Country Analysis: Malaysia

Key Highlights

• Malaysia continues to be a global role model for Islamic asset management.
• Roughly 64% of the Malaysian capital market is Islamic.
• Over 80% of securities in the Malaysian equity market is classified as Shariah compliant.

Overview
Malaysia is an exemplary dual-system environment which has great success in Islamic finance, as Shariah compliant instruments dominate both the debt and equity capital markets. This is made possible by the strong top-down approach: the government continues to prioritize Islamic finance and the regulator remains proactive in developing this market segment with supporting policies and measures.

Regulatory framework
The Securities Commission Malaysia (SC) is the body responsible  for regulating the Malaysian capital market. It has the power to lay down ground rules and enforce capital market regulations, plus supervise activities of exchanges, licensees, clearing houses and other relevant parties. They are bound by the Capital Markets and Services Act (CMSA) 2007.

The SC oversees various aspects of the capital market, focusing on the soundness of the structure – which includes asset valuation, auditing, anti-money laundering and counter-terrorism financing. It also oversees financing instruments such as bonds and Sukuk, collective investment schemes, digital assets, equities and more.

The SC set up the Capital Markets Promotion Council in 2012, rebranded to Capital Markets Malaysia (CMM) in 2014. The CMM highlights different segments of Malaysia’s capital markets to encourage participation and serves as a platform for domestic intermediaries and global stakeholders. In cooperation with these parties, CMM works on areas such as sustainable finance and investments, the Islamic capital market (ICM) and funding through private markets. It also acts as the backbone supporting regulators to boost the depth of Islamic finance and expand sustainable funding.

The Shariah Advisory Council (SAC) of the SC is the authority for Shariah-related principles of the ICM business and is tasked to ensure Shariah compliance. The council is made up of Shariah scholars, academicians, practitioners and experts who are knowledgeable in Shariah, the capital market, finance, economics and legal frameworks.

As far as Islamic finance is concerned, guidelines on Islamic Capital Market Products and Services apply to any party wanting to be registered as a Shariah adviser, an Islamic fund management company, an issuer seeking to offer Islamic capital market products, a corporation involved in Islamic private equity activity or a market operator offering Islamic capital market products.

There are eight regulated activities under the CMSA and entities involved in any of these eight activities will require a New Capital Markets Services Licence (CMSL) from the SC. An individual representing the principal licensee to carry on these activities will need the New Capital Markets Services Representative’s Licence, as opposed to the CMSL license.

Fund management companies in Malaysia come under the purview of the CMSA and they need to comply with stringent requirements. If the management company is categorized as a bank or institution carrying out an Islamic banking business, such an entity would also need to be approved by Bank Negara Malaysia (BNM), the central bank.

Chart 1: Islamic fund breakdown by fund type in Malaysia

Investment markets
The ICM accounts for RM2.43 trillion (US$514.6 billion) or 63.73% of the overall Malaysian capital market in 2023, a 4.5% year-on-year (y-o-y) growth. Sukuk investments make up RM1.27 trillion (US$269.95 billion) or 52.38% of the ICM, with the remainder consisting of Shariah compliant securities.

Shariah compliant securities grew in 2023, standing at 811, up from 789 in 2023, with a total of 995 securities listed on Bursa Malaysia. Islamic equities market capitalization showed a similar growth trajectory of 3.25%, constituting 64.32% of total market capitalization as of December 2023.

Asset management
The IFN Investor Fund Database showed the Malaysian Islamic fund management market to be valued at RM136.86 billion (US$28.99 billion) as at the end of Q1 2024, with 551 Islamic funds – including different currency classes denomination – and managed by 44 unique fund managers. This number is roughly 23% of the entire fund management market, taking into account conventional funds.

On the global front, Malaysia is ranked second in terms of Islamic assets under management (AuM) – almost US$5 billion shy of Saudi Arabia’s US$39.9 billion Islamic AuM.

In 2023, 17 Islamic funds were launched by nine fund managers. In terms of returns, the top five best-performing funds in Q1 2024 boasted three-month returns of over 25% with heavy focus on equities.

Table 1: Malaysia’s top five performing Islamic funds in Q1 2024

This report was produced by Aravinth Rajendran and Elliot Yip, financial data analysts at IFN Investor.