Islamic Capital Markets – Malaysia’s CMP3 2021-2025

The Securities Commission Malaysia (SC) launched the country’s third Capital Market Masterplan 2021-2025 (CMP3) in September 2021, which will serve as a strategic framework for the growth of Malaysia’s capital market in the next five years.

CMP3 seeks to leverage on the strengths and potential of the Malaysian capital market to accelerate economic growth that is sustainable and inclusive, based on global megatrends that will shape the recovery and growth of global and Malaysian economies.

Inclusivity, sustainability and stakeholder participation, as Senator Zafrul Tengku Abdul Aziz, Malaysian Minister of Finance, alluded to at the launch are core structural objectives of the Master Plan. “The CMP3,” he stressed, “fits well into the nation’s aspirations as one of the key enablers that will pave the way for a wider population to participate in the nation’s growth by enabling more inclusive and accessible investment products and distribution channels.

“As we transition towards becoming a more developed nation, Malaysia will need to cultivate more domestic firms in the frontier sectors of the rapidly changing contours of the global economy, in order to capture economic growth. Strategies outlined in the CMP3 will address this priority to spur innovation and provide risk capital for domestic entrepreneurs more comprehensively, enabling more funding avenues for entrepreneurs and small-and-medium business owners to grow their companies into competitive firms in the global economy.”

Not surprisingly, Datuk Syed Zaid Albar, Chairman of the SC, sees Malaysia at a critical juncture in its post-COVID-19 journey in which the capital market is expected to continue to support the economy as the country transitions into an inclusive and sustainable dispensation.

The progress in the capital market, he maintains, “cannot be measured solely by growth and size, as it also has to serve the underlying needs and aspirations of the country and its people.” As such, he sees the CMP3 as the conduit towards achieving three desired outcomes: relevant to the development of the economy and its stakeholders; efficient in capital mobilisation and in achieving the desired regulatory outcomes; and diversified to create value for all participants.

CMP3 is a comprehensive document whose framework aspirations are clearly defined amidst global megatrends in an uncertain world defined by the COVID-19 pandemic. The Framework objectives concentrate on ‘Catalysing Competitive Growth,’ ‘Empowering Investors for a Better Future,’ ‘Shaping a Stakeholder Economy with Sustainable and Responsible Investment and Islamic Capital Market,’ ‘Embedding Shared Accountability within the Capital Market,’ ‘Prioritising Efficiency and Outcomes,’ and ‘Embracing the Digital Age.’

The CMP3 comprises six development and regulatory thrusts which centre
around facilitating fundraising for competitive businesses through a diverse market and intermediation ecosystem; empowering Malaysians to invest for their future; promoting digital inclusion; protecting vulnerable investors; and through the SRI and ICM pillars, shaping a stakeholder economy by mobilising more capital towards sustainable businesses.

In tandem, the SC’s regulatory approach will strive to embed greater shared accountability within the capital market; achieve a more efficient regulatory outcome and greater efficiency in investor protection through swift, effective and targeted enforcement and supervision; and the greater use of technology – both RegTech and SupTech – for greater efficiency.
However, CMP3 avoids setting actual targets and its tenure is 5 years compared with the 10 years of CMP2 2011-2020. Nevertheless, the achievements of CMP2 are impressive. These include inter alia 5.3% compound annual growth rate (CAGR) in total size of the capital market; 9.1% CAGR in total asset under management (AUM); 7.5% CAGR in total size of Islamic capital market (ICM); 1st globally to issue green Sukuk; and 2nd globally in protecting minority investors.

Perhaps the standout achievement is that Malaysia is the only country in the world whose ICM dominates the overall capital market. In 2020, for instance, the size of overall capital market despite the impact of the pandemic totalled RM3.4 trillion (US$820 billion), up from the RM3.2 trillion in 2019. The ICM accounted for a staggering RM2.3 trillion compared with RM2.03 trillion in 2019 or 65.85% of the total capital market. In other words, the ICM grew 10.85% in 2020 compared to 2019.

In the Sukuk sector, it is the Malaysia Government that leads from the front. In 2020, the Putrajaya issued RM146.96 billion of Sukuk (2019: RM132.81 billion). This represented 56.07% (2019: 52.70%) of total Government bonds and Sukuk issuances of RM262.09 billion (2019: RM252.03 billion).

Total Government Sukuk outstanding stood at RM424.36 billion in 2020 (2019: RM383.47 billion), out of total Government bonds and Sukuk outstanding at RM876.62 billion (2019: RM792.24 billion). This represented 48.41% (2019: 48.40%) of total Government bonds and Sukuk outstanding.

The ICM features strongly in the future of the Malaysian capital market. “Moving forward,” says the SC, “ICM offerings will continue to be expanded to better support the needs of stakeholders of the economy. One key area of focus will be the Sharia’a-compliant funding needs of MSMEs, especially in the halal sector which comprises mostly MSMEs and which contributes to approximately 7% of the national GDP, and Sharia’a-compliant SRI.”

MSMEs typically rely on the banking sector as well as funds from families and friends. In this regard, says the SC, ICM fundraising offerings in VC, PE, ECF and P2P financing can complement the banking sector and fill the funding gaps to support the growth of MSMEs in the halal sector.

To facilitate this, the SC will collaborate with relevant stakeholders to establish and develop an ecosystem conducive to businesses in the halal economy, focusing on Shariah-compliant funding models and mechanisms.

This includes developing broad Shariah guidance to facilitate assessments of the Sharia’a-compliant status of unlisted companies for industry reference. Ongoing efforts to raise awareness of alternative Islamic fundraising activities and efforts to broaden Islamic offerings through crowdfunding platforms will also be intensified.

“These initiatives”, says the SC, “are expected to expand and provide greater access to the full spectrum of the Islamic investment universe, including the unlisted markets, thus providing greater avenues for both retail and sophisticated investors to participate in both public and private markets. This will enable a more diversified Sharia’a-compliant investment portfolio across asset classes and economic sectors as well as facilitate greater mobilisation of funds towards the halal economy, promoting inclusivity.”

In addition, the SC will enhance investor access to Sharia’a-compliant companies with good ESG practices. This is aimed at encouraging companies to take into greater consideration the needs of broader stakeholders, including people or communities and the environment, and is expected to further elevate the socially responsible and ethical values of Sharia’a-compliant companies. In this regard, guidance will be provided to incorporate Sharia’a requirements and ESG standards for investors seeking such investments as well as companies aspiring to adopt ESG practices. This guidance will leverage existing Sharia’a screening methodologies and internationally recognised positive screening methodologies available in the market.

For greater impact to the socio-economic development in Malaysia, the SC aims to promote greater use of the ICM framework as a reference point and its products and services as funding sources for further development of the Islamic social finance sector (ISF). The key objective is to alleviate hardship among the underprivileged population within the Islamic wealth management and distribution system.

Here, Islamic social finance is enabled by capital market instruments such as SRI Sukuk and waqf-featured funds. The Commission believes that moving forward there are opportunities for impact assessments to be integrated with ISF instruments. This will enable measurable impact investments in the areas of socio-economic development – ensuring that investors will be able to measure whether the capital invested has achieved its desired impact objectives, at the same building an enabling ICM ecosystem for impact investing.

Climate action, transition to net zero, decarbonisation and ESG, maintains SC Chairman Datuk Syed Zaid Albar, are in line with Maqasid al-Sharia’a (objective of Sharia’a), which promotes the attainment of benefits and prevention of harm for the people. “By promoting greater alignment with Maqasid al-Sharia’a, the ICM can foster a more sustainable and responsible capital market ecosystem. This will enable ICM to play a greater role in facilitating sustainable and equitable growth in the economy,” he added.