MALAYSIAN ISLAMIC FINANCE Issuers and Investors Forum 2006

Rising to the Challenge:
Meeting the Needs of the Market

To start off this discussion on meeting the needs of the Islamic financial market, moderator Abdulkader Thomas posed a general question on what the key challenges were to make the MIFC initiatives a reality.

Hamdi Abdullah, before moving on to examine these challenges, acknowledged that from the legal perspective Malaysia has been at the forefront as compared to other jurisdictions, and the legal infrastructure in the country provided ready-made solutions to facilitate issuers and investors in the Islamic finance arena. However, despite having a fairly advanced legislation structure, he cautioned that legislation was not static and further enhancing it was one of the major challenges faced by players.

Speaking from the perspective of a rating agency, Mohd Asri Awang identified the lack of best practices or uniform regulations as a challenge, especially in terms of evaluating or assessing instruments, as well as the institutions offering the instruments.

Asri also perceived the approach to conducting effective ratings on Islamic financial institutions as another challenge; the rating agency needed to understand the legal implications of certain transactions, applying different underlying principles.

He said although the Islamic International Rating Agency had been established in Bahrain, a dedicated methodology for conducting such ratings had yet to be introduced to the market.

Whether the Sukuk to be rated was initiated domestically or internationally, Asri stressed that they were all similar in that the rating agency had to go back to the underlying structures and, most importantly, be able to understand the individual laws or regulations from where the instruments were initiated.

Whilst agreeing that Malaysia had progressed a long way in Islamic finance with its regulatory and tax regime evolving in tandem with industry growth, Mohamed Rashdan Yusof highlighted that Shariah compliance was one of the major challenges. He said that scholars should be more aggressive in order to get the Shariah compliance process harmonized, even within the country, and they should also work hand in hand with their counterparts in the GCC to enable the much-discussed convergence of standard practices.

Issuing an Islamic bond was far more difficult than issuing a normal bond, especially in terms of pricing, he said, noting that the structure had to be accepted by the Shariah board, as well as meeting the needs of the clients or investors.

Idris Md Tahir said the main challenge, after being in the industry for more than 20 years, was to develop an innovative Shariah compliant product. The product, he pointed out, had to be viable in order for the institution offering it to be able to sustain in the business and, more importantly, it had to be accepted and comply with the market needs.

“If our product is developed based on a globally accepted Shariah standard, it would definitely whet the appetite of a bigger market,” he explained, adding that a good product needed to build public confidence.

Idris added that there should not be any misunderstanding over the differences in Shariah views as the Shariah principles were basically universal, meant for mankind at large, and innovative practices should be accepted. As a player, it is important to introduce new products and to get them accepted as, at the end of the day, it is up to the market to judge the viability of the products.

However, Idris did add that he was not in a good position to share any experience on Sukuk as BIMB Securities only dealt with stockbroking activities, where the company was restricted to investment on the stock market only. The issuance of bonds or Sukuk would be covered by the banking jurisdiction.

Hamdi said the education process, i.e. getting people to understand the whole process, should be added to the list of challenges, as marketing and branding was still lacking in the industry.

“Wrong messages have been put forward, especially when the issuers are hit by litigation,” he concluded.