the evolution of islamic finance regulatory framework and ...€¦ · the evolution of islamic...
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Establishing Appropriate Institutional, Legal
and Regulatory Frameworks:
The evolution of Islamic finance regulatory framework
and Shariah screening reform
Kamarudin Hashim
Securities Commission Malaysia
11 August 2014
Islamic Markets Programme (IMP)
Background – Malaysia’s Islamic finance agenda
2
• Positioning Malaysia as a global hub for
Islamic finance products and services
• Islamic banking
• Takaful
• Islamic Capital Market (ICM)
• For ICM, key focus segment in the
market include Islamic equities, Sukuk
and Islamic fund management
Going beyond the
provision of an
alternative to
conventional finance
activities for issuers,
investors,
intermediaries and
other market players
3
Islamic finance and capital market
PAKISTAN
• Banking
• Takaful
• Shariah stocks
• Mutual funds
BANGLADESH
• Banking
• Takaful
THAILAND
• Banking
PHILIPPINES
• Banking
BRUNEI
• Banking
• Takaful
• Mutual funds
• Stockbroking
SINGAPORE
• Banking
• Takaful
• Mutual funds
• Bonds
INDIA
• Mutual funds
SRI LANKA
• Takaful
• Mutual funds
INDONESIA
• Banking
• Takaful
• Shariah stocks
• Mutual funds
• Index
• Bonds
MALAYSIA
• Banking
• Takaful
• Shariah stocks
• Indices
• Mutual funds
• Bonds
• Stockbroking
• Islamic fund mgmt
ICM in M’sia has grown to RM1.6 trillion in Q2 2014 from RM294 billion in 2000 SC focuses on: • Developing a
comprehensive and facilitative framework
• Working closely with the industry to widen product range
• Developing linkages with other countries
• Driving thought leadership and capacity building
3
Capital markets institutional framework in Malaysia
Listed Companies
Stockbroking Companies
Unit Trust Mgt Co
Investment Banks
MINISTER OF FINANCE
Fund Managers
PRS Distributors
Unit Trust Distributors
Banking/ Islamic banking
and insurance/ takaful sector
Private Pension Administrator
Securities Industry Dispute
Resolution Centre
SECURITIES COMMISSION BANK NEGARA MALAYSIA
FIMM
Bursa Malaysia
Attorney General’s Chambers
Companies Commission
Retail and Institutional Investors
e.g. Tabung Haji 4
Investor Education e.g. SIDC, INCEIF
CRAs BPA
Trustees
Invt. Advisers Financial planners
National Shariah Advisory Council
Philosophy in developing Islamic finance regulatory framework
5
Standards for Islamic finance regulatory framework should not be less than
conventional finance
• The regulatory framework for Islamic banking, Takaful and Islamic Capital
Market benchmarked against international standards and best practices
• Islamic finance products and services can
− leverage on existing regulatory infrastructure
− not compromise the universal goals of financial market regulations
• E.g. IOSCO Report of the ICM Taskforce 2004 and Analysis of IOSCO’s
Objectives and Principles of Securities Regulation for Islamic Securities 2008
− conventional regulatory framework applicable to Islamic capital market products and services
− Islamic capital market products and services may be introduced and developed within any existing well-structured securities market
6
Regulatory outcome for Islamic finance remains consistent with the overall objectives and principles of financial market regulation
• In Malaysia, we have the whole spectrum for the Islamic finance regulation.
• To suit specific need of the market segment
• To realize Malaysia’s vision as the international centre for Islamic
finance
… that therefore seeks to achieve similar objective with
conventional regulatory framework
Although the form for Islamic finance regulation may differ
• Specific legislation e.g. Islamic Financial Services Act 2013
• Non specific legislation e.g. Capital Market and Services Act 2007, but
with certain provisions for Islamic capital markets
• Specific Guidelines e.g. Guidelines on Sukuk, Guidelines on Islamic
Fund Management
• Non specific Guidelines - Guidelines on the offering of Structured
Products, but with certain provisions for Islamic structured products
Practical approach adopted for Islamic finance regulation
7
In Malaysia, a 2-tier approach to Islamic Capital Market is being practised
Tier 1 Universal / General Regulatory
Requirements
Tier 2 Specific Shariah Requirements
Guidelines on the Offering of
Asset- Backed Securities
Guidelines on the Offering of
Structured Products
Guidelines on Unit Trust &
Wholesales Funds
Guidelines on ETF
Bonds - Trust deed, mandatory rating, eligible persons, etc
Unit Trust - Investment committees, trustees, management company, etc.
REITs - At least 75% investment in real property
Guidelines on Sukuk Guidelines on Islamic
REITs Guidelines of Islamic
Fund Management Guidelines and Best
Practices on Islamic Venture Capital
Sukuk - Shariah adviser, compliance with Shariah requirements, application of Shariah rulings
Islamic Unit Trust - Shariah adviser to certify that fund complies with Shariah requirement Islamic REITs - Tenants’ activities and rental income must comply with Shariah
requirement
… with Shariah framework viewed as a fundamental
component within the overall regulatory framework
8
• Two levels for Shariah governance
National based: Shariah Advisory Council - Bank Negara Malaysia
and SC
Market based : Shariah Supervisory Boards of Islamic Financial
Institutions
• Importance of Shariah governance
Ensure strict Shariah-compliance
Instill market confidence
• Increasing Shariah dialogue between national and market Shariah
experts as a platform to promote thought leadership and development
9
Sukuk Issuers • Tax neutrality for sukuk transactions
Stamp duty exemptions
• Tax deduction on issuance cost for sukuk
Company setting up sukuk SPV also given tax
deduction
• Sukuk SPV not required to comply with
administrative matters under Income Tax Act
Investors
• Income tax exemptions for all residents on income
derived from non-RM investments
• No capital gains tax
• No withholding tax on income from RM and non-RM
investments
Intermediaries
• Tax exemptions on fees obtained from arranging,
underwriting and distribution of non-RM sukuk from
Malaysia
• Tax exemptions on profits received from the trading
of non-RM sukuk from Malaysia
Islamic funds Investors • No withholding tax
Islamic Fund Management Companies
• 10-year tax exemption on all fees received by fund
management companies for managing approved
Islamic funds for local and foreign investors up to
2016
MIFC promotion
• Additional/double tax deduction for promotion of
MIFC activities
Human capital
• Income tax exemption given to income received by
non-resident experts in Islamic Finance
Regulatory and tax framework to promote growth of ICM –
Malaysia’s case
10
Sukuk
• Deemed approval (1-day) accorded for issues rated ‘AAA’ by local credit rating agency or for issues rated ‘BBB’ and above by a foreign credit rating agency
• Exemption from issuing a trust deed
• No restriction on use of international law in the offering documentation
• Opportunity to be listed on Bursa Malaysia - the top
sukuk listing destination in the world
• Foreign currency sukuk listed on Bursa and LFX that
meet certain criteria eligible to be included in
Bloomberg Malaysian Sukuk Ex-MYR Index
Islamic funds
Islamic Fund Management Companies
• Allowed to conduct foreign currency and ringgit fund management for retail and institutional investors
• Islamic fund management companies are allowed to invest all their Shariah funds abroad
• Up to 100% foreign equity ownership in the Islamic fund management companies
Investors
• Employees Provident Fund (EPF) has set aside a specific allocation of start-up fund for foreign Islamic fund management companies
• Bank Negara Malaysia (BNM) has also disbursed funds for Shariah equity investments and set up a developmental ‘Sukuk Investment Fund’ specifically for Islamic fund management companies
Human capital
• Expedited immigration approval through the ‘Green
Lane’ established for expatriates in Islamic Finance
and their family members.
Regulatory and tax framework to promote growth of ICM –
Malaysia’s case (cont’d)
11
Shariah stock-screening
• List of Shariah compliant securities by SC’s
Shariah Advisory Council published twice a year
Regulatory and tax framework to promote growth of ICM –
Malaysia’s case (cont’d)
Government Investment Issue (GII)
• Long-term non-interest-bearing Government
securities based on Islamic principles issued by
the Government of Malaysia for funding
developmental expenditure
• Benchmark for Sukuk pricing
Sukuk
• Expenses for the issuance of AgroSukuk be given a double deduction for a period of four years effective from year of assessment 2013 to 2015.
• Framework on issuance of Socially Responsible Investment (SRI) sukuk being finalised, in response to global trend in issuances of green and social impact bonds to finance sustainable activities.
12
Driving the growth of Islamic finance
• Both the public and private sectors have an important
role to play in developing the Islamic Finance market
• State of development of the financial market
• Need and sensitivity of the market
• In the early stages of development, Malaysia took the top
down approach
13
Government plays a key role to support growth and development
Strong and consistent Government support is essential
MIFC, Capital Market Masterplan (CMP) and CMP 2, Financial Sector
Masterplan and Financial Sector Blueprint
Shariah stock screening
14
• Shariah stock screening refers to a process undertaken by the SC SAC that seeks to ensure securities of public listed companies (PLC) comply with the principles of shariah
• Each PLC is reviewed once a year based on the audited financial statements for
each financial year end and other relevant material
• The SAC issues a list of shariah-compliant stocks which are published by the SC in May and November of each year
• Companies seeking to list on the exchange may apply to undertake shariah screening to ascertain its shariah compliance. Pre-IPO screening is voluntary and is subject to a processing fee of RM10,000 + 5% of SC’s IPO fee with a maximum of RM50,000.
Shariah stock screening – historical background
15
• Pioneered in Malaysia by Bank Islam as they sought to identify “permissible counters for investment” by reviewing the activities of companies listed on the then KLSE
• A national level screening methodology was first developed in 1995 by the SC through the work of ICM unit and Islamic Instrument Study Group (IISG)
• Publication of the list of shariah-compliant securities began in 1997 following the formation of SC’s SAC in 1996
• Revised screening methodology announced by the SC in 2012 and implemented in November 2013
• Publication of methodology and list of shariah-compliant securities allows scale and
growth of shariah-compliant equity and investment management segments and expansion on Islamic capital markets’ international reach outlined in CMP2
• List of shariah-compliant securities forms the basis for Bursa’s Shariah indices, as well as investable securities for Islamic funds, ETFs, structured products etc.
Shariah stock screening – milestones
16
Pre-1993
• Shariah screening pioneered by Bank Islam
1995 • Development of shariah screening criteria to facilitate compliance review
process undertaken by SC’s ICM unit and Islamic Instrument Study Group (IISG)
1996 • Establishment of the Shariah Advisory Council of SC
1997 • The SAC announced the official list of shariah compliant securities
1999 • Bursa Malaysia launched the Kuala Lumpur Shariah index
2004 • The SC disclosed the benchmarks applied in the screening of shariah
compliant securities
2004 • Shariah compliant review at pre-initial public offering stage undertaken by the
SAC upon application by issuers
2007 • Bursa Malaysia and FTSE launched 2 Shariah indices - (i) FBM EMAS Shariah
Index and (ii) FBM Hijrah Shariah index
2012 • The SC announced the revised screening methodology
2013 • Revised screening methodology made effective in November
The SAC provides a national level shariah compliance review
17
• Facilitates efforts to promote centralisation and harmonisation of shariah decisions on
the status of listed stocks • SC’s regulatory mandate also allows for the issuance of relevant guidelines on shariah
compliance e.g. guidelines on disposal of non-compliant stocks
• Enhances market confidence as the stocks are endorsed by the shariah body at the national level
• SC has appointed scholars, academicians and practitioners from diverse backgrounds for membership of the SAC to accommodate broad perspectives on Islamic jurisprudence
Revised stock screening methodology – November 2013
18
Stock screening involves both quantitative and qualitative assessments: 1. Quantitative assessment
I. Contribution from shariah non-compliant activities (computed and compared with group revenue and the group profit before tax) must be below predetermined thresholds
II. Financial ratio benchmark - shariah non-compliant cash and debt must be below a predetermined percentage of total assets (i.e. 33%)
2. Qualitative assessment
I. Public perception and image of the company is assessed
The listed security must pass screening at both stages in order to qualify as shariah-compliant
Revised vs. previous screening methodology
19
The revised screening methodology introduces financial ratio benchmarks, in addition to the business activity benchmarks of the previous methodology
Quantitative assessment • Business contribution
thresholds: • 5% • 10% • 20% • 25%
Quantitative assessment • Business contribution
thresholds: • 5% • 20%
• Financial ratio benchmark: • 33%
Previous methodology Revised methodology
Qualitative assessment Qualitative assessment
Impact of revised screening methodology
20
817
650
923 911
Dec-2012 Dec-2013
Number of Shariah-compliant Securities
Shariah-compliant
Total listed securities
942 1030
1466
1702
Dec-2012 Dec-2013
Market Cap of Shariah-complaint Securities (RM bil)
Shariah-compliant
Total Market Cap
• Revised screening methodology reduced the number of shariah-compliant securities – however market capitalisation as a whole was not severely impacted
• Despite the contraction in numbers, shariah-compliant securities continue to experience robust growth.
0.0
2.0
4.0
6.0
8.0
10.0
12.0
14.0
16.0
18.0
20.0
% Growth FBM EMAS vs. FBM EMAS Shariah
FBM EMAS Shariah FBM EMAS
Guidance on disposal of shariah non-compliant securities
21
Within six months of effective date Six months after effective date
Price = or > investment cost (Breakeven/Net
profit)
Price < investment cost (Net loss)
Price > investment cost (Net profit)
Price < investment cost (Net loss)
• Must liquidate holdings within six months
• Any dividends received and capital gain from disposal can be kept by investors
• May hold until price of securities equal or exceeds investment cost
• Dividends received can
be used to expedite disposal
• Allowed to subscribe to/receive any new issue of securities by the company e.g. rights, special, bonus to expedite disposal
• Liquidate immediately
• Profit (dividends received prior to and difference between investment cost and the closing price on the announcement date of the latest list) can be kept
• Excess profit (dividends received after and difference between disposal price and closing price of announcement date) channeled to baitulmal and/or charitable bodies
• Allowed to hold until the price of securities equal to investment cost
• Dividends received can be used to expedite the disposal
• Allowed to subscribe to/receive any new issue of securities by the company e.g. rights, special, bonus to expedite disposal
22
Thank You
Members of SC’s Shariah Advisory Council
23
Y.A.Bhg. Tun Abdul Hamid bin Haji Mohamad Former Chief Justice Malaysia
Y.Bhg. Tan Sri Sheikh Ghazali bin Haji Abdul Rahman
Shariah Legal Advisor, Attorney General’s Chambers
Y.Bhg. Datuk Dr Mohd Daud Bakar Group Chairman, Amanie Advisors
Y.Bhg. Dato’ Dr. Abdul Halim bin Ismail Chairman, Shariah Committee of Shariah-Compliant Funds of Amanah Mutual Bhd
Sahibus Samahah Dr Haji Zulkifly bin Muda Terengganu Mufti
Prof Dr Ashraf bin Md Hashim Chief Executive Officer, ISRA Consultancy Sdn Bhd
Prof Dr Engku Rabiah Adawiah Engku Ali IIUM Institute of Islamic Banking and Finance (IIiBF), International Islamic University Malaysia
Prof Mohamed Ismail bin Mohamed Shariff Adjunct Professor, International Centre for Education in Islamic Finance and Founder of Mohamed Ismail & Co.
Prof Madya Dr. Aznan bin Hasan Ahmad Ibrahim Kulliyyah of Laws, International Islamic University Malaysia
Prof Madya Dr Asmadi Mohamed Naim Dean, Islamic Business School, Universiti Utara Malaysia
Dr Shamsiah Mohamad Senior Researcher, International Shari’ah Research Academy for Islamic Finance (ISRA)
Quantitative Assessment – Business Activity Benchmarks
24
Previous
Benchmark
Revised
Benchmark Activity
5%
5%
Conventional banking; Conventional insurance; Gambling; Liquor
and liquor-related activities; Pork and pork-related activities;
Non-halal food and beverages; Shariah non-compliant
entertainment; and other activities deemed non-compliant
according to Shariah
10%
Interest income from conventional accounts and instruments;
Tobacco and tobacco-related activities; and other activities
deemed non-compliant according to Shariah
20%
20%
Rental received from Shariah non-compliant activities; and other
activities deemed non-compliant according to Shariah
25%
Hotel and resort operations; Share trading; Stockbroking
business; and other activities deemed non-compliant according
to Shariah
• Streamlined business activity benchmarks are as follows:
Revised Screening Methodology
25
• Revised methodology introduced is in line with global practices in Shariah screening of securities.
SC Malaysia Dow Jones Islamic Market Indices
FTSE Shariah Global Index Series
Scope Malaysian Stocks Global Stocks Global Stocks
Screener Regulator Index Provider Index Provider
Discretion Qualitative stage of screening N/A N/A
Denominator Total Assets (TA) Market Cap (MC), Trailing 12-month Average
Total Assets (TA)
Income Contribution Ratios
Specific non-compliant activity income < 5% or 20% of total revenue and profit before tax depending on activity
Specific non-compliant activity income < 5% of total revenue
Total interest and non-compliant activities income < 5% of total revenue
Financial Ratios
• Total debt/TA < 33% • Cash/TA < 33%
• Total debt/MC< 33% • Cash+Interest bearing
securities/MC < 33% • Receivables/MC < 33%
• Total debt/TA< 33% • Cash+Interest bearing
securities/TA < 33% • Receivables/TA < 50%
Quantitative Assessment – Financial Ratio Benchmarks
26
Financial ratios introduced are intended to measure riba and riba-based elements within a company’s balance sheet: • Cash over Total Assets
• Cash will only include cash and cash equivalents placed in conventional accounts and instruments, whereas cash placed in Islamic accounts and instruments will be excluded from the calculation.
• Debt over Total Assets
• Debt will only include interest-bearing debt whereas Islamic debt/financing or sukuk will be excluded from the calculation
Both ratios must be lower than 33%.