IMP gearing up to meet challenges in Islamic finance

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With the global sukuk market largely back on track with Malaysia successfully closing its second sovereign issuance of $1.25 billion in June 2010, Indonesia indicating that it may go to the market with its second sovereign issuance and GE Capital confirming that it too will raise funds through a second sukuk, market education and knowledge, especially of Islamic Capital Markets (ICM), becomes a competitive advantage.

Indeed, the Islamic Markets Program (IMP), which is held annually by the Securities Industry Development Corporation (SIDC), the training and development arm of the Securities Commission Malaysia (SC), is by far the best in the world and is aimed at helping participants to analyze the philosophy and fundamentals of ICM and to distinguish between its various products; to evaluate Islamic equity, sukuk and derivatives as alternatives means of financing and investment to conventional products; and to assess the significance and essentials of corporate governance, risk management and sound regulation in promoting Islamic markets.

In fact, the 5th annual IMP under the theme "Gearing up to Meet Future Challenges" convenes in Kuala Lumpur on Monday for a five-day program - the fifth since 2006 - which will comprise an introductory workshop on Islamic finance; ICM offerings and processes; strengthening ICM framework; Islamic equity and sukuk; and meeting challenges ahead.

Since its inauguration, 175 participants from 27 countries all over the world have partaken in the program, which comes under the Malaysian Technical Cooperation Program, through which Malaysia shares its development experiences and expertise with other developing countries. Qatar remains the only GCC country to have participated in the IMP to date.

According to SIDC, the growth of ICM products and services in Malaysia over the last decade or so has been dramatic for both financing and investment. But to accelerate growth of the ICM, human capacity building must be accorded high priority in its development efforts. "The ICM industry needs to be equipped with a new breed of innovators, regulators, intermediaries and risk managers with the right blend of capital market knowledge and understanding of Shariah principles. Furthermore, there is a pressing need to enlarge the pool of human capital in the areas of Islamic finance, law, accounting and risk management," explained SIDC.

Nik Ramlah Nik Mahmood, managing director, Securities Commission Malaysia, in a speech during a Malaysia International Islamic Finance (MIFC) road show in GCC states earlier this year, stressed that in Malaysia, in addition to having the world's largest sukuk market, "we have a comprehensive Islamic capital market and offer many incentives for the development of market itself. Currently 88 percent of the stocks listed on Bursa Malaysia are Shariah-compliant having total market capitalization of 637.9 billion ringgits ($187.6 billion) or 63.8 percent of total market-capitalization. As a result of this it has been possible to have an end-to-end Shariah compliant ETF, designed to provide returns that closely correspond to the performance of a benchmark index in this case, Dow Jones Islamic Market Malaysia Titans 25 Index."

In addition, she added, there are currently 145 Islamic unit trust funds managing over 21.69 billion ringgits ($6.40 billion) representing about 12 percent of total industry. Apart from equities, there are three Shariah-compliant REITS not just underlined upon real estates but also an oil palm plantation. This diversity of assets contributes to an extent toward insulating Islamic finance from potential risks resulting from excess leverage and speculative financial activities.

"Indeed, the equity market is an area where there are strong opportunities, enabling issuers to meet their funding needs through the Islamic equity market into new markets. Last year we saw the listing of several China-based companies on Bursa Malaysia. These companies have applied for and received Shariah-compliant status at IPO (initial public offering). Individual and institutional investors seeking Shariah-compliant investments can therefore access the companies through investing in Bursa Malaysia," she explained.

With this success has come international recognition and cooperation for Malaysia, arguably the most advanced Islamic finance market with the most proactive government support in the world.

Zarinah Anwar, chairman of the Securities Commission Malaysia, who is currently also the vice-chairman of the Emerging Markets Committee of the International Organization of Securities Commissions (IOSCO), and has been chairman of the ASEAN Capital Markets Forum, a grouping of securities regulators from the 10-member Association of Southeast Asian Nations (ASEAN), was heavily involved in an IOSCO Report on ICM and indeed was the chairman of the committee that produced the report.

In fact, Tan Sri Zarinah is a strong advocate of the connectivity in global Islamic finance, and is active in promoting cross-border Islamic capital market activity. Under her watch, the Securities Commission and Dubai Financial Services Authority, for instance, recently entered into a milestone agreement for cross-border marketing of Islamic funds. Similarly, the Securities Commission Malaysia has signed bilateral ICM cooperation agreements with Australia and Hong Kong.

The Securities Commission argues that the global financial crisis has created a unique opportunity for Islamic finance, despite it being a niche and nascent industry. This is because Islamic finance has been spared the wrath of the global financial crisis because of the better ethical foundations of Islamic finance reinforced by the prohibition on leverage and speculation which were instrumental in driving the reckless growth of credit regardless of the risks associated with the new securitized instruments.

However, GCC markets in particular have been affected by the economic impact of the crisis like many others. GCC states too were more affected by the real estate bubbles, including Islamic financial institutions, and a few defaults of sukuk.

The situation faced by the GCC countries, stresses the IMP, has been a wakeup call "making people realize that reckless lending and irrational exuberance are universal issues in all types of financial systems."

By Mushtak Parker

© Arab News 2010