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Malaysia: Islamic finance pensions

by Paulius Kuncinas. Posted on August 5, 2012, Sunday

Moves to liberalise Malaysia’s pension market is expected to galvanise the Islamic fi nance market, already a key segment of the country’s economy, though greater regulatory oversight will be needed to bolster investor confi dence in the sector.

On July 23, the international press reported that Malaysia was introducing ‘sweeping reforms’ to its pension system.

The changes introduced a new, voluntary Private Retirement Scheme (PRS) to run alongside the existing Employees Provident Fund (EPF).

The PRS would allow Malaysians to purchase a wide variety of products from private fund management firms, making it easier for them to focus on Islamic investment.

Currently, the EPF collected pension contributions and invested the cash; contributors could place up to 20 per cent in a single mutual fund.

By facilitating investments in private products by individuals, the reforms were expected to kick-start the growth of Malaysia’s small private pensions sector, which the government now expects to be worth RM73 billion (US$22.92 billion) by 2020.

Though some think the prediction is rather optimistic, most agree that there is a lot of potential for growth given the regulatory changes, growing disposable incomes and a rising culture of saving for the future.

Officials – and the structure of the new regulations – made it clear that increasing investment in Islamic products was one of the aims of the changes.

“The PRS will contribute to the growth of Islamic fund products,” Zakie Ahmad Shariff, a board member of the Private Pension Administrator (newly founded to oversee the PRS funds) and chief executive officer (CEO) of the Federation of Investment Managers Malaysia, told international press.

Analysts agreed that those investing in the new system would gain from sharia-compliant offerings in particular.

Of the first 30 products offered through the PRS, only six would be Islamic, with the expectation that there would be more to come.

The eight existing PRS providers – all of which had syariah- compliant arms – could offer between three and seven conventional products through the system, but could provide up to 10 products if they offered Islamic schemes as well.

As the domestic market grows in new segments, Malaysia continues to cement its position as one of the world’s leading sharia-compliant sectors.

It is particularly strong in sukuk (Islamic bonds), which accounted for 68.7 per cent of the US$84.4 billion issued globally last year and 71 per cent of the US$43.5 billion launched in the fi rst quarter of 2012 (a 55 per cent increase on 2011’s fi rst quarter).

In July, Axiata, Malaysia’s leading mobile telephone operator, announced it was looking to raise up to US$1.5 billion in sukuk issues to tap low-cost long-term funds and increase its capital efficiency.

It would be the fi rst Asian telecoms fi rm to issue multiple currency sukuk, according to the company.

The launch was ‘strategic’ and targeted at investors in the region, as well as the Middle East and Europe, and offi cials said the move would help strengthen Malaysia’s position as a global sukuk leader.

The private sector and government bodies were likely to provide further issuances in the near future as Malaysia rolled out its ambitious Economic Transformation Programme, which envisaged large investments in infrastructure and services and aimed to develop the economy to boost value added and strengthen value chains.

While Malaysia’s Islamic finance sector continued to be a world leader, the industry’s rise to global prominence was relatively new.

As elsewhere in the world, growth had brought on regulatory challenges, and some parts of the industry lagged behind others.

“Syariah-compliant trustee management needs to move forward,” Abdul Jalil Rasheed, the CEO of Aberdeen Asset Management, which moved into Islamic finance in Malaysia in 2009 and counted the EPF as its biggest customer.

He told OBG, “Asset management is still a very locally driven business in Malaysia.

“There are currently 16 licences in the market for Islamic asset management, not all of which are doing well.”

Rasheed suggested that ‘innovation needs to slow’ so that Islamic finance could put down deeper regulatory roots and to prevent firms from over-extending themselves, adding that the market might still not be mature enough for sharia-compliant hedge funds to flourish.

As Deputy Finance Minister Datuk Awang Adek Hussin noted last year, greater cooperation among Islamic finance experts, religious scholars, government bodies and the private sector was needed to support and consolidate the industry.

“Although Malaysia’s Islamic financial performance has shown encouraging development, we should not be complacent with our achievements thus far,” he said.

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