Good for Islamic banking subsidiaries to list

PETALING JAYA: Bursa Malaysia encourages financial institutions to begin exploring possibilities of listing their Islamic banking subsidiaries, as there’s inadequate syariah-compliant equity instruments in the financial services sector.

Bursa Malaysia chairman Tan Sri Abdul Wahid Omar said a majority of financial institutions, such as major local banks, were still categorised as conventional, despite a big portion of their businesses being syariah-compliant now.

“More than 60% of Malayan Banking Bhd’s total financing is already syariah-compliant. In a typical approach, we would like to encourage these banks to list their Islamic banking subsidiaries,” he said at the Invest Shariah Conference 2023, organised by CGS-CIMB Securities Sdn Bhd yesterday.

Abdul Wahid said there will be some challenges, as most banks operate on a leverage model, which means that their Islamic banking business leverages on their current branch network, management team and other aspects.

He said if financial institutions were to list their Islamic banking subsidiaries separately, there will be a presence of minority shareholders and third-party transactions, which will become an issue.

“I think that is why we have to start thinking about other instruments, which will enable a portion of equities to be traded on the syariah-compliant market,” he told the media at the event.

“In the past, I had mentioned the need to designate some of the shares as syariah-compliant shares. What you do is earmark and ring-fence income from the Islamic banking operations as a source of payments for dividends and so on,” Abdul Wahid added.

He added Bursa Malaysia expects a positive outlook for the Islamic equities market for the second half of 2023.

“Given global interest rates have appeared to have reached the peak level in the second half, we will see a reversal of investment flow away from developed markets into emerging markets. This is not just into Malaysia, but also into other Asean markets,” he added.

Abdul Wahid said once investors entered the market, it will bolster not only the syariah-compliant equities, but the broader market as well.

He then shared that the exchange was still developing a system for its new offering, Bursa Gold Dinar (BGD), which provides a platform for investors to invest in gold at a significantly lower spread.

“As you know, Malaysians like to invest in gold and currently the spread to invest in gold is very high, as much as 7%,” he noted.

He said through the new platform, the spread to buy and sell gold will be much lower, with the exchange targeting a spread of below 2%.

The BGD will operate based on a syariah-compliant equilibrium model, in which Bursa Malaysia will be purchasing the gold before it is digitalised and made available for trading on the platform.

With a starting price of RM10, Bursa Malaysia believes this is an affordable price for gold and once buyers accumulate 4.25 gms, they will be able to physically redeem the gold. Abdul Wahid said the BGD platform is expected to officially launch by the end of the year.

On a separate note, Bursa Malaysia head of investor development Stephanie Tan said there was room to further improve the range and depth of syariah-compliant financial instruments to meet investors’ demand.

“To meet the demands of the ever-evolving market landscape, the need for modernisation becomes evident. Emerging asset classes, financial instruments and investment strategies present opportunities to thrive in this evolving environment,” she said.

Tan said by embracing a broader array of financial instruments such as sukuk, Islamic exchange-traded funds (i-ETF) and Islamic real estate investment trusts (REITs), it expands access to diversified investment opportunities, enhances liquidity and accommodates varying risk profiles.

As of June 2023, 81.9% of Bursa Malaysia’s total market capital was syariah-compliant while the combined market capital of the five islamic REITs accounted for 43% of the 19 REITs listed on the platform.

“There are six i-ETFs, making up 18.9% of the net asset value of the 20 ETFs listed on Bursa,” she added.

Tan said the development of syariah-compliant technological solutions had reshaped the landscape of Islamic finance.

She said on the traditional front, as of June 2023, the Malaysian Islamic capital market size stood at RM2.3 trillion, making up 64.5% of the total size of the Malaysian capital market.

“With technological innovations continually evolving, the industry is poised to experience unprecedented growth and global recognition,” she said.