Malaysia chases the big money in Islamic finance
Shariah savings scheme could be a game-changer; wealth push follows success in sukuk market.
One can make an argument that the only bright spot in Malaysian finance, commerce and politics today is Islamic finance. It is the only area where Malaysia leads the world. The Securities Commission intends to keep it that way and in January launched a five-year blueprint to cement its status.
How? Malaysia already leads the world in nearly all Islamic finance metrics: 54% of global sukuk outstanding; 314 Islamic investment funds (more than anywhere else) worth RM100.6 billion ($22.7 billion) at the end of 2015; and an Islamic capital market that has tripled in size since 2005, accounting for 60.1% of the total Malaysian capital market.
If there is a gap, it is in Islamic fund and wealth management and this is the Securities Commission’s latest thrust. Although Malaysia leads in the number of funds, Saudi Arabia still leads in terms of overall invested assets, and the Gulf states have the natural advantage of a disproportionate number of exceptionally wealthy people. The UAE, for example, with one third of Malaysia’s population, has 59,000 millionaires compared with 31,000 in Malaysia, according to Credit Suisse.
Wealth management is a natural target to aim for.
Credit Suisse estimates that the number of affluent and high net-worth individual Muslims is expected to rise to about 12 million by 2030; even if Gulf Arabs prefer to use funds in their part of the world, Indonesia would be a terrific market for Malaysia to attract.
Credit Suisse expects it to have 151,000 millionaires by 2020 (by which time Malaysia will have 64,000). The assets of total global Islamic funds have grown at a compound annual growth rate of 8.5% from 2004 to 2015, and those rates will be sustainable if more Islamic countries develop pension systems.
This brings us to arguably Malaysia’s secret weapon – the Employees Provident Fund (EPF). By far the most powerful institutional investor in the country, it had RM712.5 billion under management as of September 30, 2016 and, crucially, it is very much on-side with Malaysia’s ambitions in Islamic finance.
In August, it launched its Simpanan Shariah (Shariah savings) scheme, to give members the option to convert their conventional EPF account to an Islamic one. It has said it expects to invest an average of RM25 billion in Shariah assets every year and it intends to allocate a minimum of 45% of its assets into Shariah-compliant forms.
This is a game-changer for Malaysia and for more than one reason.
The first is that EPF has sufficient scale to be very interesting to asset managers worldwide. This is already visible through the Malaysia International Islamic Financial Centre, launched in 2006. Largely through that mechanism, there are now 20 fully fledged Islamic fund management companies operating in Malaysia, half of them wholly foreign-owned and two of them local-foreign joint ventures.
Leading firms, including Aberdeen, BNP Paribas, Principal (with CIMB), Franklin Templeton, Nomura and Threadneedle, are represented, and many were attracted by seed investment that came, ultimately, from the EPF.
The second point is that for all of Malaysia’s blueprint directives, most of them are things it already does.
Provide an enabling framework to support innovation in Islamic markets? Malaysia has led in that regard since the 1990s.
Enhance market access and international connectivity? Same.
Develop a vibrant ecosystem to accelerate growth of Shariah-compliant investment? The whole reason Malaysia got this far in the first place is because Bank Negara Malaysia, the Securities Commission, the government, the EPF and most of the banks worked together from the outset to make it happen. The ecosystem is already vibrant.
The one truly transformative thing Malaysia can do is point seven on its list of recommendations: “Spur institutional participation in Islamic funds.” If every sovereign wealth and pension fund in the Islamic world took the same approach as the EPF and if they came to believe that Malaysia was the best hub through which to do it, the industry would change for ever.
The Securities Commission cites a finding from the Esade Business School that “the governance bodies of 77% of Muslim countries’ sovereign wealth funds have expressed the wish to increase significantly the number of transactions carried out under Islamic finance.”
Given that Muslim countries probably manage about half of the whole sovereign wealth sector – and that sector is worth $7 trillion globally – the potential is clear.
The blueprint says that an investment fund will be established to enhance and broaden the global capability of Malaysia’s Islamic fund managers and attract the participation of institutional and global investors. The details of this fund will be key.
The Securities Commission has also started talking about sustainable and responsible investing in Malaysia.
This actually requires very little to be done: SRI and Shariah portfolios tend to overlap very closely, with the biggest difference being Shariah’s exclusion of banks that make money from interest.
Malaysia now calls sustainability a national agenda and has numerous initiatives underway. Bursa Malaysia has the first ESG index in Asia and in 2015 Khazanah issued an inaugural SRI sukuk, channelling its proceeds to state schools.
Another driver will be the promotion of Shariah-compliant private equity, which is another easy win; private equity fits very nicely with the risk-sharing parameters of Shariah financing.
“There is strong potential for greater and sustained demand for Islamic wealth management services globally,” says Tan Sri Dato’ Seri Ranjit Ajit Singh, chairman of Securities Commission Malaysia. “This provides substantial opportunities for Malaysia.”