Malaysia’s thriving fixed-income market (or more commonly known as the bond market) is equivalent to almost the size of its GDP, placing it third in Asia after Japan and South Korea. In other words, Malaysia boasts the largest bond market in South-east Asia. As at end December 2022, the domestic bond market was valued at RM1.9 trillion, translating into about 47.2% of the nation’s RM3.6 trillion overall capital market. Malaysian bonds are stable, liquid and offer attractive real yields to investors.
The history of the Malaysian bond market can be traced back to the late 1980s and early to mid-1990s, when the domestic economic boom was fuelled by the privatisation of mega infrastructure projects. Conventional bonds and sukuk had become a popular way of raising funds for such projects, offering long-term local-currency financing. Against this backdrop, Bank Negara Malaysia (BNM) established the country’s first credit rating agency (or CRA) – Rating Agency Malaysia Berhad (now RAM Rating Services Berhad or RAM Ratings) – in November 1990, as a catalyst for the development of the domestic debt capital market. The second CRA, Malaysian Rating Corporation Berhad (better known as MARC), followed in 1996.
The domestic bond market’s stakeholders include bond and sukuk issuers, financial institution intermediaries, investors (mostly institutional, e.g. pension funds, insurance funds and fund management companies) and, of course, BNM and the Securities Commission Malaysia (SC) as the regulators. Other participants in the Malaysian bond market include Danajamin Nasional Berhad, Bond Pricing Agency Malaysia (BPAM) and Fully Automated System for Issuing/Tendering (FAST).
By and large, the Malaysian bond market is segregated into the public (government bonds) and private (corporate bonds) segments. Government debt papers encompass Malaysian Government Securities (MGS), Malaysian Government Investment Issues (MGII), Malaysian Treasury Bills (MTB), and Malaysian Islamic Treasury Bills (MITB). On the other hand, corporate bonds (or private debt securities) originate from the private sector. Corporates tap the bond market for financing through the issuance of long-term bonds, medium-term notes (MTN) and short-term commercial papers (CP).
Retail bonds and sukuk may be issued and traded on either Bursa Malaysia or over-the-counter through appointed banks. New issuances of Malaysian corporate bonds climbed up to RM153.3 billion in 2022 (2021: RM114.3 billion), yet again overshadowing the RM26.0 billion raised through the equity market (2021: RM16.6 billion).
The Malaysian fixed-income market is also further segregated into the conventional (bonds) and sukuk segments. The intrinsic difference between them is that sukuk comprise fixed-income instruments that comply with Shariah principles. Based on data from the SC, the market generally favours sukuk over its conventional counterpart. In 2022, corporate sukuk commanded almost 82% (2021: 80%) of total corporate bond and sukuk issuances. Total sukuk issuances in 2022 represented 68.2% (2021: 62.9%) of total bonds and sukuk issuances whereas total sukuk outstanding represented 63.2% (2021: 63.4%) of total bonds and sukuk outstanding.
Both local and global investors have been answering the clarion call for sustainable and socially as well as environmentally responsible methods of financing. This has in turn given rise to a flourishing market for sustainable and responsible investment (SRI), which has been rapidly gaining traction. In 2022, seven corporates issued SRI sukuk in Malaysia, which summed up to RM10.6 billion and translated into 8.5% of total corporate sukuk issuance. This brought the number of SRI sukuk issues to 25 in all. At the same time, outstanding corporate SRI sukuk augmented to RM17.9 billion at yearend (end-December 2021: RM8.1 billion), making up 2.7% of total outstanding corporate sukuk
The Malaysian bond market is under the purview of BNM and the SC. All bond and sukuk issuances require the SC’s approval. To enhance efficiency and turnaround time, the SC introduced the Lodge and Launch Framework (LOLA) in 2015. LOLA shortens time-to-market by enabling the launch of structured products, bonds, sukuk and asset-backed securities once the required information has been lodged with the SC via its online submission system. This contrasts against the previous 14-21 days for approval. In 2017, the SC launched the Bond and Sukuk Information Exchange (BIX), a non-profit information platform that provides free access to information on bonds and sukuk issued in Malaysia – in both the primary and secondary markets.
Bonds and sukuk are perceived as an asset class that can serve as a hedge when markets are bearish, besides being used to generate a steady income in the long run. Historically, bonds and sukuk could only be purchased by institutional investors (e.g. pension funds, insurance funds) or high-net-worth individuals due to daunting entry barriers. Back then, one lot of bonds and sukuk had been priced at RM5 million, with a lowest denomination of RM250,000 per odd lot for high-net-worth individual investors. In 2018, the SC launched its seasoned bond framework, thereby allowing retail investors to purchase bonds and sukuk that had originally been meant for only institutional investors in the primary market. Today, exchange-traded bonds and sukuk (ETBS) have made it easy for all investors to purchase fixed-income securities through Bursa Malaysia. ETBS, issued by companies and governments to finance their needs, take various forms such as fixed-rate, floating-rate and hybrid bonds and sukuk
Corporate bonds are perceived to entail higher risk than government bonds. As such, interest or coupon rates are usually higher for corporate bonds, even for companies with top-notch credit quality. Bonds are typically backed by the ability of the issuer to pay, underscored by its earnings from future operations. Credit risk is calculated based on the issuer or borrower’s overall ability to repay a bond or loan according to the original terms. Before bonds are issued to investors, they are reviewed in terms of the issuer’s creditworthiness, which is where the CRAs play their part. In Malaysia, both RAM Ratings and MARC have their own rating scales and methodologies when assigning credit ratings to bonds and sukuk. In essence, the higher an issuer’s credit risk, the lower the assigned credit rating. Lower-rated bonds normally pay higher interest rates/coupons (i.e. higher yield) as investors will demand a premium for the higher risk they take on. A bond’s price and yield determine its value in the secondary market.
Bonds and sukuk can be bought and sold in the secondary bond market after they have been issued in the primary market. Retail bonds and sukuk may be issued and traded either on Bursa Malaysia or over-the-counter (OTC) through appointed banks. In the secondary market, bond and sukuk sale proceeds go to the seller (either an investor or a dealer) while in the primary market, they are channelled directly to the issuer. The size of the Malaysian bond market has been matched by the development of its secondary market. Trading across various maturities compares well with that of other bond markets in the region. Most secondary market activity in Malaysia is concentrated on MGS, the turnover ratio of which is significantly higher than that of MGII.
To encourage the development of the domestic sukuk market, the Government of Malaysia offers several tax incentives such as exemption of stamp duty and real property gains tax as well as exemption on interest earned from such instruments. In a bid to further liberalise the financial sector and broaden the corporate bond market, the SC removed mandatory credit rating in January 2017. That said, many entities still obtain credit ratings from the CRAs to highlight the investability of their bonds and sukuk.