia • Issuance of sukuk is not confined to Islamic institutions − Multilateral institutions such as World Bank and IFC have issued sukuk − Non-Islamic institutions have issued sukuk − Non-Muslim majority countries have shown interest to issue sukuk • Local and foreign financial institutions are now actively intermediating and structuring ICM products − − Sukuk Islamic investment products Islamic exchange traded funds Islamic REITS 7

Malaysian ICM has been developed through clear vision and well articulated policies Capital Market Masterplan • Strong leadership and proactive role of government Financial Sector Masterplan 9 th Malaysia Plan Malaysia International Islamic Financial Centre (MIFC) • Close collaboration with private sector • Progress of implementation closely monitored 8

The Capital Market Masterplan (CMP) Launched in 2001, the CMP provides a blueprint for long-term strategic development of the Malaysian capital market with 152 recommendations covering 11 areas : • • Equity market Bond market Derivatives market Stockbroking industry Market institutions Investment management Regulatory framework Corporate governance • Islamic capital market • Technology & e-commerce • Training & education To develop Malaysia as an international Islamic financial centre 9

A sound Shariah framework is fundamental for ICM development… • Main thrust of Islamic capital market is compliance with Shariah principles (Islamic jurisprudence) • National level Shariah Advisory Council (SAC) established under the Securities Commission Act 1993 − Comprises prominent Shariah scholars, jurists & market practitioners − Advises SC on all Islamic capital market matters − Provides investment guidance − Acts as a reference point for industry − Promotes product harmonisation and standardisation • SC works closely with industry and the SAC to facilitate new products/concepts • Publication of Resolutions of the SAC 10

…with universal principles of securities regulation applied to Malaysian Islamic capital market • Islamic capital market products and services must − − • leverage on existing infrastructure not compromise the universal goals of securities regulation IOSCO’s Objectives and Principles of Securities Regulation applies v Protection of investors v Ensuring markets are fair, efficient & transparent v Reduction of systemic risk • IOSCO Islamic capital market task force 2001 affirmed key issues: − − − • Conventional regulatory framework applicable to Islamic capital market products and services may be introduced and developed within any existing well-structured securities market Reaffirmed in 2008 IFSB efforts in setting international prudential standards 11

A two-tier approach in regulating Islamic products… Tier I Tier 2 General regulatory requirements Bonds - Trust deed, mandatory rating, eligible persons, etc Unit Trust - Investment committees, trustees, management company, etc. REITs - At least 75% investment in real estate Shariah - specific requirements Sukuk - applicable to both conventional and Islamic products applicable to Islamic products Additional disclosure for Musyarakah Mudharabah structures via info memo, Shariah adviser, utilisation of proceeds Islamic Unit Trust Islamic REITs - Shariah adviser to certify that fund complies with Shariah requirements Tenants’ activities and rental income must comply with Shariah requirements 12

…issuance of Islamic capital market guidelines… • Guidelines on the Offering of Islamic Securities, 2004 • Guidelines on Islamic REITs, 2005 • Guidelines on Islamic Fund Management, 2007 • Guidelines and Best Practices on Islamic Venture Capital 2008 13

…facilitates the offering of a comprehensive range of products and services Islamic unit trusts Shariah compliant stocks Sukuk Islamic REITs Shariah compliant futures contracts Products Islamic ETFs Islamic structured products Islamic fund management Islamic stockbroking Services Islamic banking & takaful Corporate finance / Advisory 14

Malaysia has built a reputation as a centre of innovation… Centre of innovation • First sovereign 5 year global sukuk of US$600 million in 2002 (Govt. of Malaysia) • First global sukuk of USD 150 million issued by Guthrie Berhad in 2001 • First Islamic residential mortgage backed securities issued by Cagamas Berhad in 2005 • First Islamic Ringgit bond issuance of RM 760 million (USD 217 m) by a multilateral financial institution in 2005 (World Bank) • First listed Islamic Real Estate Investment Trust in 2006 • First Islamic structured product in 2007 (USD 1 = RM 3. 5) 15

…with landmark Islamic issues Recent Landmark ICM Issues • Largest sukuk funding programme of RM 60 billion (USD 17. 14 b) by Cagamas • Largest corporate sukuk of RM 15. 4 billion (USD 4. 4 b) by Binariang GSM • Largest exchangeable sukuk of USD 850 million by Khazanah • RM 3 billion (USD 0. 86 b) Islamic stapled income securities by Telekom and Hijrah Pertama • First Asian Islamic ETF launched by i-Valuecap Management in 2008 16

Malaysia – An International Islamic Capital Market Hub 17

Malaysia : An international investment hub… Competitive cost structure Conducive lifestyle Vibrant economy Malaysia Islamic finance niche Efficient business environment Deep, broadbased capital market 18

Malaysia…positive economic conditions with moderate outlook… …slowdown in economic growth due to global environment, with stable and resilient banking system… Stable growth at 5% – 5. 5% in 2008 Diversified and flexible economic structure Low inflation of 2. 0% @ Dec 2007 (2008: 5. 5 – 6%) Strong domestic demand conditions Low unemployment (3. 5% in Q 2 2008) High international reserves (USD 100 b @ November ‘ 08) Sound Economic Fundamentals Low external debt (end-June ’ 08: 34% of GNI) High gross national savings (38. 4% of GNI) …Malaysia’s real GDP shows moderate growth …high foreign exchange reserves and low external debt provide one of the strongest external positions globally Malaysia’s Credit Rating: A- (S&P), A 3 (Moody’s) 19

. . . and an attractive business & investment destination Ranked 4 th in investor protection Ranked 3 rd for regulating directors Ranked 3 rd for most attractive outsourcing centre Most protected Most attractive New Zealand India Singapore China Hong Kong Malaysia Canada Thailand United States Brazil Israel Cambodia Indonesia Israel Chile Canada Ireland United Kingdom Source: World Bank 2008 Hong Kong South Africa Source: World Bank 2008 Mauritius Philippines Bulgaria Source: A T Kearney 2007 Mexico World Economic Forum 2007 Global Competitiveness Index: • Malaysia ranked 21 st in Global Competitiveness Index (World Economic Forum) • Investment Guarantee Agreements with over 50 countries • Dynamic legal, regulatory and tax framework • Regional Centre of Arbitration in Kuala Lumpur • Affordable cost of living – among cheapest in Asia • Liberal exchange control regime 20

A large Shariah-compliant equities market… Shariah-compliant Securities by market Shariah-compliant Securities Year M-cap of Islamicsector% of M-cap Equities Islamic equities Trading/Services 20% (RM bln) 2001 303. 2 (USD 86. 6) 65. 2 2002 290. 5 60. 3 2003 383. 9 59. 9 2004 448. 2 62. 1 2005 439. 8 63. 3 2006 548. 4 64. 6 2007 705. 1 63. 7 2008+ 416. 47 (USD 119) 63. 5 Construction 6% Properties 9% Plantation 4% Industrial Products 33% Technology 12% Others 1% Consumer Products 15% +As at end-Nov 2008 Shariah-compliant securities on Bursa Malaysia Number of Shariah-compliant securities-Nov 2008 855 securities % to total listed securities 87% Equity market indices 31 Oct 2008 30 Nov 2008 % change KL Composite Index (KLCI) 863. 61 866. 14 0. 29% FBM EMAS Shariah 5843. 46 5900. 37 0. 97% FBM Hijrah Shariah 6565. 90 6594. 18 Source: Securities 0. 43% Commission * The SAC of SC releases the updated Shariah-compliant securities list twice a year in May and November 21

…makes Malaysia an attractive Primary Listing Destination Kuala Lumpur Composite Index Market capitalisation as at end-November 2008 stood at RM 657 billion (USD 188 b) • Largest number of listed companies in ASEAN (982 as at Sept-08) • Well-balanced participation ~ with retail, domestic institutional and foreign institutional accounting for roughly a third of trading values each • Market Diversity - 15 Sectors with 50 economic activities • Product Diversity – Structured Warrants, REITs, ETFs, Shariah compliant products • A total of 13 listed REIT – 2 Islamic and 1 conventional converting to an Islamic at the end of the year • 3 listed ETFs, FTSE Bursa Malaysia Large 30 Index, ABF Malaysia Bond Index Fund & My. ETF Dow Jones Islamic Market Malaysia Titans 25 (First Shariah ETF launched in Asia) • Resilient performer – Among top performing markets in 2007 and performing in line with other Asian exchanges in 2008 O ct -0 8 * KLCI record high: 1516. 22 on 11 th Jan 2008 • Gives excellent market coverage, peer comparisons, sector premiums 22

Attractive value propositions • Vibrant economy with competitive cost structure, efficient business environment & conducive lifestyle • Strategic, Islamic connectivity for Middle Eastern funds to capitalize on Malaysian growth opportunities • Valuation is comparable to regional exchanges and relatively higher valuation on niche sectors • Non-resident PLCs can repatriate any amount of capital raised during IPO without BNM approval • Companies can choose to have their Shariah compliant status determined pre-IPO 23

PE Valuations Regional PE Valuations (end-Q 3 2008) KLCI Sectoral PE Valuations (end-Q 3 2008) 24

Direct listing requirements foreign companies Requirement Main Board MESDAQ Paid-up share capital Min RM 60 mil (USD 17. 14 m) Operating history At least 3 -5 full financial years Min RM 2 mil (USD 0. 57 m); or Min RM 20 mil (USD 5. 7 m) (technology incubators) • Tech-based companies: None • Tech incubators: At least 12 months in operations • Others: 3 years operating revenue Profit Track Record Test Market Capitalisation/ Profit Test IPC test • • Uninterrupted profit after tax (PAT) of 3 -5 FYs; Aggregate PAT of at least RM 30 mil (USD 8. 6 m); and PAT of at least RM 8 mil (USD 2. 3 m) for latest FY Market capitalisation of at least RM 500 mil (USD 142. 9 m) • PAT of at least RM 30 mil (USD 8. 6 m) for latest FY Must have right to build an infrastructure project – • which contributes to economic growth of Malaysia • concession not < 15 yrs • cost not < RM 500 mil (USD 142. 9 m) N/A N/A 25

Secondary listing requirements foreign corporations Flexible requirements for a foreign corporation seeking a secondary listing on Bursa Malaysia: • The applicant’s home exchange must be a member of the World Federation of Exchanges and must have standards of disclosure rules at least equivalent to those of Bursa Malaysia • Market capitalisation at least equivalent to RMI billion (USD 285. 7 m) on its home exchange • After tax profits of at least equivalent to RM 60 million (USD 17. 14 m) based on the audited financial statements for the most recent full financial year • The applicant must be incorporated in a jurisdiction whose corporation laws and other laws and regulations have standards at least equivalent to those in Malaysia, particularly with respect to- − Corporate governance − Shareholders and minority interest protection and − Regulation of take-overs and mergers 26

The Malaysian Islamic Capital Market – Active global sukuk centre ed ib cr s v o 0 x b su er 1 Malaysia has competitive advantage: ü Local currency bond market is largest in ASEAN region, as of end-Nov 2008 − total: RM 523 bn (USD 145 bn) − sukuk: RM 194 bn (USD 54 bn) ü New asset class, wide investor base ü 57% of corporate debt securities are sukuk ü Corporate sukuk issued in 2007: USD 20 bn — 1 H 2008: > USD 4. 3 bn Despite financial volatility due to continued uncertainties, many large issuances in 2007 and 1 H 2008 were made signifying large demand for sukuk 27

Sukuk - Primary Market Activity in 2008 Corporate Approval Jan – Sep 2007 No. of issues Size of issues (RM‘bil) Sukuk approvals 43 86. 77 36 24. 60 Conventional bond approvals 51 31. 27 43 65. 43 Total 94 118. 04 79 90. 03 46% 74% 46% 27% % of Sukuk approved to total corporate bonds approved • Jan - Sep 2008 Decrease in amount of Sukuk approved in 2008 is partly due to: - Local and foreign FIs whose assets are conventional based, tapping the bond market; - One off large Cagamas issuance in 2007 amounting to RM 60 billion Sukuk approved based on various Shariah principles 2007 Jan – Sep 2008 Corporate Issuance Jan-Sep 2007 Jan-Sep 2008 Size of sukuk issued 25. 92 15. 03 Size of conventional bonds issued 17. 65 24. 64 Total corporate bonds issued 43. 57 39. 67 % size of sukuk issued to total corporate bonds issued 59% 38% 28

A fast growing Islamic fund management industry – Islamic REITs & ETFs Tax transparency introduced. SC issued new Guidelines. Lower income tax for investors ü Malaysia – 1 st to issue Guidelines for Islamic REIT (2005) ü Malaysia – 1 st to have a Shariahcompliant REIT listed on the stock exchange. ü Currently, 2 listed Shariahcompliant REIT – Ø a healthcare REIT; and Ø a plantation REIT (oil palm) M’sian Govt waived RPGT and stamp duty. ETFs: ü 1 st Islamic ETF in Asia (Jan 2008) ü RM 840 million (USD 240 m) My. ETF Dow Jones Islamic Market Malaysia Titans 25 ü Listed on Bursa Malaysia 29

Islamic fund management – Islamic unit trusts No. of Islamic Funds vs. Total Industry NAV of Islamic Funds vs. Total Industry Islamic unit trust funds Number of approved funds 2007 Sep-2008 Islamic 134 149 Total industry 521 582 Net asset value (NAV) of approved funds Islamic (RM billion) 16. 90 17. 54 (USD 5 b) Total industry (RM billion) 169. 40 148. 81 (USD 42. 5 b) % of Islamic to total industry 10. 0% 11. 8% Source: Securities Commission 30

Islamic fund management companies Liberal shareholding structure v Islamic fund management companies are allowed to have 100% foreign ownership v Islamic fund managers are permitted to manage both institutional & retail funds Facilitative cross border investment policy Greater access to institutional funds Competitive operating environment v Islamic fund management companies are allowed to invest 100% of their assets abroad v RM 7 billion (USD 2 b) in start up funding will be channeled by EPF to Islamic Fund management companies v Income tax exemption on all Islamic fund management activity fees until 2016 v Income tax exemption for non-resident Islamic finance experts v One-stop center at the Securities Commission (SC) for all fund management queries 31

Islamic fund management companies • Shariah assets under management (AUM) − As at 30 June 2008, 10% (RM 23 billion) of the total AUM of RM 235 billion (USD 67. 14 b) for the fund management industry were Shariah mandates − 35 fund mgt companies in Malaysia have Shariah mandates − The first fully fledged local Islamic fund management company is CIMB Principal Islamic Asset Management • Growing interest by international companies to use Malaysia for their fund management activities − Aiiman Capital (owned by DBS Bank) is licensed while; − The following have been approved for establishment - Global Investment House - Kuwait Investment House - Reliance Capital Asset Management 32

Thank You Securities Commission 3 Persiaran Bukit Kiara 50490 Kuala Lumpur Malaysia www. sc. com. my 33

Islamic equity market: Sizable component of the capital market Top 3 Shariah-compliant companies by sector and market capitalization Company name RM billion Plantation Company name 1. Sime Darby 35. 15 2. MISC 31. 76 3. Tenaga Nasional 25. 57 4. Petronas Gas 19. 19 5. IOI Corporation 19. 10 RM billion Top 10 Shariah-compliant companies by IOI Corporation 19. 10 market capitalization 2. Kuala Lumpur Kepong 8. 91 3. Batu Kawan 3. 27 Construction Company name RM billion 1. YTL Corporation 10. 78 2. Gamuda 3. 39 3. IJM Corporation 2. 16 Properties 6. TM International 14. 19 7. Telekom Malaysia 13. 90 8. Plus Expressway 13. 45 9. Digi. com 13. 41 10. PPB Group 10. 14 Company name RM billion 1. SP Setia 2. 76 2. KLCC Property 2. 56 3. IOI Property 2. 04 Oil & Gas Company name 1. 2. 3. Petronas Gas • Shell Source: Bursa Malaysia Sapura. Crest RM billion 19. 19 2. 64 0. 87 34

Some existing foreign cross listings Dual Listing Bursa and Copenhagen SE Bursa and Tokyo SE Bursa and HKEX <---------Bursa and London SE----------> Foreign-owned with listings on Bursa Companies with Foreign-based Operations listed on Bursa Key West Gefung Holdings Sino Hua-An International 35

Selected notable sukuk issuance Issuer Shell MDS Sdn. Bhd KL International Airport Government of Malaysia IFC & World Bank Khazanah Nasional (Rafflesia Capital Limited) Cagamas Berhad Facility/ Amount Year of Issue Bid-to-cover ratio Private placement RM 125 m (USD 36 m) 1990 RM 2. 2 b (USD 630 m) 1996 USD 600 million 2002 2 x RM 500 m (USD 143 m) RM 760 m (USD 217 m) 2004 2005 4. 3 x 1. 9 x USD 750 million 2006 6 x RM 60 b (USD 17 b) prgm, up to 40 years. Issued: • RM 2. 745 b IMTNs 2007/ 2008 • RM 1. 515 b ICPs AEON Credit Services RM 400 m (USD 114 m) • Private placement Bought-deal 2007 6 x, 4 x 28 Dec 2007 2 x USD 550 million 12 Mac 2008 10 x Toyota Capital RM 1 b (USD 0. 3 b) prgm. Issued: RM 100 m ICPs May 2008 Private placement Islamic Dev. Bank RM 1 b (USD 0. 3 b) prgm: Issued: RM 300 million Aug 2008 1. 5 x RM 3. 5 b (USD 1 b) prgm RM 400 m, RM 300 m Binariang GSM (Maxis Comm. ) RM 15. 35 b (USD 4. 4 b) Khazanah Nasional • World’s 1 st RM Islamic corporate bond issued • • • World’s 1 st global sovereign sukuk Upsize from USD 500 mil to USD 600 mil 1 st RM sukuk by supranational Largest supranational deal in RM World’s 1 st exchangeable sukuk Largest exchangeable instrument issued out of Asia ex-Japan (2006) • Largest, longest term funding program • 1 st combined Islamic and conventional program (CP/MTN) • 3. 83 x (RM 750 mil MTNs) • 13% non-resident investors for ICPs 2007 Tesco Stores Transaction Highlights • 1 st Japanese-owned co. issuing sukuk • 1 st sukuk issuance by a British owned MNC • Largest-ever sukuk issue in the world • Exchangeable into Parkson Retail Group, a HK-listed company • IDB’s first RM sukuk 36