Bursa Malaysia's Islamic innovation drive

Since assuming the role of chief executive of the Bursa Malaysia in 2011, Tajuddin Atan has presided over a period of record growth for the country’s stock exchange. Market capitalisation has increased by 184%, in line with the broader expansion of the Malaysian economy. The impressive growth of the Bursa Malaysia has been accompanied by various developmental milestones, including the formation of the Association of South-east Asian Nations (Asean) exchange link, involving Singapore, and Thailand. This was regarded as the first step in establishing a pan-Asean regional platform, a long-held ambition of the leading south-east Asian economies.

These achievements have been considerable and point to the ongoing efforts of the Malaysian authorities to develop a balanced model for economic growth, supported by a pro-business and investment-friendly regulatory environment. Yet, the Bursa Malaysia’s pioneering approach to the development of Islamic finance has been an even more salient feature of its recent performance. Though it has long been considered a leading light in the global sharia-compliant financial market, the degree of innovation emerging from Malaysia’s stock exchange over the past five years has propelled it to new heights.

Breaking boundaries

“Companies operating in Malaysia are benefiting from strong domestic and regional growth,” says Mr Tajuddin. “So we are attracting the conventional investors who are looking at fundamentals such as yield, returns and capital gains. But we also appeal to investors who are conscious of sharia-compliance, and who consider other investment issues. Some 73.6% of companies listed on the Bursa Malaysia are sharia compliant.”

By most indicators, the country’s stock exchange is the leading global centre for Islamic capital markets. Historically, between 65% and 70% of total sukuk issued globally emerge from Malaysia, meaning that the Bursa Malaysia dwarfs its nearest competitors, the London Stock Exchange and Dubai Financial Market, by some margin, according to data from the Malaysia International Islamic Financial Centre. While these numbers point to quantity and scale, the Bursa Malaysia has also been effective at developing a number of Islamic capital markets products to assist sharia-compliant investment.

“I think one of the first things that came to the attention of Malaysia is that multiple jurisdictions are now very interested in Islamic finance. We want to tap into this growth and expand the borders of Islamic finance. This is important because we can’t simply rely on Malaysia’s domestic population for growth,” says Mr Tajuddin.

To that end, the Bursa Malaysia has worked in partnership with other government agencies to establish the Bursa Suq Al-Sila’ (BSAS), the world’s first sharia-compliant commodity trading platform, designed to ease Islamic finance institutions’ liquidity management issues. BSAS permits multi-currency and multi-commodity trades and acts as a commodity murabaha, using palm oil as the underlying commodity, in order to support Islamic interbank placements, client deposits and financing along with sukuk issuances. Nevertheless, commodity murabaha remain contentious in the Islamic finance industry, with some jurisdictions and players, particularly in the Gulf, rejecting the mechanism’s Islamic credentials.

"The acceptability of BSAS has grown. There is a growing number of foreign jurisdictions using  this instrument, and we have seen particular growth in the Middle East and the UK. Over the past year-and-a-half we have seen usage increase by 71%, though this has been from a low base,” says Mr Tajuddin.

Multiple instruments

The Bursa Malaysia’s work on the BSAS mechanism is part of a wider ambition to create a broader suite of sharia-compliant investment instruments. As such, aggressive product innovation has seen the exchange create sharia-compliant exchange-traded funds (iETFs), as well as a sharia-compliant real estate investment trusts (iREIT).

“What we want to do is ensure that any conventional investment instrument is matched by an Islamic equivalent. So it's not just limited to the iETFs and iREITs, we also want to have securities borrowing from a sharia-compliant perspective. One has to also consider these issues from a regulatory and structural perspective and this is what we are focused on at present,” says Mr Tajuddin.

Meanwhile, steps are being taken to increase the connectivity of the Islamic finance industry. In February 2014, the Bursa Malaysia signed a memorandum of understanding with the Saudi Tadawul to promote further collaboration between the two exchanges and to formalise existing ties. "The thinking here is that there is a connection that needs to be made given the interest in the Islamic space and the signing is to ensure that we have a long-term and sustainable Islamic finance place. And we need to share and collaborate and partner with other jurisdictions in this space,” says Mr Tajuddin.