Malaysia’s Islamic capital market (ICM) is a vital pillar of Malaysia’s well-developed Islamic finance industry. Backed by its track record and international credentials, Malaysia has been and continues to maintain its leadership in the global ICM. It is also widely recognised as the leading centre for innovation in Shariah-compliant products and services and Malaysia’s capital market regulator, i.e. the Securities Commission Malaysia (SC), has been setting the foundation for innovative structures and capital market products through a supportive regulatory framework. In conjunction with this agenda, the SC issued the Guidelines on Islamic Fund Management in 2007. More recently, in 2017, the SC launched a five-year Islamic Fund and Wealth Management Blueprint (IFWM Blueprint) to plan the medium and long-term strategic direction of Malaysia’s Islamic fund and wealth management industry to cater to the growing needs of the global market.
As at end-December 2023, the Malaysian ICM continues to account for the lion’s share of Malaysia’s capital market, with a total of RM2,426.8 billion (end-December 2022: RM2,322.3 billion) or 63.73% of the RM3,807.7 billion overall domestic capital market. Of this, RM1,155.5 billion (end-December 2022: RM1,138.5 billion) stemmed from the market capitalisation of Shariah-compliant equities while RM1,271.2 billion (end December 2022: RM1,183.8 billion) is attributable to total outstanding sukuk. The numbers clearly highlight investors’ preference for Shariah-compliant financing. Drilling down further, the Islamic assets made up a total of RM226.14 billion as December 2023 (end-December 2022: RM205.9 billion). This total comprised equities (RM85.1 billion), sukuk (RM51.6 billion), money-market instruments (RM50.9 billion), unit trust funds (RM4.7 billion), private equity/unquoted stocks (RM0.3 billion) and others (RM12.5 billion).
An Islamic or Shariah-compliant investment fund is an investment scheme where investors can contribute money to earn halal profits that comply with Shariah principles. It is deemed a type of socially responsible investment or ethical funds that are available in the market. There are different categories of Islamic funds in Malaysia, namely those that invest in Shariah-compliant equities, Islamic bonds and Mudharabah deposits.
Similar to the sustainable and responsible funds that are benchmarked against the environment, social and governance (ESG) pillars, Shariah-compliant funds filter potential investment instruments for specific features, e.g. the appointment of a Shariah board and prohibition from investing in companies that derive the bulk of their earnings from the sale of non-halal products such as alcohol, pork and gambling.
Popular asset classes sought by such funds include real estate investment funds (REITs) and exchange-traded funds (ETFs). Private equity is also considered a good investment, although interest or riba is forbidden under Shariah law. While Shariah-compliant funds have been growing at a respectable pace, it is not easy to accurately estimate the industry’s size or valuation because much of the investment is through private placements. Moreover, the funds are not traded in secondary markets, thus further reducing data visibility.
Islamic fund management companies in Malaysia must register with SC and fall under the purview of Section 377 of the Capital Market Services Act 2007. These guidelines will be applied to Islamic fund managers that are holders of capital market services licences, and whose sole purpose it is to undertake Islamic fund management activities. An Islamic fund management company is subject to the following requirements:
- Must have more than 50% foreign equity ownership and incorporated in Malaysia.
- Undertake fund management activities.
- Conduct its activities from an office in Malaysia.
- Comply with the requisite licensing requirements under the securities laws.
- Must have a paid-up capital of at least RM2 million.
- Parent company (or holding or related company) must have a sound track record in the international fund management industry.
- Memorandum and Articles of Association must state the business aims to achieve commercial objectives and follow Shariah principles.
- Must appoint a Shariah adviser.
- Must be an approved individual or corporation.
- Must be an Islamic bank or licensed financial institution approved by Bank Negara Malaysia to carry on an Islamic banking business.
In November 2020, the SC issued the Waqf-Featured Fund Framework (the Waqf Framework) to facilitate the offering of Islamic funds with waqf features. Waqf is an Islamic endowment instrument typically linked with social development and philanthropic objectives. The development of waqf had been earmarked as an area for potential social development, greater public good and wealth distribution under the SC’s Islamic Fund and Wealth Management Blueprint (launched in 2017). On 28 November 2022, the SC expanded the Waqf Framework to encompass listed funds such as Islamic REITS and Islamic ETFs, to further develop Islamic social finance.
The Waqf Framework is applicable to existing and newly launched unit trust and wholesale funds. It broadens the range of innovative ICM products while providing public access to Islamic funds that allocate part or all of their returns to socially impactful activities via waqf. The Waqf Framework also specifies additional requirements that Islamic unit trust and wholesale funds must comply with providing guidance to fund managers on investment goals, distribution policies, eligible waqf recipients, and disclosure of the requisite information in offering documents, websites and periodic reports. In October 2023, the SC unveiled its principles-based Maqasid Al-Shariah Guidance Islamic Capital Market Malaysia. The Guidance serves to complement its existing rules and regulations with universal guiding principles that enhance the competitive edge of the ICM and fortify its contribution to society and the economy.