MALAYSIAN ISLAMIC FINANCE Issuers and Investors Forum 2006

Islamic Finance as a Preferred Choice
in Fund Raising

Islamic banking and finance has become a force to be reckoned with in the global economic marketplace. It forms part of the equation in international finance, whether at the government to government or the private sector level.

Moderator Yusli Mohamed Yusof, in his brief introduction to the topic, acknowledged that Malaysia has always been at the forefront of the industry, as well as being the pioneer in issuing Islamic debt papers.

Yusli then posed a question to the panel as to why issuers should look to raise capital using Islamic instruments as opposed to conventional instruments. He also raised some concerns on issues of pricing, rating and distribution of Islamic financial instruments.

Responding to Yusli’s concerns, Iqbal Khan said that since the Malaysian debut Sukuk in 2002, the rating agencies, investors and trade committees of Islamic banking had been educated about Sukuk as an instrument to raise funds and capital. According to Iqbal, one of the reasons behind the push to use Islamic instruments was that when tapping the Islamic capital market, the equities listed on the various exchanges were classified as Shariah compliant, a clear indication that those equities underwent strict requirements of disclosure and corporate governance, thus providing better transparency.

The volume of Islamic issues has been increasing for the last few years, and they are as competitive and efficient as their conventional counterparts, Mohsin Nathani claimed, adding that there had been concern in the past that Islamic issues were far more complex tham conventional instruments.

“Conventional instruments are said to be more efficient
and much cheaper,” he said, highlighting that this is just no longer true.

Mohsin also listed liquidity, especially with the surge of the petrodollar, as another factor encouraging issuers to consider Islamic finance products. Investors were keen to build an asset base using the surplus liquidity and they could only go for Shariah compliant products due to the strong demand and better pricing.

On the subject of Malaysia, Mohsin commended the players as well as the regulators for doing such an exemplary job, especially in issuing Islamic commercial papers and further enticing foreign issuers to come to the country, although more liberalization was still required.

Expanding on this push for further liberalization, he said it was down to accepting the different views of different Shariah scholars. As for the types of Sukuk to be issued, Mohsin said most investors were quite open as long as the pricing and ratings assigned to the Sukuk were acceptable. This was especially so in Malaysia, where investors were less demanding that GCC investors.

Iqbal said another area that investors should consider in their capital raising in Malaysia was Real Estate Investment Trusts (REITs). In order for this to happen, the government should seriously consider reducing the withholding tax rate to become level with neighboring Singapore.

“The current withholding tax rate of 28% charged on non-residents is exorbitant,” Iqbal claimed, suggesting that the rate be reduced to 20%, although that was still considered high compared to Singapore’s 10%.

While Malaysia had a facilitative regulatory framework with proper guidelines, supported by incentives for both the issuers and investors, Azizi Ali, however, tended to agree with the point made by Iqbal on the withholding tax rate and urged the government to seriously consider the reduction of this.

Moving on to other alternatives and opportunities in making Malaysia the preferred choice for issuers as well as investors, Nathif J Adam mentioned a few successful instruments in Malaysia, such as industrial Sukuk or the Sarawak Quasi-Sovereign Sukuk. He stressed that if Malaysia could continue to produce a more flexibly structured Sukuk or other Shariah compliant products, more investors and even issuers would come to the country.

Malaysia, he added, was also a good ground for other Shariah compliant instruments, as most of the products were developed after taking into consideration the views of scholars from different schools of thoughts.

Mohsin concluded by noting that great convergence in Shariah fatwa had taken place in Malaysia, especially as some of the Middle Eastern scholars had been appointed to sit on the Shariah boards of Malaysian companies, and vice-versa.