Given the commitment of and close collaboration between the regulators and the Islamic finance community, the Islamic capital market (ICM) is a crucial pillar of Malaysia’s well-developed Islamic finance industry. Backed by its credentials, Malaysia has been able to maintain its leadership in the international ICM.
All said, the ICM is widely recognised as the leading centre for innovation in Shariah-compliant products and services. 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 consonance with this agenda, the SC issued the Guidelines on Islamic Fund Management in 2007.
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 the many socially responsible investment or SRI funds that are available in the market. There are different categories of Islamic funds in Malaysia, which typically invest in Shariah-compliant equities, Islamic bonds and Mudharabah deposits.
As with the other socially responsible funds in the environmental, social and governance (ESG) universe, Shariah-compliant funds filter potential investment portfolios 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.
Although the concept has been around since the late 1960s, Shariah-compliant funds have only been gaining traction relatively recently. 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:
As at end-December 2022, the Malaysian ICM accounted for the lion’s share of RM2,322.3 billion (end-December 2021: RM2,308.5 billion) or 64.4% of the RM3,607.3 billion overall domestic capital market. Of this, RM1,138.5 billion (end-December 2021: RM1,204.3 billion) stemmed from the market capitalisation of Shariah-compliant equities while RM1,183.8 billion (end-December 2021: RM1,104.3 billion) is attributable to total outstanding sukuk. The numbers clearly highlight investors’ preference for Shariah-compliant financing. Drilling down further, Islamic AUM summed up to RM205.9 billion as at end-December 2022 (end-December 2021: RM224.8 billion). This 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).
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.