Securities Commission Malaysia : Malaysian ICM July - December 2020

Malaysian Islamic Capital Market Bi-Annual Bulletin by the Securities Commission Malaysia	July - December 2020 Vol. 15 No. 2

2020 In Review - Driving Sustainability

The year 2020 was predominantly marked by the COVID-19 pandemic. Despite the pandemic causing repercussions including adverse market conditions and health concerns, stakeholders' drive towards sustainability initiatives remained consistent. As the global population work towards a recovery phase, the Securities Commission Malaysia (SC) continues to recognise the relevance of sustainability in the Islamic capital market (ICM), especially in light of the global health crisis.

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SHARIAH		DEVELOPMENT		REGULATORY

•	Shariah Advisory Council	• Shariah Advisory Council	• Revised Guidelines on Unlisted
	Resolutions	Resolution on Digital Assets		Capital Market Products
• SC Names New Shariah			under the Lodge and Launch
	Advisory Council Line-Up			Framework
•	List of Shariah-Compliant		• Revised Guidelines on Unit
	Securities by Shariah Advisory			Trust Fund
	Council
FEATURES			STATISTICAL UPDATES

•	Repurposing Islamic Finance	•	Islamic Capital Market	• Size of Capital Market and
	for Longer-Term Opportunities		Graduate Training Scheme 2.0		Islamic Capital Market
•	11th SC-OCIS Virtual	•	ICM Innovation Roundtable	•	Shariah-Compliant Securities
	Roundtable		Series	•	Sukuk
		•	Malaysian ICM Remains	•	Fund Management
			Resilient in 2020

• ICM Activities In 2H 2020

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F R O N T S TO R I E S

2020 In Review -

Driving Sustainability in the ICM1

During this challenging time, the drive towards attaining sustainability goals remains a relevant agenda in the global space. The third quarter of 2020 saw a record US$155 billion of sustainable finance raised, as a result of COVID-19 and wider concerns about sustainability2. As with the global economy, the Islamic finance industry including the ICM is going through a recovery phase and adjusting to the COVID-19 pandemic. For the Malaysian ICM and SC in particular, sustainability continues to be a key priority. Prior to 2020, the SC championed various efforts in facilitating sustainable finance.

At the end of 2019, the SC revised it's Sustainable and Responsible Investment Sukuk Framework (SRI Sukuk Framework), expanding the list of SRI projects deemed eligible under the SRI Sukuk Framework to provide clarity while encouraging diversity and innovation in the types and variants of sustainable sukuk. By 2020, there were 12 corporate issuances financing a range of projects including large scale solar, green buildings, hydropower and education.

As the industry continues to build a holistic sustainable finance ecosystem, numerous innovative projects could be

considered and financed under this Framework. Growth and development in this space will be underpinned by the breadth of projects and innovative transactions.

To further encourage sustainable finance, the government of Malaysia in its Budget 2021 proposal, announced measures that will continue to advance Malaysia on an upward trajectory in developing its sustainable finance ecosystem.

To encourage the issuance of sustainable sukuk and bonds, the SRI Green Sukuk Grant issued by the SC was extended to cover not only green

1. This article is extracted from a keynote address by Sharifatul Hanizah Said Ali, Executive Director, Islamic Capital Market Development, SC at the IFN Green & Sustainable Finance On-Air Forum on 14 December 2020.
2. Sustainable Finance Market Continues 2020 Growth, Refinitiv Deal Insights (2020).

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sukuk but all types of SRI sukuk and SRI green, social and sustainable bonds issued under the ASEAN standards. Further, the tax exemption on this grant has been extended to five years ending in 2025.

The Government will also continue the Green Technology Financing Scheme 3.0 (GTFS3.0) with a fund size of RM2 billion for two years up to 2022. The GTFS is a special financing scheme that was first introduced in 2010 by the government to support the development of Green Technology in Malaysia.

The Malaysian government has also issued the landmark Sukuk Prihatin to contribute towards the country's economic recovery following the COVID-19 pandemic. Following this, the government announced the issuance of its first sovereign sustainability bond or sukuk for environmental and social initiatives in 2021. This issuance will be another significant milestone for Malaysia in signalling the commitment by the country as a whole - government, regulators, investors, corporates and intermediaries.

Impact of COVID-19

The COVID-19 pandemic has provided greater impetus, urgency and motivation to consider environmental, social and governance (ESG) factors on how to move forward. The sustainable agenda's momentum significantly increased during 2020; a record US$357.5 billion was raised by sustainable companies and in

sustainable products globally till the end of September; a 96 per cent increase during the same period in 2019. While funding a transition towards a low-carbon economy is still high on the sustainability agenda, there is an increased focus on how funding can make a greater impact on social issues - protecting jobs and livelihoods, ensuring greater equality and alleviating poverty.

In this regard, the capital market is well placed to utilise the concept of waqf or the Islamic endowment, which can be a tool for growth in the social finance space. The SC recorded another milestone when the Waqf- Featured Fund framework was released to facilitate the offering of unit trust funds and wholesale funds with waqf features that integrate commercial and social objectives. This may lead to a widening of products, with Islamic fund management companies potentially launching Waqf-Featured Unit Trust Funds.

For waqf to thrive as a capital market product, it is important that there is a stable, sustainable and consistent income stream from waqf assets. With greater developmental traction in this segment via more innovative, diversified use of waqf assets, this could potentially lead to the issuance of waqf-linked sukuk for Shariah- compliant social infrastructure projects.

Within the social finance space, Islamic crowdfunding has also been instrumental in facilitating fundraising through the capital market for social projects, particularly in the

The capital market is well placed to utilise the concept of waqf or the Islamic endowment, which can be a tool for growth in the social finance space.

microfinance and small-to-medium enterprise (SME) segments. The SC observed that a reasonable amount has been raised through Islamic crowdfunding platforms and further growth is expected within this space as more micro enterprises and SMEs continue to seek funds to sustain and grow their businesses.

In 2020, the pandemic has given the financial services industry a new lens in viewing how and what to finance, fund and invest in. ESG principles are being prioritised more than ever before and as a whole, the business world is now placing a significantly larger emphasis on the concept of 'doing good'.

Despite the challenging environment the pandemic has presented, there is much potential for Shariah-compliant finance and funding that can take the lead in the delivery of innovative funding solutions and drive further the development of the sustainable ecosystem.

3 Sustainable Finance Market Continues 2020 Growth, Refinitiv Deal Insights (2020).

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S H A R I A H

Shariah Advisory

Council Resolutions

The Shariah Advisory Council (SAC) plays a significant role in contributing to the comprehensive development of ICM in Malaysia. The SAC actively reviews and update resolutions on various Shariah-related issues in relation to ICM to ensure that the transactions that are undertaken complies with Shariah requirements. The SAC also ascertains the appropriate Shariah principles that can be applied in order to facilitate new and innovative ICM products to be consistent with the latest development in the marketplace. Among the resolutions that were issued by the SAC recently relating to sukuk are as follows:

1

INVESTMENT IN THE SHARIAH- COMPLIANT GENERAL BUSINESS BASED ON MUSHA` FOR SUKUK WAKALAH BI AL-ISTITHMAR

There are situations whereby sukuk which is structured based on the principle of wakalah bi al-istithmar (sukuk wakalah) is issued based on tranches1 or series2.

When the investment made by the wakil (agent) is in the Shariah- compliant general business and not in a specific business, a question arises whether the investment in the former can be determined based on the concept of musha`3 via specific percentage for each issuance of tranche or series of the sukuk.

RESOLUTION

The SAC had resolved that the investment in the Shariah- compliant general business, which is based on tranches or series and that is determined based on the concept of musha` via specific percentage is permissible.

1

2

3

Tranches refers to an issuance of sukuk programme in several tranches. Each tranche of the sukuk is issued at different time with different tenures and maturity dates for each tranche.

Series refers to tranches, which are divided into several series. Every series issued in each tranche may have different maturity dates but were issued at the same time.

Musha` from the perspective of fuqaha' refers to joint ownership over an asset in proportion and physically undivided. For details, refer to Nazih Hammad, Mu`jam al-Mustalahat al-Maliyyahwa al-Iqtisadiyyahfi Lughah al-Fuqaha',Dar al-Qalam, Damsyik, 2008, First Edition, pp. 417-418.

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S H A R I A H

2

SUBSCRIPTION OF SUKUK BY WAY OF MUQASAH

Muqasah (offset) is a concept that has been accepted by Shariah. In the structuring of sukuk based on Asset- Backed Securitisation (ABS), there is an issue related to muqasah, which is the muqasah between the sukuk subscription price by the originator and the purchase price of the asset that is payable by the issuer to the originator.

In the issuance of sukuk involving the abovementioned issue, the originator sold its asset to the issuer at a certain price. To pay the purchase price of the asset, the issuer will issue sukuk to the investors.

If the originator subscribed the sukuk as an investor, the originator is not required to make any cash payment to the sukuk issuer for the sukuk subscription price. This is because the sukuk subscription price that should be paid by the originator will be offset by way of muqasah against the purchase price of the asset payable by the sukuk issuer to the originator.

Hence, question arises whether Shariah permits the subscription of sukuk by the originator by way of muqasah against the payment of the purchase price of the asset payable by the sukuk issuer to the originator.

RESOLUTION

The SAC had resolved that the subscription of sukuk by the originator by way of muqasah against the payment of the purchase price of the asset payable by the sukuk issuer to the originator is permissible.

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