Economics

Financial strenth, economic resilience

By Kit

September 13, 2007

Maintaining Islamic Finance Leadership

As highlighted in the previous years’ budget, Malaysia has progressed significantly in the development of Islamic financial services, especially in terms of the size of investments and an increase in the number of institutions. Malaysia was the first to issue a global sukuk in 2002, as well as the first country where supranationals have issued ringgit-denominated Islamic bonds, namely the International Finance Corporation with an issuance of RM500 million and the World Bank, RM2 billion. In 2006, Malaysia was the largest issuer of Islamic bonds in the global capital market, accounting for USD30 billion, which is more than 70% of the overall global issuance of USD41 billion.

With the continued growth of importance in Islamic finance, we want to encourage more of this business to come to Malaysia. There is approximately US$500 billion of funds within the Islamic finance system, growing at around 15% annually. In the Gulf and Asia, Standard & Poor’s estimates that 20 per cent of banking customers would now spontaneously choose an Islamic financial product over a conventional one with a similar risk-return profile.

However the market’s growth in importance has also attracted some of the largest capital markets in the world such as the United Kingdom and Singapore to develop financial services and products to capture this market, which will result in a loss of market share for Malaysia. For example, one of the largest sukuk to date issued by Dubai Ports was written out of the London office of Barclays Capital in January 2006. And in August 2006, the first billion dollar sukuk to be listed on the London Stock Exchange raised £2.5 billion (US$5 billion). In addition, ambitious plans have been announced to make London the western capital of Islamic finance as the government announced tax relief for sukuk in March this year.

Nearer home, Singapore is increasingly serving as a bridge between the Middle East and Asia. More Middle Eastern banks are setting up in Singapore, which is experiencing double-digit growth in funds originating from the Middle East, for investment in Asian capital markets and real estate. Given Singapore’s lead in the Over-The-Counter (OTC) derivative market as the fourth-largest foreign exchange trading centre in the world, they will certain provide stiff competition for Malaysia.

Hence, it is proposed that a joint working committee be set up by the Malaysia International Islamic Finance Centre (MIIFC) top officials from the key relevant Ministries, Government departments and agencies, financial and market regulators and representatives from the banking and takaful sectors. The main objective of this committee, shall be to help member companies of both organizations to establish key contacts and to find potential partners and clients.

As the practice of Islamic corporate securitisation increases, so must there by a corresponding improvement in trade and liquidity. While Malaysian Islamic banks have brought together a sizeable amount of financial deals based on Islamic instruments, the lack of liquidity and trade of these tools on a exchange will result in loss of deals in the future as clients move to markets which provides exchange liquidity, such as the London Stock Exchange. A committee comprising of investment bankers, BNM, Bursa Malaysia, Securities Commission and key broking institution discussing financial mechanism for increasing liquidity and trade of the financial instrument.

With greater global acceptance and maturity of Islamic financial instruments, it now becomes critical for Malaysian Islamic financial institutions to expand their business to global cities which attracts the greatest amount of financial deals. Of greatest importance is for Malaysia to make its presence felt in New York, London and Hong Kong, for otherwise, we will be destined to lose out to other financial institutions set up in these cities. Therefore, the DAP proposes that Malaysian Islamic banks and other related institutions be granted a double tax deduction on expenses incurred for setting up and promoting their operations in foreign financial districts.

Liberalisation, Competition & Growth of Financial Services

In part to reduce our extraordinarily high dependence on commodities and in the face of strong competitive pressures in the manufacturing sector from lower cost developing countries, it is highly important that we develop an advanced and mature financial services sector to move Malaysia up the value chain. A successful development of the Malaysian financial services sector will certainly compensate for losses in revenue due to decline in commodity prices or the depletion of natural resources in the future. Unlike commodities and natural resources, the sector is dependent only on a pro-active and accommodating government as well as its human resources to create value for the economy. The two key complementary pillars of a sound and forward-looking financial institutions as well as a broad and deep capital market are necessary to create a vibrant and dynamic Malaysian financial hub for the region.

In the light of globalisation, it has become imperative that Malaysia continues to liberalise, progressively but decisively, the financial services sector in order to regain Malaysia’s position as a leading country in Asia Pacific for the sector. Ultimately, we want to establish a vibrant and dynamic global financial hub.

Capital Markets

While our stock and debt markets have performed credibly in the past year, it has not outperformed the bourses in the region, including Singapore and Hong Kong. It is critical that we acknowledge that our domestic markets alone will not sustain the depth, breadth and resilience needed by liquid capital markets. In fact, in terms of market capitalisation, Malaysia has declined substantially since the heydays of 1996 when we were ranked 2nd in the Asia-Pacific ex-Japan, and has since dropped in terms of ranking to a dismal 10th today.

It is thus critical for us to develop the equity and debt markets to help service Asian needs, and be linked up with global markets. We need to build up a critical mass of players and activity in our capital markets and to do that we must provide incentives and a conducive environment for foreign fund managers to carry out their transactions in Malaysia. Refining the rules, developing liquid capital markets and promoting the asset management industry will provide the basis for attracting this critical mass.

As one of the key policies, the Malaysian capital and foreign exchange controls will be further liberalised to remove obstacles from attracting and retaining foreign funds and investments. A more progressive and vibrant environment will enable foreign companies to list on Bursa Malaysia, or to issue bonds in the country. To do that Malaysia must prove that we possess the necessary competitive advantages in the region. These companies would want to raise capital at the lowest cost, and find liquidity and support for their securities in the secondary market.

Hence there must be two set of reforms. Firstly, reforms must remove non-financial and performance related conditions such as the 30% bumiputera equity requirement for listing on Bursa Malaysia. Few globally successful foreign companies will subject themselves to this tenuous condition in the light of competition from other countries which do not impose such restrictions. The government will then lead Bursa Malaysia to promote its bourse in the regional developing markets to encourage high quality companies to list themselves in Bursa. Only with a greater and more diverse portfolio of quality companies, will foreign investors be more attracted to the bourse.

Secondly, reforms are required to incentivise more asset and fund managers to locate their investment in Malaysia. Only a successful implementation of such a strategy will globally successful regional companies display a keen interest in listing on Bursa Malaysia. To this end, it is proposed that the Government implement a new scheme to grant tax exemption to a fund approved by Bank Negara Malaysia over the next 5 years, for specific income from approved investments for the life of the fund. In addition, it is proposed that investment banks be qualified for a 10% income tax rate for fees derived from providing investment advisory services to foreign investors or funds. This incentive should encourage more local financial advisors to seek and attract foreign funds to complete their capital and debt market requirements in Malaysia.

Harnessing Talent in the Financial Services Sector

The financial industry is a global industry driven by technology, innovation and competition. The pace of change is unrelenting. What is most critical to the industry is not just attractive financial incentives and progressive financial reforms. Instead, what the industry lacks critically today is insufficient and dwindling talent.

It is a well known fact that in the past 12 months, the number of professionals in the financial services industry that has been headhunted to the other more advanced capital and debt markets such as Hong Kong and Singapore have increased manifold. In order for Malaysia to even keep abreast of the financial developments and challenges in the region and the world, Malaysia must have a pool of highly skilled professionals who are at the forefront of their respective specialist areas. Therefore, it is imperative for the country to enhance our own local financial sector talent and redouble our efforts to attract and retain top international financial talent into the country.

As part of the plan to encourage greater interests in the financial services sector, the DAP will urge our local commercial and investment banks to offer bonded scholarships to top Malaysian students to pursue degree programmes at the top universities in the United Kingdom and the United States, home of the world’s largest financial districts. To encourage these crucial long term moves, it is proposed that the Government will match the scholarship funds raised by the financial institutions on a RM1 to RM1 basis.

It is also proposed that the Government offers up to 10 scholarships a year for students contemplating postgraduate programmes in economics, financial engineering and other related courses to create “rocket scientists” in the financial services industry with the only condition being their return to the country to contribute to the financial services sector. These scholarships shall only granted to programmes conducted in the top 10 global universities of the respective fields, which will likely cost us up to RM1.5 million per annum. At the same time, up to 50 RM8,000 fee-grants shall be awarded to students seeking to pursue these courses in local universities per annum.

Local universities and colleges shall also be encourage to devise degree and postgraduate programmes which are not only more relevant to the fast changing financial services sector, but also improve the rigour of their courses. As experts in these fields are difficult to attract to our local academia, often due to obscene differential between the income of a practitioner and an academic, a supplementary grant fund shall be established to reduce the differential to ensure that our students will receive adequate and quality training, teaching and mentorship from successful practitioners.

The above measures should hopefully assist Malaysia in building up a critical pool of specialists proficient in sophisticated financial instruments such as financial modelling, structured derivatives, quantitative research methods, risk management and specialised insurance activities. At the same time, other related ancillary services such as legal support and financial advisory work will require the necessary support to ensure that Malaysia remain relevant in the rapidly changing industry.

In the short to medium term however, it is critical for local financial firms to increase their efforts to retain both young and experienced talent in Malaysia or all the Government’s efforts in developing and strengthening the financial services industry will be wasted. In addition, it is important for Malaysian firms to scour globally for talent to lead our financial services industry. Just as how Hong Kong and Singapore are developing their highly successful and respected markets, we expect an infusion of foreign talent in this sector will lead to greater cross-fertilization of ideas and increased innovation amongst industry players. This will not only provide the cutting edge for our competitiveness, but also possibly assist in retaining our own local talent from moving on to greener pastures.

(Speech 9 on 2008 Budget in Parliament on Monday, September 10, 2007)