Malaysia is tightening rules for the US$307 billion of stocks now deemed in compliance with Shariah law as it seeks to attract more investment from overseas Muslims.
The Securities Commission will require companies to limit debt and cash that don’t conform to Koranic principles to less than 33 per cent of total assets to qualify for Shariah listing, from no provision previously, said Zainal Izlan Zainal Abidin, the executive director for the Islamic capital market. The regulator will publish a revised list of equities next month from the current 801 that comply with religious tenets, he said.
The stricter screening is in line with international practice and could potentially spur capital inflows, Zainal Izlan said in a September 20 e-mail interview in Kuala Lumpur. The new regulations put the nation on a par with the conditions needed for inclusion in the Dow Jones Islamic Market World Index, which has a market capitalization of US$14.9 trillion.
"With harmonization of standards to global expectations, it definitely would open up the market to a wider investor base, especially from the Middle East," Alhami Mohd Abdan, Kuala Lumpur-based head of international finance and capital markets at OCBC Al-Amin Bank Bhd, the Islamic unit of Singapore’s Oversea-Chinese Banking Corp, said in an interview yesterday. "There are benefits attached to meeting those requirements."
The Securities Commission announced the amendment in June last year, with companies given 17 months to comply, Zainal Izlan said. Fund managers will get a six-month grace period from November, he said, adding that the current methodology was first introduced in 1995.
Shariah law forbids investments in shares of companies involved in activities considered as unethical such as gambling, prostitution, and alcohol or pork-related businesses.
In Indonesia, regulators require corporates listing shares as Islamic to not have interest-based debt of more than 45 per cent of total assets, according to the Financial Services Authority’s website. There’s also a stipulation that interest-rate gains and revenue from non-Shariah operations aren’t more than 10 per cent of income.
The Dow Jones Islamic Market World Index, which tracks global shares that meet Shariah investment guidelines, climbed 11 per cent this year. That compares with a 14 per cent advance in the Dow Jones Global Index of conventional equities.
Conditions for inclusion in the Islamic gauge are that a company’s debt, receivables, cash and interest-bearing securities must be below 33 per cent of the corporation’s average market value in the past 24 months, according to the Standard & Poor’s Dow Jones Indices website.
The new Malaysia regulation would create a better environment for overseas Islamic investors because their own in-house standards may not be in-depth enough to differentiate the companies’ funding sources, according to Amanah Capital Group Ltd, a Kuala Lumpur-based consulting company.
"The idea of the revised screening methodology would be to make Malaysia in line with the Shariah screening done for other indices," Megat Hizaini Hassan, partner and head of the Islamic finance practice at Kuala Lumpur-based law firm Lee Hishammuddin Allen & Gledhill, said in an interview yesterday. "It’s an added incentive but whether it would be the main determinant of investments remains to be seen."
Malaysia pioneered Islamic finance more than 30 years ago and is also the world’s biggest market for sukuk, or bonds that pay returns on assets to comply with the Koran’s ban on interest. Sales of the debt dropped 69 per cent in 2013 to RM25.1 billion from a year earlier, data compiled by Bloomberg show. Issuance reached a record RM95.8 billion in 2012.
The Bloomberg-AIBIM Bursa Malaysia Sovereign Shariah Index, which tracks the most-traded ringgit-denominated securities, rose 1.5 per cent this year to 111.95, after climbing 4.3 per cent last year. An equivalent corporate gauge of sukuk listed in the Southeast Asian nation increased 1.7 per cent to 104.
Average borrowing costs on Islamic debt sold in the international market dropped 13 basis points, or 0.13 percentage point, to 3.9 per cent last quarter, according to the HSBC/Nasdaq Dubai US Dollar Sukuk Index. That was the first three-month decrease since the period ended December.
The yield premium investors demand to hold the securities over the London interbank offered rate narrowed 10 basis points to 207. Shariah-compliant bonds posted a 0.6 per cent loss this year, according to the HSBC data, while emerging-market notes dropped 7.4 per cent, JPMorgan Chase & Co’s EMBI Global Index shows.
Bursa Malaysia Bhd, the stock-exchange operator in Kuala Lumpur, and FTSE Group offer Islamic equity indexes including the FTSE-Bursa Malaysia EMAS Shariah Index, which has a market capitalization of RM863 billion. The gauge, whose constituents are screened by the security commission’s Shariah Advisory Council, rose 7.4 per cent in 2013 versus a 12 per cent gain for all of last year.
"The screening is one of the efforts to promote transparency for investors who really care where their money goes," Abas A. Jalil, chief executive officer at Amanah Capital, said in an interview yesterday. "The company’s business may be Shariah compliant but their source of financing might not be."-- Bloomberg