by KFH Research Limited (KFHR)
The 2014 Budget was tabled at a critical time when the Malaysian economy is at a crossroad of having to engineer sustained growth rates to ensure a smooth journey towards Vision 2020 and to tackle significant imbalances that may affect the future foundation of the economy.
On the financial sector front, we opine that the measures to introduce a socially responsible sukuk framework, coupled with the introduction of an Environmental, Social and Governance Index (ESG) and the establishment of an SRI Fund, demonstrate Malaysia’s leadership in creating a more inclusive and socially responsible financial environment.
As outlined in the 2014 Budget, Malaysia, as the leading global sukuk market, will establish a framework for a socially responsible sukuk instrument or SRI Sukuk that will finance various sustainable and responsible investment initiatives.
The move in promoting social responsibility by capitalising on core value propositions of Islamic finance is highly commendable as it will provide investment avenues for investors looking for prospects that are not only Shari’a compliant but will also be channelled to activities that produce significant benefit for the general public and stakeholders.
Meanwhile, the introduction of ESG and SRI Fund will allow Malaysia to better compete with its regional peers, particularly Singapore, which has introduced an Impact Exchange specifically designed at promoting socially responsible companies and investments.
Malaysia has already established itself as a key player in the global Islamic finance sphere, where the Islamic capital market specifically is recognised as a hallmark of international financial success.
This is evident in the depth and diversity of Malaysia’s capital market, which has been enriched through the rising number of foreign issuers issuing both Ringgit and USD-denominated sukuks out of Malaysia.
Malaysian sukuks accounted for 76.7% of total global sukuks issued in 9M13 and 59.2% of total global sukuks outstanding as at end-3Q13, allowing the country to retain its title as a global leader in the sukuk market.
In the Malaysian dual financial system, Islamic finance complements the conventional financial system as drivers of economic growth. The 2014 Budget reflects the Government’s commitment among others to encourage investments for the five regional economic corridors, enhance the development of logistics infrastructure and supply chain and support the participation of Small and Medium Enterprises (SMEs) in establishing and expanding their businesses.
The Islamic financial system in Malaysia will benefit from these economic activities as Islamic financial institutions in Malaysia have evolved to be as competitive as conventional financial institutions in supporting the economic needs of the country. As at June 2013, the issuance of sukuks surpassed the issuance of conventional bonds to account 55.5% of the total bonds issued.
Meanwhile, Islamic banking assets in Malaysia now amount to RM527.2bln or 24.1% of the banking system’s total assets. As at end-May 2013, a total of 801 Shari’a-compliant securities constitute 88% of the total 910 listed securities on Bursa Malaysia.
Overall, the plans for SRI Sukuk and ESG index will allow foreign funds, particularly from the GCC region, to continue to flow into Malaysia. Strong economic fundamentals will also support this trend– we forecast that the pace of Malaysia’s economic growth will quicken in 2014 to 5.2% y-o-y (2013E: 4.5% y-o-y) on the back of improved economic performances in the US and Europe and a gradual acceleration in global trade.