75

MONETARY
AND FINANCIAL
DEVELOPMENTS
4
ECONOMIC REPORT
2005/2006

Overview against the US dollar (USD) and its replacement

with a managed float, effective 21 July 2005.
The depegging of the ringgit was conducted
More flexibility in monetary policy and a from a position of strength, particularly resilient
stronger financial and banking system… economic growth, rising international reserves,
sustained current account surplus and a healthy

M onetary policy continues to support

economic growth in 2005, with the overnight
policy rate (OPR) unchanged since its introduction
banking system. Furthermore, the stronger ringgit
is expected to somewhat mitigate inflationary
pressures that have accumulated over a series
in April 2004. Low interest rates and ample liquidity of price adjustments, including petroleum products
in the banking system helped to support the as well as from imports. The primary objective
expansion in business activities and consumption. of the exchange rate policy remains focussed
Maintaining the accommodative monetary stance, on promoting stability to facilitate economic
however, became more challenging, particularly activity.
in the light of significantly higher oil prices as
well as the gradual tightening of monetary policies The banking system remains the main mobiliser
in several major and regional countries. of funds in the economy, supporting the higher
Inflationary pressure has risen to its highest in financing needs from the household and business
six years due to soaring oil prices while interest sectors. Although household financing continues
rate differentials have widened vis-à-vis domestic to dominate bank lending since the financial
interest rates. Nonetheless, inflation has been crisis, growth in loans outstanding to the business
mitigated by productivity increase and capacity sector turned positive from December 2004,
expansion. On the reversal of interest rate trends, affirming the recovery in private investment and
particularly in the United States (US), the increase entrenching the private sector as the driver of
has been gradual and more importantly, their economic growth. Significantly, loans to small
monetary policies continue to support growth. and medium enterprises (SMEs) rose to account
On the domestic front, Malaysia’s strengthened for 41.8% of loans to the business sector, following
economic fundamentals continue to accord several initiatives over the years to enhance
flexibility in pursuing an accommodative monetary SME economic contribution and resilience,
policy. especially their access to financing.

A significant development during the year was Meanwhile, financial restructuring in Malaysia
the removal of the seven-year old ringgit peg has been successfully concluded, following
76

Danaharta’s final redemption of its bonds in March more effective financial planning for the
this year and its scheduled cessation of operations Government. Similarly, another milestone was
by year-end. Measures implemented over the achieved with the issuance of the world’s first
years to enhance the capacity and capability of residential mortgage-backed securities under
domestic banking institutions, particularly through Islamic principles against housing loans of civil
the consolidation exercise and the Financial servants. The equity market was active with higher
Sector Master Plan (FSMP), have yielded positive turnover and initial public offerings (IPOs),
results. The banking sector remains robust with reflecting its importance as an avenue of financing.
strong capital base and record low non-performing The introduction of new instruments such as
loans (NPLs) ratio, in addition to improved Exchange Traded Funds (ETFs) and Real Estate
efficiency and competitiveness. Investment Trusts (REITs) further enhanced the
depth and breadth of the domestic capital market,
The strengthened position of the financial system besides providing investors with alternative
has enabled Malaysia to further liberalise the investment opportunities.
financial sector and foreign exchange
administration rules. The threshold of foreign
equity ownership has been increased from 30%
to 49% for investment banks, Islamic subsidiaries Monetary Policy
and takaful entities to promote competition and
enable greater synergies besides enhancing the Monetary policy remains accommodative…
integration of domestic financial entities into the
global financial landscape. A key liberalisation Monetary policy remains accommodative in 2005
measure to allow multilateral development banks for the eighth year since the 1997 Asian financial
and multilateral financial institutions to raise crisis to support economic activity and growth.
ringgit-denominated bonds witnessed three Maintaining an easier monetary stance has,
supranationals raising a total of RM1,660 million however, become more challenging amid rising
ringgit bonds in Malaysia, reflecting their inflationary pressures due to higher oil prices
confidence in the domestic capital market. and widening interest rate differentials. The
Meanwhile, restrictions have also been lifted on Consumer Price Index (CPI) crept up to 3.7%
foreign participation in the stockbroking, futures in August, the highest inflation rate since 1999.
broking, fund management and venture capital The increase in inflation was due to cost-push
industries. factors, which was however, somewhat offset
by the increase in labour productivity, capacity
Malaysia is also steadily evolving into an Islamic expansion and a firmer ringgit.
financial services hub, following the approval
for three foreign players to operate Islamic banking Amidst ample liquidity in the financial system,
in Malaysia and the transformation of Islamic interest rates remained low and stable to support
banking windows of six domestic banks into economic activity and consumption. The OPR
Islamic subsidiaries. The takaful industry is also of Bank Negara Malaysia (BNM) has been
set to expand with the expected entry of four maintained at 2.70% since its introduction in
new players. April 2004, reflecting the accommodative
monetary stance. In contrast, there has been
The bond market remains an important source some tightening of monetary stance on the global
of funding for the economy, with outstanding front through interest rate increases to mitigate
private debt securities (PDS) accounting for 37.3% inflationary pressures from rising oil prices, as
of Gross Domestic Product (GDP) at end-July shown in Table 4.1. The US raised the federal
2005. A significant development for the bond funds rate to 3.75% in September this year, the
market was the securitisation of Government eleventh consecutive increase of 25 basis points
staff housing loans through the issuance of since June 2004. With the latest hike, the nominal
residential mortgage-backed securities. The interest rate differential has widened to 105 basis
securitisation not only introduced a new asset points in favour of the US. In contrast, the euro
class for the bond market but also facilitated zone has kept its key interest rate unchanged
 77

TABLE 4.1

Key Interest Rates of Selected Countries

Country End-2004 20 Sep 2005 Change Effective date

(%) (%) (basis points)

Australia (cash rate target) 5.25 5.50 +25 2 Mar 2005

Euro Area (refinancing rate) 2.00 2.00 0 5 June 2003
Japan (official discount rate) 0.10 0.10 0 19 Sep 2001
UK (repo rate) 4.75 4.50 -25 4 Aug 2005
US (federal funds rate) 2.25 2.50 +25 2 Feb 2005
2.75 +25 22 Mar 2005
3.00 +25 3 May 2005
3.25 +25 30 June 2005
3.50 +25 9 Aug 2005
3.75 +25 20 Sep 2005
Indonesia (1-month discount rate) 7.43 8.25 +82 29 June 2005
8.44 +19 6 July 2005
8.49 +5 13 July 2005
8.50 +1 3 Aug 2005
8.71 +21 10 Aug 2005
8.75 +4 17 Aug 2005
9.50 +75 30 Aug 2005
10.0 +50 6 Sep 2005
Philippines (overnight call rate) 6.75 7.00 +25 7 Apr 2005
Malaysia (overnight policy rate) 2.70 2.70 0 26 Apr 2004
Thailand (14-day repurchase rate) 2.00 2.25 +25 15 Mar 2005
2.50 +25 9 June 2005
2.75 +25 21 July 2005
3.25 +50 7 Sep 2005

Source: Central banks websites.

at 2.00% since June 2003, while the United against most major and regional currencies since
Kingdom (UK) lowered its repo rate to 4.50%, beginning 2005.
the first reduction since August 2004, due to the
slower growth outlook.

The seven-year fixed exchange rate regime was Monetary Developments

replaced by a managed float of the ringgit against
a basket of trade-weighted currencies of Money supply and loans expanded strongly…
Malaysia’s major trading partners on 21 July
2005. The primary objective of the exchange Monetary aggregates expanded on the back of
rate policy remains focussed on promoting sustained economic activities during the first
stability, important for the open and trade-reliant seven months of 2005. Narrow money or M1
Malaysian economy. The non-internationalisation rose by 12.6% in July 2005 (end-2004: 11.9%),
of the ringgit was, however, maintained to prevent reflecting strong demand for transaction balances
speculative activity. The depegging of the ringgit from households and businesses, as shown in
was timely, given the nation’s strong economic Chart 4.1. Broad money or M3 grew by 11.6%
fundamentals and the appreciation of the ringgit (end-2004: 12.4%), driven by continued net inflow
78

of external funds of RM47.6 billion and higher

CHART 4.1
private sector financing of RM15.7 billion in the
Monetary Aggregates first seven months of 2005.
(annual change)
Interest rates remained low and stable amidst
% Money Supply %
35 35
ample liquidity in the banking system during the
first seven months of 2005. Liquidity operations
of BNM helped to offset the expansionary impact
30 30 of net external operations and maintained the
30.3
OPR at 2.70%. The base lending rate (BLR) of
25 25 commercial banks and finance companies was
also unchanged at 5.98% and 6.90%, respectively
at end-July 2005 (end-2004: 5.98%; 6.90%), as
20 20
shown in Table 4.2. However, intense competition
among banking institutions led to an easing of
15 15 lending rates, with the average lending rate of
M1 12.6
commercial banks and finance companies
10 M3 10
declining to 5.90% and 8.75%, respectively (end-
11.6 2004: 5.98%; 8.78%).

5 M2 5 Savings deposit rates also declined between 14

and 37 basis points. Interest rates on 1 to
0 0 12-month fixed deposits, however, remained
M J S D M J S D M J S D M J S D M J J1 unchanged due to the prescribed minimum rates
2001 2002 2003 2004 2005
on such deposits. With inflation creeping up, the
1
As at end-July 2005. positive real rate of return to depositors has
Source: Bank Negara Malaysia. narrowed. The Merdeka Savings Bond launched

TABLE 4.2

Interest Rates of Commercial Banks and Finance Companies

End-1998 End-2004 End-July 2005 Change vs end-2004

(%) (%) (%) (percentage point)

Commercial banks
Base lending 8.04 5.98 5.98 0.00
Average lending 9.72 5.98 5.90 -0.08
Savings deposit 3.87 1.58 1.44 -0.14
1-month fixed deposit 5.82 3.00 3.00 0.00
12-month fixed deposit 5.74 3.70 3.70 0.00

Finance companies
Base lending 9.50 6.90 6.90 0.00
Average lending 11.76 8.78 8.75 -0.03
Savings deposit 5.01 1.98 1.61 -0.37
1-month fixed deposit 6.35 3.00 3.00 0.00
12-month fixed deposit 6.57 3.70 3.70 0.00

Source: Bank Negara Malaysia.

 79

CHART 4.2 CHART 4.3

Gross Private Sector Financing through Banking System:

Banking System Loans and Capital Market Loans Outstanding and Growth
RM billion RM billion
55 55 RM billion %
550 10
Equity
Loans outstanding
Gross PDS 533.8 534.4
Loan growth
Loans disbursed 9
(right scale)
8.2%
6.2% 514.0 522.6 8.7
44 44 8
9.0% 501.9
500
492.6
Annual 9.8% 7
growth:
479.0
5.8% 472.5 473.8
33 33 463.8 6
Monthly average

453.4
450 5

4
22 22

3
400
2
11 11
1

350 0
Mar June Sep Dec Mar June Sep Dec Mar June July1
2003 2004 2005
0 1 0
2001 2002 2003 2004 2005 1
As at end-July 2005.
1 As at end July 2005.
Source: Bank Negara Malaysia.
Source: Bank Negara Malaysia.

in 2004, however, provided senior citizens, retired the PDS market has grown significantly with
armed forces personnel and Malaysians who total PDS outstanding at RM167,850 million and
have retired on medical grounds with a higher accounted for 37.3% of GDP at end-July 2005
return of 5% per annum. BNM has issued Merdeka compared to 16.5% at end 1998.
Savings Bond amounting to RM1.94 billion in
2004 and another RM1.16 billion as at end- Loan applications, approvals and disbursements
August 2005. of the banking system expanded further by 14.5%,
7.9% and 7.9%, respectively in the first seven
Gross private sector financing through the months of 2005 (January-July 2004: 17%; 13.7%;
banking system and the capital market grew by 12.4%), as shown in Table 4.4. Significantly,
8.2% to RM316.9 billion in the first seven months loans outstanding to the business sector was
of 2005, supported by sustained demand from up by 2.6% at end-July 2005 (end-2004: 2.6%),
the business and household sectors, as shown marking eight consecutive months of positive
in Chart 4.2. Bank lending remained resilient, growth rates since end-2004 in tandem with
with an annual growth of 8.7% in loans outstanding growing private investment. The bulk of loan
at end-July 2005 (end-2004: 8.5%), as shown disbursements continued to be channelled to
in Chart 4.3 and Table 4.3. The capital market the manufacturing sector (RM73,395 million;
remained an important source of financing, with 24.6% of total loan disbursements) and the
total PDS raised expanding to RM14,217 million wholesale and retail trade, hotels and restaurants
during the first seven months of 2005 (January- sector (RM54,221 million; 18.2% of total loan
July 2004: RM13,385 million). Financing from disbursements), as shown in Chart 4.4.
80

TABLE 4.3

Banking System: Direction of Lending1

RM million Share (%)

Sector December 2004 End-July 2005 Change End-July 2005

Agriculture, hunting, forestry and fishing 10,878.8 11,192.4 313.6 2.1

Mining and quarrying 990.1 959.4 -30.7 0.2
Manufacturing 63,020.3 61,738.9 -1,281.4 11.6
Electricity, gas and water 5,195.7 4,137.2 -1,058.5 0.8
Wholesale and retail trade, hotels and
restaurants 43,454.9 45,763.8 2,308.9 8.6
Broad property sector 208,460.9 219,343.1 10,882.2 41.0
Construction 30,711.1 29,687.2 -1,023.9 5.6
Residential property 132,913.6 142,209.7 9,296.1 26.6
Non-residential property 31,134.6 33,142.8 2,008.2 6.2
Real estate 13,701.6 14,303.4 601.8 2.7
Transport, storage and communication 9,915.6 9,949.7 34.1 1.9
Finance, insurance and business services 30,939.4 29,968.7 -970.7 5.6
Consumption credit 68,821.3 113,205.6 44,384.3 21.2
of which:
Credit cards 12,838.4 15,141.3 2,302.9 2.8
Purchase of passenger cars 39,313.1 79,203.2 39,890.1 14.8
Purchase of securities 19,387.6 19,363.5 -24.1 3.6
Purchase of transport vehicles 2,493.8 3,280.4 786.6 0.6
Community, social and personal services 5,105.8 5,966.5 860.7 1.1
Others 10,114.5 9,481.2 -633.3 1.8

Total loans outstanding2 513,877.7 534,350.3 20,472.6 100.0

1
Including Islamic banks.
2
Including loans sold to Cagamas.

Source: Bank Negara Malaysia.

Loans outstanding to SMEs increased by 9% to newly formed SME Bank is expected to start
RM92,066 million at end-July 2005 (end-2004: operations on 3 October 2005.
7.7%; RM88,301 million) and accounted for 41.8%
of total loans to the business sector (end-2004: Loans outstanding to SMEs were mainly extended
40.3%), indicating the success of several initiatives to the wholesale and retail trade, hotels and
taken over the years to enhance access to restaurants accounting for 26% of total
financing for SMEs as well as strengthen their outstanding loans, manufacturing (22%) and
capacity and competitiveness. Recent key construction (13%) sectors. The five special SME
measures include the establishment of the funds administered by BNM totalling RM8,900
National SME Development Council in August million have also been well utilised, with loans
2004 as well as an increase in allocation of drawn down amounting to RM8,329 million from
RM2.5 billion to the Fund for Small and Medium approved loans of RM10,031 million to account
Industries 2 and RM850 million to the New for a utilisation rate of 83% at end-July 2005
Entrepreneurs Fund 2 in 2004. In addition, a (end-2004: 82.6%).
 81

TABLE 4.4

Banking System: Loan Indicators

January-July
Indicator RM million Annual growth (%)
2004 2005 2004 2005
Total
Loan applications 154,122.9 176,525.2 17.0 14.5
Loan approvals 100,231.9 108,153.3 13.7 7.9
Loan disbursements 276,002.5 297,900.4 12.4 7.9
Loan repayments 266,021.2 279,813.0 12.9 5.2
of which:
SMEs
Loan applications 30,173.9 35,468.4 14.3 17.5
Loan approvals 16,990.2 20,269.5 15.6 19.3
Loan disbursements 56,567.1 61,811.1 19.3 9.3
Loan repayments n.a n.a n.a n.a
Other businesses
Loan applications 52,252.8 57,581.2 6.8 10.2
Loan approvals 31,893.9 30,506.6 2.1 -4.3
Loan disbursements 132,515.5 140,411.2 10.2 6.0
Loan repayments n.a n.a n.a n.a
Households
Loan applications 70,350.1 80,905.1 29.2 15.0
Loan approvals 49,930.0 56,068.1 22.9 12.3
Loan disbursements 73,947.2 81,983.9 15.4 10.9
Loan repayments 61,665.6 65,800.6 18.1 6.7

Source: Bank Negara Malaysia.

CHART 4.4

Loan Approvals and Disbursements by Sector:

Value and Share
January-July 2005

Loan Approvals Loan Disbursements

Manufacturing
(RM11.0b; 10.1%)

Wholesale and retail

trade, hotels and
Others restaurants Others
Manufacturing
(RM26.8b; 24.8%) (RM8.6b; 8.0%) (RM64.6b; 21.7%)
(RM73.4b; 24.6%)

Purchase of
passenger cars
Purchase of (RM22.1b; 7.4%) Wholesale and retail
passenger cars Purchase of Construction trade, hotels and
(RM22.0b; 20.3%) residential property (RM6.6b; 6.1%) restaurants
(RM21.5b; 19.9%)
(RM54.2b; 18.2%)

Credit cards
(RM23.6b; 7.9%)

Finance, insurance
Construction
Credit cards Finance, insurance and business services
(RM17.1b; 5.7%)
(RM7.1b; 6.5%) and business services (RM20.9b; 7.0%) Purchase of
(RM4.6b; 4.3%) residential property
(RM22.0b; 7.4%)
Total loans approved: RM108.2 billion Total loans disbursed: RM297.9 billion

Source: Bank Negara Malaysia.

82

Loans outstanding to the household sector, the rose by a significant 11.9% against the euro,
driver of bank lending since the financial crisis, 9.7% vis-à-vis the yen and 10.4% against the
rose by 15.1% at end-July 2005 (end-2004: pound. The firmer US dollar was supported by
14.4%), helped by positive consumer confidence, better growth of the US economy compared to
higher disposable income and the low interest the euro area and Japan as well as US interest
rate environment. Loan disbursements were rate increases and expectations of further hikes.
predominantly for credit card loans accounting The euro weakened on concerns over the future
for 28.9% of total household loan disbursements of EU integration while both the euro and pound
and the purchase of passenger cars (27.1%) were affected by market speculation of a reduction
and residential properties (26.9%). Credit card in the benchmark interest rates.
usage has been rising, driven by continued strong
growth in private consumption and aggressive The ringgit also appreciated broadly between
promotion in marketing of credit cards. Credit 0.2% and 7.7% against most regional currencies
card transactions by Malaysian cardholders during the same period. The baht and rupiah
expanded by 17.5% to RM22,565 million in the weakened vis-à-vis the US dollar as demand for
first seven months of 2005 (January-July 2004: the greenback increased to pay for higher oil
RM19,201 million). prices. In contrast, the Korean won firmed up
against the US dollar since the fourth quarter
The exchange rate of the ringgit strengthened of 2004, benefitting from strong capital inflows.
in the first half of 2005 in tandem with the stronger
US dollar. Prior to the removal of the ringgit peg The ringgit further strengthened following the
on 21 July 2005, the ringgit tracked the shift from a fixed exchange rate regime to a
performance of the US dollar and appreciated managed float of the ringgit against a currency
against the major and regional currencies, as basket, with the value of the ringgit determined
shown in Chart 4.5 and Table 4.5. The ringgit by economic fundamentals effective 21 July 2005.

CHART 4.5

Performance of Ringgit against Selected Currencies

(percentage change)

End-2004 vs 21 July 2005 21 July 2005 vs end-August 2005

US dollar 0.0 0.8

Pound sterling 10.4 -2.0

Euro 11.9 0.4

Japanese yen (100) 9.7 -0.7

Singapore dollar 3.0 0.8

Thailand baht (100) -8.3 7.7 -0.5

Indonesian rupiah (100) 5.7 11.6

Philippines peso (100) -0.6 1.5

Korean won (100) 0.2 0.5

-2 0 2 4 6 8 10 12 14 -4 -2 0 2 4 6 8 10 12 14
% %
Source: Bank Negara Malaysia.
 83

TABLE 4.5

Performance of Ringgit against Selected Currencies

RM per foreign currency 1 Change (%) vs

Currency 2 Sep End-Dec 21 Jul End-Aug 2 Sep End-Dec 21 Jul
1998 2004 2005 2005 1998 2004 2005

US dollar 3.8000 3.8000 3.8000 3.7698 0.8 0.8 0.8

Pound sterling 6.3708 7.3169 6.6270 6.7605 -5.8 8.2 -2.0
Euro 2 - 5.1729 4.6212 4.6027 - 12.4 0.4
Japanese yen (100) 2.7742 3.7026 3.3745 3.3985 -18.4 8.9 -0.7
Singapore dollar 2.1998 2.3258 2.2570 2.2395 -1.8 3.9 0.8
Thailand baht (100) 9.3713 9.7636 9.0681 9.1178 2.8 7.1 -0.5
Philippines peso (100) 8.8302 6.7706 6.8131 6.7098 31.6 0.9 1.5
Indonesian rupiah (100) 0.0354 0.0408 0.0386 0.0364 2.3 17.9 11.6
Korean won (100) 0.2827 0.3671 0.3665 0.3648 -22.5 0.6 0.5

1
Interbank rates at 12.00 noon in Kuala Lumpur are an average of the highest buying and lowest selling quotes.
2
Euro was introduced in January 1999.

Source: Bank Negara Malaysia.

Since 21 July to end-August 2005, the ringgit

CHART 4.6
appreciated in the range of 0.5% and 11.6%
against most major and regional currencies. The Banking System:
transition to the managed float has been orderly Gross Non-Performing Loans (NPLs),
and well-managed. The increase in the value Net NPL Ratio and Risk Weighted Capital Ratio
of the ringgit against other exchange rates has,
however, not been large, as the ringgit had already RM billion %
appreciated significantly prior to the introduction 80 18
Gross NPL
of the managed float.
70
Risk weighted capital ratio
64.3 (right scale) 15

13.3
Health of the Banking System 60 14.3

12.6 12
50.7
50
Robust banking system, with strong capital 46.2
base, higher profitability and lower NPLs… 40
9
8.2
Net NPL ratio-6 months
The banking system remained robust with strong (right scale)
30
capitalisation, higher profitability and declining 5.8
6
NPLs in the first seven months of 2005. Both 5.0
20
the risk-weighted capital ratio and core capital
ratio of the banking system remained strong at 3
10
13.3% and 10.4%, respectively at end-July 2005
(end-2004: 14.3%; 11.3%), significantly higher
0 0
than the Bank for International Settlements
M J S D M J S D M J S D M J S D M J J1
minimum requirement of 8%. The banking system 2001 2002 2003 2004 2005
recorded pre-tax profits of RM5.8 billion during 1
As at end-July 2005.
the first half of 2005, supported by favourable Source: Bank Negara Malaysia.

economic and financial market conditions.

84

NPLs based on 6-months classification declined financial system, and launched in 2001 is on
by 9% or RM4,562 million from RM50,712 million track and schedule. As at end-June 2005, a
at end-2004 to RM46,150 million at end-July total of 45 recommendations has been fully
2005 due to lower incidence of NPLs, higher completed, which accounts for almost half of
write-offs and reclassifications of NPLs to the recommendations with milestones. Another
performing status, as shown in Chart 4.6. 28 recommendations are being implemented on
Likewise, the net NPL ratio based on 6-months a continuous basis, where initiatives are
fell to 5% at end-July 2005 (end-2004: 5.8%), continuously being taken to attain the desired
the lowest level since the financial crisis in 1997. outcomes.
Net NPLs based on 3-months also declined to
6.7% as at end-July (end-2004: 7.5%). The initiatives undertaken thus far have resulted
in a financial sector which is stronger, more
resilient and in a better position to face greater
competitive pressures. The ability of domestic
Financial Sector Restructuring banking institutions and insurance companies
to continue recording strong financial performance
Successful conclusion of Malaysia’s financial despite increasingly competitive operating
sector restructuring… environment reflects their growing strength and
capability. In addition, the regulatory framework
On 31 March 2005, Danaharta successfully has been further enhanced to cope with the
redeemed its final three tranches of bonds challenges of an increasingly complex financial
amounting to RM795 million. Danaharta had market. Financial institutions have adopted
issued 15 tranches of bonds totalling RM11,140 better risk management practices in their business
million to finance its acquisition of NPLs from operations, which have also provided them
distressed financial institutions during the financial greater ability and flexibility to respond to the
crisis. Significantly, Danaharta had generated increasing demands and expectations from
enough recovery from its operations to redeem customers.
the bonds. With the progress, Danaharta is on
track to wind up its operations in 2005, signifying A significant FSMP recommendation was
the conclusion of the financial sector restructuring implemented in 2005, which was the introduction
exercise, which started in 1998. of a deposit insurance system for Malaysia on
1 September. The deposit insurance system
Danaharta is the third institution to successfully provides coverage of up to RM60,000 inclusive
of principal and interest per depositor per bank
cease operations after the closure of the
as well as separate additional coverage for Islamic
Corporate Debt Restructuring Committee (CDRC)
deposits, joint accounts, trust accounts, sole
in August 2002 and Danamodal in February 2004.
proprietors and partnerships. The system replaces
During its seven-year life span, Danaharta had
the implicit guarantee on deposits from the
acquired NPLs totalling RM52,440 million (loan
Government in the event of a bank failure. The
rights acquired plus accrued interest) and
deposit insurance scheme will further strengthen
achieved a recovery rate of 59%. consumer protection as well as encourage
financial institutions to improve their risk
management.
Progress of the Financial Sector
Masterplan Islamic Banking
FSMP ensures a stronger and more resilient Geared for further growth with entry of foreign
domestic financial sector to face rising players and commencement of operations of
competition… Islamic subsidiaries…

The implementation of the FSMP, a blueprint The Islamic banking industry continued to
charting the strategic direction of the Malaysian expand albeit more moderately during the first
 85

seven months of 2005 with banking assets and

TABLE 4.6
deposits increasing by 8% and 6.6%, respectively
Islamic Banking: Key Indicators at end-July 2005 (end-2004: 15.1%; 21.1%), as
shown in Table 4.6. The industry sustained its
RM million Change (%) market share in terms of assets and deposits
End- End-
2004 July 2005
accounting for 10.6% and 11.2%, respectively
of the total banking system (end-2004: 10.5%;
Assets 94,574 102,136 8.0 11.2%). Islamic financing rose by 9% to RM63,080
Deposits 72,857 77,694 6.6 million to constitute a higher market share of
of which:
11.8% of total financing of the banking system
Investment 41,993 43,123 2.7
at end-July 2005 (end-2004: 11.3%).
Savings 8,432 9,005 6.8
Demand 12,887 13,652 5.9
Others 9,545 11,914 24.8
Similar to conventional banking, Islamic financing
was dominated by lending to households,
Financing 57,841 63,080 9.0 accounting for 60.5% of total financing. Household
of which: financing was supported by strong consumer
SMEs 7,994 8,865 10.9 spending, particularly for the purchase of
Large corporations 13,931 14,126 1.4 residential properties (24.9% of total outstanding
Households 34,127 38,164 11.8
Islamic loans) and consumption credit (33.2%),
Source: Bank Negara Malaysia. as shown in Table 4.7. Financing to SMEs

TABLE 4.7

Islamic Banking System: Direction of Lending

RM million Share (%)
Sector December 2004 End-July 2005 Change End-July 2005

Agriculture, hunting, forestry and fishing 2,328.5 2,202.1 -126.4 3.5

Mining and quarrying 76.6 134.3 57.7 0.2
Manufacturing 6,112.6 6,883.9 771.3 10.9
Electricity, gas and water 719.2 541.2 -178.0 0.9
Wholesale and retail trade, hotels and
restaurants 3,070.9 3,456.8 385.9 5.5
Broad property sector 22,410.7 22,586.8 176.1 35.8
Construction 3,530.9 3,260.8 -270.1 5.2
Residential property 15,393.0 15,736.8 343.8 24.9
Non-residential property 2,580.4 2,560.0 -20.4 4.1
Real estate 906.4 1,029.2 122.8 1.6
Transport, storage and communication 1,176.5 1,208.9 32.4 1.9
Finance, insurance and business services 2,089.9 2,329.6 239.7 3.7
Consumption credit 17,490.5 20,965.6 3,475.1 33.2
of which:
Purchase of consumer durables 43.6 40.0 -3.6 0.1
Personal use 2,448.4 3,057.6 609.2 4.8
Purchase of transport vehicles 14,998.5 17,868.0 2,869.5 28.3
Purchase of securities 877.9 908.4 30.5 1.4
Community, social and personal services 418.5 550.6 132.1 0.9
Others 1,069.5 1,312.3 242.8 2.1

Total loans outstanding 57,841.3 63,080.5 5,239.2 100.0

Source: Bank Negara Malaysia.

86

continued to be significant with a 10.9% growth Roadshows has also been organised. The
to RM8,865 million and accounted for 14.1% of roadshows are jointly organised by BNM, the
total outstanding loans at end-July 2005 (end- Association of Islamic Banking Institutions
2004: 13.8%). Malaysia (AIBIM) and Malaysian Takaful
Association (MTA). To date, three roadshows
The Islamic banking industry is set to grow further have been held, with another two to be held by
following the implementation of several strategic end of 2005.
initiatives to strengthen the development of the
Islamic banking industry both on the domestic
and international fronts. These initiatives include Development Financial
the approval of new Islamic banking licences
under the Islamic Banking Act 1983 (IBA) to Institutions
three leading foreign Islamic financial institutions
from the Middle East. The issuance of Islamic Stronger loan growth of DFIs…
banking licences to foreign players is part of the
strategies to enhance the diversity and depth Development financial institutions (DFIs) continue
of players in the Islamic financial landscape as to complement the banking system in providing
well as strengthen the global integration of the financing to certain priority areas such as
domestic Islamic financial system. The first foreign infrastructure, Bumiputera entrepreneur
Islamic bank has commenced operations in August development, agriculture, manufacturing and
2005. exports as well as SMEs. Financing activities
of the DFIs grew strongly by 20% to RM45,290
Another important strategic measure is the million as at end-June 2005 (end-2004: 16.5%;
transformation of the current Islamic windows RM37,739 million), as shown in Table 4.8.
into Islamic subsidiaries (IS) within the respective The surge in loan growth was mainly contributed
banking groups. To date, six domestic banking by financing for infrastructure projects,
groups have been approved to establish IS, of consumption credit and purchase of residential
which three have commenced operations. properties.
Meanwhile, up to 49% foreign equity is allowed
in the IS. The liberalisation move is expected Loans channelled to infrastructure projects
to increase the potential for building strategic recorded a growth of 26.9%, representing 27.8%
partnerships to acquire new expertise, tap the of total loans outstanding by the DFIs. The
best talents from a broad range of fields and increase reflected mainly loans to the
develop new value-added activities that would transportation and communication, construction
stimulate greater innovation and expansion of and utilities sectors by Bank Pembangunan dan
the Islamic banking industry as well as enhance Infrastruktur Malaysia Berhad (BPIMB). Higher
global integration of the industry. lending for consumption credit, which rose 21.4%
was attributable to stronger demand for personal
To support the activities of syariah scholars in loans following active promotion by Bank Rakyat
the areas of research and capacity building in and Bank Simpanan Nasional. The two banks
Islamic banking and finance, a RM200 million also leveraged on the low interest rate
endowment fund has been established by BNM. environment to aggressively promote their housing
The endowment fund will be utilised to finance loan products, leading to an 18% growth in
training programmes for syariah scholars financing for purchase of residential properties.
worldwide, conduct research in Islamic finance Of the 14 DFIs, financing activities continued
and scholarships as well as organise international to be dominated by seven DFIs, which extended
annual dialogues and workshops among syariah more than 85% of total loans outstanding.
scholars.
Total resources of DFIs rose by 6.9% to RM96,521
As part of ongoing efforts to increase consumer million at end-June 2005 (end-2004: RM90,310
awareness and education in Islamic banking and million). The increase reflected higher borrowings
finance, a series of Islamic Banking and Takaful from the Government of RM19,098 million
 87

TABLE 4.8

Direction of Lending by DFIs1

RM million Share (%)

Sector End-2004 End-June 2005 End-2004 End-June 2005

Manufacturing 4,186.3 4,520.2 11.1 10.0

Agriculture 3,261.3 3,380.6 8.6 7.5
Electricity, gas and water 1,228.9 2,173.5 3.3 4.8
Broad property 10,022.5 10,670.3 26.6 23.6
of which:
Construction 4,136.1 4,524.7 11.0 10.0
Residential property 4,066.4 4,795.6 10.8 10.6
Consumption credit 9,238.5 11,216.0 24.5 24.8
Transport and communications 5,315.4 6,624.5 14.1 14.6
Finance, insurance and business services 1,306.7 1,764.9 3.5 3.9
Others 3,178.9 4,939.7 8.4 10.9

Total 37,738.5 45,289.7 100.0 100.0

1
Comprising Bank Industri & Teknologi Malaysia Berhad, Bank Pembangunan dan Infrastruktur Malaysia Berhad, Bank Simpanan
Nasional, Bank Kerjasama Rakyat Malaysia Berhad, Export-Import Bank of Malaysia Berhad, Bank Pertanian Malaysia, Malaysian
Industrial Development Finance Berhad, Sabah Development Bank Berhad, Borneo Development Corporation (Sabah) Sendirian
Berhad, Borneo Development Corporation (Sarawak) Sendirian Berhad, Malaysian Export Credit Insurance Berhad, Credit Guarantee
Corporation Malaysia Berhad, Sabah Credit Corporation and Lembaga Tabung Haji.

Source: Bank Negara Malaysia.

(end-2004: RM17,569 million), mainly to finance the Export-Import Bank of Malaysia (Exim) will
infrastructure projects. The increase in deposits be strengthened and absorb the functions of
mobilised by the deposit-taking DFIs accounted Malaysia Export Credit Insurance Berhad (MECIB)
for more than 50% of total resources. The DFIs to enhance the availability of trade finance and
were also funded by shareholders’ funds totalling export insurance. This initiative is expected to
more than RM10 billion or 11.5% of total further encourage SMEs to venture abroad and
resources. expand their export of goods and services.

In line with the objective to further develop SMEs,

the SME functions of two DFIs namely, BPIMB Insurance Industry
and Bank Industri & Teknologi Malaysia Berhad Sustained growth momentum with stronger
(BITMB) will be merged to form the new Bank expansion of general insurance…
Perusahaan Kecil dan Sederhana (SME Bank).
SME Bank is tasked with nurturing and developing The insurance industry continues to support the
SMEs by providing financial and non-financial economy through the mobilisation of long-term
services, including creating an entrepreneurial savings, besides facilitating economic risk
community, providing guarantees to loans transfers. It recorded positive growth in the first
granted by banking institutions, facilitating half of 2005, albeit more moderately, with
securitisation as well as providing credit ratings combined premium income for both life and
and business analysis on SMEs. SME Bank is general business increasing by 8.6% to RM11,546
expected to commence operations on 3 October million (January-June 2004: 21.5%; RM10,628
2005. Apart from establishing the SME Bank, million), as shown in Table 4.9. The generation
88

of premium income continued to be dominated

TABLE 4.9 by life insurance, which constituted about 68%
of total combined premium income. The slower
Life and General Insurance Business pace of premium income growth was attributable
End-2004 End-June
to the larger life premium base achieved in 2004
2005 1 following exceptionally strong new demand for
investment-linked and endowment products. In
Life insurance business contrast, the general insurance sector
(RM million) experienced stronger growth with the stabilisation
New business of premium rates after two consecutive years
Number of policies of premium rate declines in line with global rate
(‘000 units) 1,411 689
trends.
Sums insured 170,840.1 92,714.3
Total premiums 6,641.7 3,642.2 Total benefits and claims paid by the insurance
industry increased by 6.6% to RM4,674 million
Business in force
in the first half of 2005 (January-June 2004:
Number of policies
19.2%; RM4,383 million). The bulk of benefit
(‘000 units) 9,724 9,953
payouts was attributable to maturity benefit
Sums insured 593,185.9 615,164.9
payments by life insurers on endowment policies
Annual premiums 11,251.1 11,706.2 that matured during the period. Insurance fund
Premium income 15,131.0 7,844.9 assets expanded by 5.4% to RM91,567 million
as at end-June 2005 (end-2004: RM86,852
Benefit payments 5,397.3 2,827.8
million), with life insurance funds accounting for
General insurance over 80% of total assets, as shown in Table
(RM million) 4.10. Insurance companies remained significant
Premium income institutional investors in the capital market, with
Gross direct premiums 8,557.5 4,848.8 total investments in corporate and debt securities
Net premiums 6,910.9 3,700.7
increasing to RM42,854 million at end-June 2005
(end-2004: RM40,380 million). In terms of asset
Reinsurance placed outside allocation, the largest share or 46.8% of total
Malaysia 977.1 518.1 assets (end-2004: 46.5%) continued to be
Retention ratio2 (%) 87.0 87.2 concentrated in investments in corporate and
debt securities, particularly longer-term bonds
Number of insurance
companies
to match the long- term liabilities of life insurers.
Direct
New business premiums in the life insurance
Life 7 7
sector rose by 14.7% to RM3,642 million in the
General 26 26 first six months of 2005 (January-June 2004:
Composite 9 9 53.7%; RM3,176 million), driven by consumer
Reinsurance demand for attractive investment options. There
Life 1 1 was strong preference for endowment plans which
grew by 71.1% to RM1,608 million (January-
General 5 5
June 2004: 85%; RM940 million). New premiums
Composite 1 1
for investment-linked business, however, fell by
31% to RM819 million due to the larger base
1
Preliminary data. recorded in the corresponding period of 2004
2
Net premiums to gross direct and reinsurance accepted premiums (103.3%; RM1,186 million). Despite the decline,
less reinsurance within Malaysia.
sales of investment-linked plans contributed the
Source: Bank Negara Malaysia. second largest share or 22.5% of new life business
premiums after endowment plans, which garnered
44.1%. The recent move to increase the limit
for insurance companies’ overseas investments
 89

TABLE 4.10

Assets of Life and General Insurance Funds

(RM million)

Life Insurance General Insurance

End-2004 End-June 2005 1 End-2004 End-June 2005 1

Fixed assets 355.8 357.3 733.0 725.7

Loans 8,455.4 8,851.6 226.5 234.4
Government securities 12,518.7 12,310.8 2,281.1 2,519.0
Government guaranteed loans - - 10.1 10.0
Corporate and debt securities 34,694.6 37,159.7 5,685.1 5,693.8
Investment properties 2,969.4 3,006.9 429.7 429.1
Cash and deposits 8,899.2 9,964.0 5,837.6 6,149.9
Other assets 2 1,882.3 2,062.2 1,872.9 2,092.5
Total 69,775.4 73,712.5 17,077.0 17,854.4

1
Preliminary data.
2
Includes other investments and foreign assets.

Source: Bank Negara Malaysia.

from 10% to 30% of net asset value (NAV) is expanded at an annual rate of 10% to RM4,849
expected to boost sales for investment-linked million in the first half of 2005 (January-June
products, as insurance companies would have 2004: 4.2%; RM4,409 million). Motor insurance
more flexibility to diversify investment portfolios business maintained its dominance with a 45.1%
and generate higher returns to policyholders. share of total premiums. Net premiums retained
by insurers also increased, resulting in a higher
New business premiums for pure protection retention ratio of 87.2% (January-June 2004:
policies, specifically credit-related term policies 85.7%).
and medical and health insurance policies, also
recorded strong growth, indicating the increasing Both life and general insurance continued to
importance of insurance as an effective tool for record profitability in the first six months of 2005.
individuals to manage personal financial risks. Consistent with the premium growth trends, the
The positive overall new business growth trend excess of income over outgo of the life insurance
resulted in the market penetration level, measured sector was lower at RM5,169 million (January-
in terms of the total number of policies in force June 2004: RM5,789 million), while operating
to total population, increasing to 38.3% as at profit for the general insurance sector increased
end-June 2005 (end-2004: 37.9%). Compared significantly to RM711 million (January-June 2004:
to developed countries, which have higher RM504 million).
penetration rates, the current domestic
penetration level suggests strong potential for In the first half of 2005, regulatory initiatives
further market expansion. focussed on strengthening risk management
practices in the insurance industry, enhancing
In the general insurance sector, premium growth disclosures to consumers and promoting higher
rebounded strongly on the back of higher motor standards of professionalism among insurance
vehicle sales and the stabilisation of premium intermediaries. The consolidation of the industry
rates for commercial risks which had declined remains a market-driven process. As competitive
sharply since 2003. Gross direct premiums pressures intensify, mergers and acquisitions
90

are expected to be a strategy that will be pursued

TABLE 4.11
by insurers to enhance capital and operating
efficiencies. As at end-June 2005, the number Family and General Takaful Business
of direct insurers has been reduced from 58 to
42, with one other merger and acquisition involving End-July Financial End-July
2004 Year 2005
three insurers currently in progress.
2004

Assets1 (RM million) 4,760.6 5,028.6 5,642.8

Takaful Government Investment
Issues 482.5 597.4 733.3
Investment deposits 1,585.4 1,612.9 1,641.0
Strong performance with growing demand
for investment-linked takaful plans… Islamic PDS and 2,369.6 2,463.9 2,567.7
equities

The takaful industry recorded strong Cash and bank

balances 26.9 44.6 180.5
performance in the first seven months of 2005
Financing 59.9 45.4 52.0
with new business contributions of family takaful
increasing by 33.5% to RM459 million (January- Fixed assets 111.1 109.6 232.9
July 2004: 38.9%; RM344 million), as shown in Others 125.0 154.8 235.4
Table 4.11. The new contributions were mainly
Family takaful business
generated from mortgage reducing term takaful New business
plans in line with the growth of Islamic mortgage
Total contributions
financing. Growth was also driven by strong (RM million) 344.2 603.7 459.4
consumer preference for investment-linked takaful
Sums participated
plans with new contributions up by RM63 million (RM million) 25,474.1 36,458.1 27,657.0
(January-July 2004: RM6 million). Medical and
Number of certificates 163,812 290,538 212,162
health takaful plans further expanded with
contributions increasing by 29.2%, reflecting Business in force
higher demand for protection against rising Total contributions2
healthcare cost. The number of certificates in (RM million) 427.4 477.2 529.3
force increased by 16.1% to 1.4 million units Sums participated
with market penetration level at 5.1% at end- (RM million) 97,639.5 88,711.9 103,665.0
July 2005. Number of certificates 1,214,377 1,315,195 1,410,255

The performance of general takaful business General takaful business

improved further in the first seven months of Gross contributions
2005, with gross contributions increasing by 21% (RM million) 286.5 492.5 346.8
to RM347 million (January-July 2004: 35.1%; Net claims paid
RM286 million). The fire and motor sectors (RM million) 45.2 90.8 66.1
continued to dominate the general takaful 1
Assets of family takaful funds, general takaful funds and
business with 38.4% and 31.5% share of total shareholders’ funds.
gross contributions, respectively. Net claims paid 2
In force contributions reported is only for annual contributions.
by the industry increased by 46.2% to RM66 Source: Bank Negara Malaysia.
million, as a result of higher net claims in the
motor sector.
Several initiatives continue to be taken in the
During the period, assets of family and general first half of 2005 to promote and strengthen the
takaful expanded further by 12.2% to RM5,642 domestic takaful industry, in line with the objective
million (end-2004: RM5,029 million). A substantial for Malaysia to become an Islamic financial
portion of takaful funds was invested in Islamic services hub. An additional four new takaful
PDS and equities, accounting for 45.5% share licenses will be issued to qualified applicants
of total assets. The market share of takaful assets to enhance competition and accelerate the
improved to 6.1% of total assets of the insurance expansion of takaful business. In addition, foreign
and takaful industry at end-July 2005. equity of up to 49% is allowed in takaful entities
 91

to leverage on the expertise of foreign financial

TABLE 4.12
institutions.

Meanwhile, insurance brokers and adjusters Funds Raised in the Capital Market
previously licensed under the Insurance Act 1996 January-July
to conduct takaful broking and adjusting business (RM million)
will now be licensed under the Takaful Act 1984. 2004 2005
This will allow BNM to better regulate and
By public sector
supervise takaful intermediaries, enhance
Government securities
consumer protection as well as mitigate the
Malaysian Government
possibility of unlicenced persons from acting as
Securities 27,763.6 14,543.1
takaful brokers and adjusters. An additional five
Khazanah Bonds 0.0 833.2
new licences will also be issued to new takaful
broking players to promote specialisation and Government investment
issues 1,440.1 2,000.1
spur growth of the industry. Takaful operators
have also been encouraged to venture into Merdeka Savings Bonds 1,500.0 1,162.1
bancatakaful arrangements as a means to New Government securities 28,203.6 18,538.5
enhance their market presence and penetration. Less redemptions 18,657.0 8,531.9
Bancatakaful arrangements enable the takaful
Net funds raised 9,546.6 10,006.6
industry to utilise the extensive network of banking
institutions and DFIs to market takaful products By private sector
to customers. Shares 2
Initial public offerings 1,576.6 4,227.8
Rights issues 1,005.1 552.8
Capital Market Private placements 785.6 249.0
Special issues 68.0 0.0
Facilitating fund raising to finance stronger Warrants 47.7 17.4
private sector activities…
New share issues 3,483.0 4,798.0

Gross funds raised in the capital market totalled Debt securities3 (gross)
RM38,734 million, of which 52% of funds was Straight bonds 943.4 1,356.4
raised by the private sector and the remaining
Convertible bonds 2,470.2 2,708.7
48% by the public sector during the first seven
months of 2005, as shown in Table 4.12. Funds Islamic bonds 4,452.9 3,432.0
raised by the public sector moderated significantly, Asset-backed bonds 1,402.5 497.3
reflecting the Government’s fiscal consolidation Bonds with warrants - 0.0
efforts. The bulk of funds was mainly raised Medium term notes 4,116.0 6,222.6
through the issuance of Malaysian Government Cagamas bonds 4,240.0 1,180.0
Securities (MGS) amounting to RM14,543 million
New debt securities 17,625.0 15,397.0
(January-July 2004: RM27,764 million). Similarly,
gross funds raised by the private sector through Less redemptions 4 18,168.3 11,284.6
the bond and equity markets also moderated by Net issues of debt securities (543.3) 4,112.4
4.3% to RM20,195 million (January-July 2004: Net funds raised 2,939.7 8,910.4
-42.4%; RM21,108 million), mainly attributed to Total net funds raised 14,283.6 18,917.0
the lower PDS issuance on the back of
1
uncertainties regarding the outlook of interest Preliminary data.
2
rates, as well as corporates’ preference towards Excludes funds raised by the exercise of Employees Share Option
Scheme, Transferable Subscription Rights and Irredeemable
other financing avenues. In contrast, IPO issuance Convertible Unsecured Loan Stocks.
was more active with the amount raised surging 3
Includes bonds issued by banking institutions since July 2000.
more than 2.5 times. After accounting for lower 4
Includes straight bonds, bonds with warrants, convertible bonds,
PDS redemptions, net funds raised by the private Islamic bonds and Cagamas bonds.
sector rose threefold to RM8,910 million (January- Source: Bank Negara Malaysia.
July 2004: -86.9%; RM2,940 million).
92

SECURITISATION OF GOVERNMENT STAFF HOUSING LOANS – A LEAP FOR

THE BOND MARKET

Introduction

In line with efforts to further deepen and broaden the bond market, various measures have been
implemented to facilitate securitisation, including mandating Securities Commission as the sole regulator
for the issuance of bonds, the release of the Guidelines on the Offering of Asset-Backed Securities
(ABS) in April 2001 and the introduction of the Prudential Standards on Asset-Backed Securitisation
Transactions in April 2003 by Bank Negara Malaysia (BNM). The Government also provided several
tax incentives namely, stamp duty and real property gains tax exemptions on asset securitisation
transactions to further facilitate the issuance of ABS.

In Malaysia, securitisation began through the operations of Cagamas Berhad, the National Mortgage
Corporation, in October 1987, with Cagamas purchasing loans and debts by raising debt securities
at the secondary level. However, the debt securities were not strictly backed by cashflows from the
loans and debts to be deemed as “true” securitisation.

Securitisation of Government Staff Housing Loans

The Government undertook the securitisation of Government staff housing loans (GSHL) aimed primarily
at further developing the Malaysian bond market, in particular ABS as a new financial tool for raising
funds in the capital market. This is in line with the key thrust of the domestic bond market development
agenda to widen the range and sophistication of products to meet the increasingly diverse needs of
investors and issuers.

The securitisation process involved the Government assigning by way of sales its staff housing loans
on a scheduled basis over a period of time to Cagamas, the issuer, in return for cash proceeds.
Cagamas will then structure a mortgaged-backed securities (MBS) issuance to fund the scheduled
purchases of loans. The cashflows from the underlying loans will be utilised for the repayment of the
MBS issue.

Transaction Structure

Cagamas incorporated a wholly-owned subsidiary, Cagamas MBS Berhad (CMBS), in June 2004, to
undertake the securitisation of GSHL. CMSB acts as a limited-purpose entity, which will purchase
GSHL progressively and issue residential mortgage-backed securities (RMBS) to raise the purchase
consideration for the housing loans. The transaction structure for the securitisation of GSHL is shown
in Chart 1.

Currently, the total housing loans amounts to some RM29.03 billion with maturities up to 25 years.
Given this large size, the securitisation of GSHL will contribute significantly to:

i. create a yield curve for RMBS with longer maturities that will serve as a benchmark for other
ABS issuance;

ii. put in place a price discovery mechanism for other ABS since RMBS bears lowest risks as it is
backed by cashflows from housing loan instalments. This will enable investors to price more
accurately other types of ABS;

iii. promote a viable and active secondary market for ABS issuance; and

iv. promote Malaysia as an issuer of Islamic ABS, given that almost half of the housing loans
approved since 1994, constitute Islamic financing debts.
 93

CHART 1

Transaction Structure

CAGAMAS
BERHAD

Equity
(100% Ownership)

True Sale of Issuance of

RM1,936 million RM1,555
▼ million
Portfolio Pool
RMBS
▼

▼
GOVERNMENT’S
HOUSING LOANS CAGAMAS
MBS BERHAD INVESTORS
▼

▼
DIVISION
Cash RMBS
Settlement Proceeds

Portfolio Pool of
RM1,936 million
(Collateral/Security)
▼

TRUSTEE AND
SECURITY
AGENT

The first portfolio of GSHL was securitised on 20 October 2004, involving RM1,936 million of pensioners’
housing loans and the issuance of RM1,555 million in nominal value RMBS for tenures of 3, 5, 7 and
10 years. The RMBS issue was accorded the highest rating of AAA by both Rating Agency Malaysia
(RAM) and Malaysian Rating Corporation (MARC). The rating reflects the superior quality of the
underlying assets, the strong counterparties as well as the credibility of the RMBS structure, where
the source of repayment for the assets is the pension deductions of Government staff.

The RMBS issuance was well-received, with an over-subscription of 5.6 times. It attracted RM11.1
billion in book size, with RM2.2 billion from investors in Hong Kong and Singapore and RM8.9 billion
from domestic investors. The investors included financial institutions, pension funds, asset management
companies, insurance companies and corporations. The tremendous response also enabled the issue
to be priced competitively at 3.7%, 4.3%, 4.95% and 5.5% for tenures of 3, 5, 7 and 10 years, respectively,
as shown in Table 1. The success of Malaysia’s inaugural RMBS reflects the confidence of the market
in this new financial instrument.
94

TABLE 1

Composition of RMBS Issuance

Series Tenure Maturity Amount Coupon Rate

(Years) Date (RM million) (%)

1 3 19 Oct 2007 580 3.70

2 5 20 Oct 2009 340 4.30
3 7 20 Oct 2011 290 4.95
4 10 20 Oct 2014 345 5.50

Islamic Residential Mortgage-Backed Securities

The Government undertook a second issuance of GSHL, which is an inaugural issuance of Islamic
RMBS (IRMBS) in July 2005 of RM2.05 billion in nominal value. It was a landmark transaction for
Malaysia, being the world’s first rated RMBS to be issued under Islamic principles. Similar to the first
conventional RMBS issued in October 2004, the IRMBS was also a huge success with an over-
subscription rate of 5.4 times, reflecting the strong demand for a syariah-compliant instrument.

Benefits from the RMBS Issuance

The issuance of RMBS enables the Government to transform its relatively large illiquid assets into
liquid and tradeable market instruments. It also provides a more efficient and cost-effective financing
structure over the term of the securitisation, thus facilitating effective financial planning for the
Government. To the investors, the RMBS provides a better yield pick-up compared to other financial
instruments with similar rating and maturity. The RMBS also reflects high credit quality securities, as
the transaction is secured by a portfolio of GSHL loans that is serviced from monthly pension/salary
deductions of retired/existing Government staff.

Conclusion

The RMBS issuance is the successful introduction of an asset class that can be further developed.
Going forward, it is the Government’s intention that these efforts will not only facilitate the development
of asset securitisation but also pave the way for further progress and stronger growth of the Malaysian
bond market.
 95

ADVANCING ASEAN AS AN ASSET CLASS

Background

In the aftermath of the 1997 Asian financial crisis, as the ASEAN region recovered and consolidated
its economic and financial strengths, the ASEAN Finance Ministers launched the Roadmap for
Financial and Monetary Integration in the spirit of forging a progressive and prosperous ASEAN
Community by 2020. The Roadmap, initiated in 2003 to foster greater economic integration, set
milestones and timelines for activities covering the areas of capital market development, liberalisation
of financial services, capital account liberalisation as well as currency cooperation. Within the
context of capital market development, the Roadmap lays out the goals of building capacity and
establishing the required infrastructure to facilitate cross-border collaboration among the various
capital markets in the region.

As a first step towards enhancing cross-border linkages among regional capital markets, member
countries agreed in 2004 to conduct annual ASEAN Finance Ministers’ Investor Seminars in major
global capital markets. These seminars, which are collaborative investor relations initiatives, aim
to raise the profile of ASEAN capital markets and promote greater dialogue with fund managers
and various market participants. The dialogue sessions will enable the sharing of information on
how reforms have transformed ASEAN, how regional initiatives to enhance stability in the region
have progressed, and what investment opportunities the region has to offer.

As a second step, the ASEAN Finance Ministers also initiated efforts towards developing and
identifying a set of investment opportunities in the region that could be promoted as an ASEAN
benchmark with a view to:

i. brand ASEAN as an asset class;

ii. develop ASEAN as a more significant investment destination;

iii. broaden the exposure of ASEAN companies to foreign investors;

iv. facilitate investments into ASEAN companies; and

v. further accelerate the broadening and deepening of the region’s capital markets.

ASEAN as an Asset Class

The fundamental rationale for promoting ASEAN as an asset class is the upside potential of
investment based on the prospect of sustainable and robust economic growth as a result of the
region’s strong competitiveness and fast-expanding economic space. It offers a market of about 550
million people that is growing at more than 2% per year, has a combined GDP of USD800 billion
and is a repository of numerous natural resources and skilled labour that contributes to export
industries concentrated in high growth sectors. ASEAN’s USD330 billion consumer market is already
larger than India’s and comparable in terms of value to China’s booming coastal region. Furthermore,
ASEAN’s 10-member grouping controls about 40% of oil and gas resources in the Asia-Pacific
region, boasting a strong industrial base that has benefitted from relatively low wages in sub-sectors
such as consumer electronics and semi-conductors, with scope for further economic growth in the
manufacturing of biotechnology products and services sectors.
96

Future needs for wealth management also hold promise. In Asia, 10 years ago, the percentage of
the population over 50 years of age was 15%; today, it is 18%, and progressively ageing. There
is a clear trend that many are retiring, most with good health and hence longer life expectancies
as well as bigger caches of retirement savings. Efforts to increase the role of domestic demand
against a backdrop of high savings rates also point to rising future consumption. Furthermore, rising
affluence of a relatively young, economically productive workforce provides enormous opportunities
not only in terms of expenditure on high-end and lifestyle consumer products, but also on financial
services and products such as consumer banking and investment advisory services, which are likely
to see rising demand in the coming years. Better management of pools of funds includes cross-
border financial flows, particularly within the region. Managing these funds and promoting ASEAN
as an asset class would diversify portfolio risks and, in the process, augment skills of local fund
managers to understand other markets.

Meanwhile, underpinning ASEAN’s strong performance are the improving macroeconomic fundamentals
of member countries since the 1997 financial crisis. Positive political and social changes have
generally led to greater stability across the region. In addition, the corporate and financial sectors
are on much firmer ground as a result of major restructuring efforts, including the tightening of
regulations in parallel with requirements for high levels of disclosure as well as stronger minority
shareholders’ rights. Bond markets, particularly the corporate bond markets, have grown considerably
in recent years while bond spreads have narrowed, reflecting improved market confidence. Likewise,
ASEAN equity markets have grown in maturity and sophistication since 1997, more than doubling
in market capitalisation to reach the USD600 billion mark. ASEAN now offers investors potential
gains as a result of the region’s economic growth rates which are expected to be in the region of
4% to 6% this year, and in 2006. Macroeconomic policies have been re-oriented to focus on
increasing efficiency and productivity growth, reinforced with prudent fiscal management and a
broadening of the economic base as well as reducing excessive reliance on external demand.

Southeast Asia accounts for only 1.7% of total global market capitalisation despite having approximately
10% of global population and almost 15% of global exports. Thus, if the growth rates and size of
China and India serve as barometers for their future potential, ASEAN clearly holds substantial
scope and promise to emerge as an asset class.

Towards an ASEAN Index

Promoting ASEAN as a viable asset class has thus far entailed the identification of a set of top-
listed companies in the five major regional exchanges. The list of potential companies will be
showcased as an ASEAN benchmark through the establishment of an ASEAN Index.

For the ASEAN Index to be commercially acceptable and credible, the involvement of the private
sector, comprising the regional exchanges, brokers and publications as well as global index providers,
was considered vital. In this context, the five ASEAN exchanges agreed to collaborate with a
reputable and independent global index provider in developing the ASEAN Index to ensure its
success.

Spillover Benefits

Aside from showcasing ASEAN equities as an attractive asset class, the high profile grouping of
companies in the ASEAN Index must necessarily scale up the standards of governance and accountability,
thereby rendering ASEAN a more attractive investment centre and accelerating the region’s progression
towards interlinked and integrated capital markets. This, in turn, will broaden exposure of the
region’s companies, facilitating investment flows into the region as well as promoting intra-regional
investments.
 97

The Index will also provide the impetus for the development of related products such as exchange
traded funds (ETF), index futures, index warrants or other products based on various groupings of
companies. Other sub-tracker indices, such as an ASEAN telecommunication index or plantation
index, are anticipated to facilitate investment into selected growth sectors. The development of such
products is expected to further develop asset management skills in the region.

Status

Two indices were constructed and developed – the ASEAN Index and ASEAN 40 Index – and
subsequently launched at the Second ASEAN Finance Ministers’ Investor Seminar in London on 21
September 2005. The ASEAN Index, which is a benchmark index that represents the performance
of the region’s markets, comprises 180 stocks from the five markets of Indonesia, Malaysia, the
Philippines, Singapore and Thailand. The ASEAN 40 Index, which consists of 40 stocks from all five
markets, represents the performance of the largest companies in the region’s markets. The creation
of this set of indices is for the trading and benchmarking of financial products such as institutional
and retail funds, ETFs and derivatives contracts. Other spin-offs currently being considered include
the establishment of an ASEAN Equity Mutual Fund, which could be simultaneously listed on ASEAN
exchanges.

The Investor Seminar also saw the release of a supplementary booklet, “ASEAN: Opportunities Set.”
The booklet serves to highlight potential investment opportunities in ASEAN, including emerging
companies from the BCLMV1 countries as well as a brief profile on the economic performance and
outlook for all ASEAN member countries.

Moving Forward

Discussions are ongoing to further foster closer linkages among the regional stock exchanges,
including the move towards market integration, which could significantly enhance the attractiveness
of ASEAN assets as a separate asset class for international investors. To ensure the success of
this cooperation, ASEAN is also looking at ways to harmonise standards and expedite cross-border
regulatory cooperation to facilitate investments in ASEAN listed companies, which are already
assuming increasingly regional characteristics.

The integration of the capital market would, therefore, be a natural progression on the road towards
an interlinked securities market by 2010, a goal that requires the further expansion of cross-border
access. With this on the horizon, it is obvious that the promise of ASEAN dovetails well with the
theme of this year’s ASEAN Finance Ministers’ Investor Seminar - “ASEAN: One Region, Unlimited
Opportunities.”

1
Comprises Brunei Darussalam, Cambodia, Lao PDR, Myanmar and Vietnam.
98

The PDS market remained the preferred channel

CHART 4.7
for companies to finance medium and long-term
projects. New PDS issuance amounted to New Issues of PDS by Purpose
RM14,217 million (January-July 2004: RM13,385 January-July
million). The bulk of PDS proceeds was for
% share % share
financing new activities, accounting for 39.8% 70 70
of total proceeds, as shown in Chart 4.7, reflecting 2004
the continued expansion in private investment 2005
61.7

activity. About 30% of new PDS were issued by 60 60

companies in finance, insurance, real estate and

business services, as shown in Table 4.13. 50 50

Cagamas, the National Mortgage Corporation, 40

39.8
40
remained an active issuer of PDS with Cagamas 35.9

outstanding bonds amounting to RM24,347 million

30 30
or 12.8% of the PDS market at end-July 2005
(end-2004: RM26,752 million; 7.7%). During the
first seven months of 2005, Cagamas raised 9 20 19.0 20
new PDS issues valued at RM1,180 million, 14.2 14.1
accounting for 7.7% of total new issues (January-
10 10
July 2004: RM4,640 million; 10 issues). The 5.3
5.1 4.8
smaller issuance of Cagamas bonds led to a
0.0 0
substantial reduction in the volume of secondary 0
Restructuring Refinancing New activity Merger Others
trading to RM11,627 million from RM27,412 million & acquisition
over the same period last year.
Source: Bank Negara Malaysia.

New issuances were largely dominated by fixed

rate bonds accounting for 66.1% of total new
bonds issued, followed by Cagamas Bithaman
Ajil Securities, previously known as Sanadat
Cagamas (33.9%). Meanwhile, the purchase of Berhad, has since launched two issues of RMBS.
loans and debts declined by 55.5% to RM1,599 The first portfolio involved RM1,555 million RMBS
million (January-July 2004: RM3,592 million) due issued in October 2004 while the second issuance
to less active selling of loans and debts by financial in July 2005 comprised RMBS based on Islamic
institutions, amidst flushed liquidity and the low principles totalling RM2,050 million.
interest rate environment in the banking system.
As at end-June 2005, holdings of Cagamas bonds During the first seven months of 2005, the number
by banking institutions decreased to 52.6% of of ratings completed by both Rating Agency
total holdings (end-2004: 56.8%), as shown in Malaysia (RAM) and Malaysian Rating
Table 4.14. Provident and pensions funds Corporation (MARC) increased to 112 issues,
remained the largest non-banking institutional valued at RM33,451 million (January-July 2004:
holder of Cagamas bonds with 27.9% of the 94 issues; RM27,010 million). The number of
total holdings. ratings on Islamic PDS rose significantly to 63
issues valued at RM17,562 million (January-
The Government also mandated Cagamas to July 2004: 35 issues; RM9,942 million), reflecting
undertake the securitisation of the Government significant interest in Islamic papers. Similarly,
staff housing loans in efforts to further deepen credit ratings on asset-backed securities (ABS)
and broaden the domestic capital market. increased to 27 issues valued at RM5,637 million
Cagamas, through its subsidiary Cagamas MBS (January-July 2004: 20 issues; RM3,315 million),
 99

indicating the growing ABS market following

TABLE 4.13
Government’s initiatives to increase the depth
and breadth of the domestic capital market.
New Issues of PDS by Sector1
January-July
Ratings completed were predominantly on PDS
with tenure of more than 5 years, accounting
Sector 2004 20052 for 71% of the total number of proposed PDS
RM million Share RM million Share issues. The bulk of PDS rated was in the single-
(%) (%)
A category from various sectors, including
Agriculture 0 0 155.5 1.1 infrastructure and utilities, financial services as
Manufacturing 1,291.7 9.7 1,127.1 7.9 well as trading and manufacturing.
Electricity, gas
and water 4,484.0 33.5 3,533.0 24.9
Wholesale &
retail trade, Bursa Malaysia
hotels and
restaurants 20.0 0.1 122.0 0.9
Strong performance on the back of investor
Construction 4,207.6 31.4 2,211.6 15.6
confidence…
Transport,
storage and
communication 556.0 4.2 1,698.3 11.9 Bursa Malaysia, which staged a rally in the fourth
Finance, quarter of 2004, extended its favourable
insurance, performance into 2005 with the benchmark Kuala
real estate and Lumpur Composite Index (KLCI) breaching a
business
services 2,790.6 20.8 4,242.8 29.8
four and half-year high at 937 points in January.
The market, however, retraced some of its gains
Government
and others 35.0 0.3 1,126.7 7.9 in line with other regional markets as investors
were affected by high oil prices and slower global
Total 13,385.0 100.0 14,217.0 100.0
economic growth. The market was also affected
1
Excluding Cagamas bonds. by the heavy sell-down of second and third liner
2
Preliminary. stocks in May following the withdrawal of share
Source: Bank Negara Malaysia.
financing by some banks. As a result, the second
board index plunged to its lowest level in nearly
seven years at 81.75 points while the MESDAQ
market index fell to 84.3 points, a two-year low.
However, market sentiment improved following
TABLE 4.14 the Government’s swift action to restore market
integrity and confidence as well as continued
Distribution of Cagamas Bonds
assurance by local banks to maintain and expand
shares financing facility. Investors also responded
Holder End-2004 End-June 2005
positively towards the Government’s decision to
RM million Share RM million Share lift the ringgit peg with the KLCI surging to a
(%) (%)
five year high to close at 952.59 points on 3
Banking institutions 15,207 56.8 13,540 52.6 August, with market capitalisation of RM738.9
Insurance companies 1,189 4.5 3,027 11.7 billion. The upward trend, however, could not
Provident and be sustained, as concerns over the impact of
pension funds 7,129 26.6 7,184 27.9 record high oil prices on economic growth led
Other investors 3,227 12.1 2,005 7.8 to more cautious sentiments in global and
regional stock markets. The KLCI closed at 921.99
Total 26,752 100.0 25,757 100.0
points on 16 September 2005 with a gain of
Source: Cagamas.
1.6% (end-2004: 907.43 points), as shown in
Chart 4.8.
100

CHART 4.8 TABLE 4.15

Performance of Selected Stock Market Indices

Bursa Malaysia: Selected Indicators
January-August
End - 2004 vs 16 September 2005
2004 2005
KOSPI, Korea 31.1
Price indices1
FTSE, UK 12.8 Composite 828.0 913.6
Emas 196.9 208.2
Nikkei, Japan 12.8 Second Board 109.2 88.4
MESDAQ Market 115.5 90.5
STI, Singapore 11.3
Total turnover2
SET, Thailand 6.0 Volume (million units) 72,322.7 74,817.0
Value (RM million) 147,797.6 127,021.6
JCI, Indonesia 5.6
Average daily turnover2
HSI, Hong Kong 5.3 Volume (million units) 441.0 456.2
Value (RM million) 901.2 774.5
PCOMP,Philippines 4.8 1
Market capitalisation
(RM million) 654,260.3 704,361.7
KLCI, Malaysia 1
1.6 Market capitalisation
/GDP (%) 145.5 144.5
Nasdaq, US A -0.7

Total no. of companies 944 1,003

DJIA, US A -1.3
listed 1
Main Board 614 639
TWSE, Taiwan -1.8
Second Board 280 272
-4 0 4 8 12 16 20 24 28 32 36 MESDAQ Market 50 92
%
Source: Bank Negara Malaysia. Market liquidity 1
Turnover value/market
capitalisation (%) 22.6 18.0
Turnover volume/no. of
Trading on Bursa Malaysia was higher at 74,817 listed securities (%) 25.5 23.4
million units in the first eight months of 2005
(January-August 2004: 72,323 million units), as Market concentration1
10 most highly capitalised
shown in Table 4.15 and Chart 4.9. The market stocks/market
attracted higher foreign participation, accounting capitalisation (%) 34.2 36.4
for 34.5% of trading activity during the period. Average paid-up capital of
Foreign funds were encouraged by several stockbroking firms 1
positive developments including the resilience (RM million) 174.7 170.6
of the Malaysian economy, the ongoing reform 1
End period.
of government-linked companies (GLCs) and 2
Based on market transactions during period.
further liberalisation in financial services. On a
Source: Bursa Malaysia.
sectoral basis, the plantation sector was the
top-performing sector with an increase of 6.4%
in the plantation index on account of favourable
earnings of plantation companies, as shown in investor interest in new listings. A large number
Table 4.16. The MESDAQ Market Index declined of smaller firms raised funds in the equity market,
by about 26%, underpinned by the down-cycle with 31 on the MESDAQ market and 16 on the
of the technology sector, particularly in the semi- Second Board, against 11 companies on the
conductor segment. Main Board. Funds raised rose more than twofold
to RM4,228 million (January-July 2004: RM1,577
The equity market remained an important avenue million). With 1,003 companies listed at end-
for the private sector to raise funds. A total of August 2005, Bursa Malaysia ranked third in
58 IPOs was issued during the period, with the East Asia (excluding Japan) in terms of listings
majority being oversubscribed, indicating strong on a stock exchange.
 101

CHART 4.9

Bursa Malaysia: KLCI and Total Volume

million units Index

30,000 1,500
2001 KLC I 2002 KLC I 2003 KLC I 2004 KLC I 2005 KLC I
High: 736.34 (2 Feb) High: 808.07 (23 Apr) High: 817.12 (31 Oct) High: 919.97 (2 Dec) High: 952.59 (3 Aug)
Low: 553.34 (9 Apr) Low: 616.46 (3 Dec) Low: 619.22 (11 Mar) Low: 781.05 (17 May) Low: 860.73 (31 May)
Volume Volume Volume Volume Volume
High 681.9 mil (23 Nov) High 906.2 mil (17 Apr) High 1,468.1 mil (5 Jul) High 1,325.5 mil (2 Mar) High 1,087.3 mil (7 Jan)
24,000 1,200
Low 66.6 mil (17 Apr) Low 93 mil (24 Dec) Low 79.2 mil (3 Jan) Low 213.2 mil (4 Jun) Low 306.2 mil (12 Apr)
Total: 54,949.2 mil Total: 62,744.5 mil Total: 124,200.3 mil Total: 122,680.5 mil Total: 86,678.9 mil
Average: 226.1 mil Average: 253 mil Average: 504.9 mil Average: 494.7 mil Average: 528.5 mil

18,000 900
Volume

KLCI (right scale)

12,000 600

6,000 300

0 0
J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A S O N D J F M A M J J A
2001 2002 2003 2004 2005

Source: Bursa Malaysia.

TABLE 4.16 Unit Trust Industry

Bursa Malaysia: Performance of Selected Growing popularity of unit trusts as an

Indices investment instrument…

Index End-Dec End-August Change The unit trust industry registered strong growth
2004 2005 (%)
with increased number of units in circulation,
Composite 907.4 913.6 0.7 number of accounts and trust funds in the first
EMAS 214.3 208.2 -2.8 seven months of 2005, reflecting the growing
Second Board 110.9 88.4 -20.3 popularity of unit trusts as an investment
MESDAQ Market 122.8 90.5 -26.3
instrument. The market witnessed the launch of
Construction 171.3 145.6 -15.0
33 new funds during the period (2004: 62 funds),
bringing the total number of unit trust funds to
Consumer products 232.2 224.3 -3.4
306, as shown in Table 4.17 and Chart 4.10.
Finance 7,462.9 7,378.8 -1.1
The NAV of the industry rose by 6.8% to RM93,299
Industrial 1,965.6 1,983.0 0.9
million (end-2004: RM87,385 million) in line with
Industrial products 85.1 78.2 -8.1
the better performance of the stock market.
Mining 361.2 370.1 2.5
Reflective of the strong market demand for Islamic
Plantation 2,417.1 2,571.2 6.4 financial products, the Islamic unit trust segment
Property 717.0 599.1 -16.4 expanded further to 72 Islamic funds as at end-
Syariah 133.8 130.8 -2.2 July 2005 (end-2004: 65 Islamic funds). The
Technology 43.1 29.5 -31.6 NAV of Islamic funds grew by 12.7% to RM7,621
Trading/services 131.9 131.9 0 million (end-2004: RM6,760 million), accounting
Source: Bursa Malaysia and Bloomberg.
for 8.2% of total NAV of the unit trust industry.
There is great potential for the unit trust industry
102

TABLE 4.17

Unit Trust Industry: Selected Indicators

End-2004 End-July 2005

Government Private Total Government Private Total

supported Funds supported Funds
Funds Funds

Number of unit trust management companies 10 26 36 10 26 36

Number of unit trust funds 1 35 238 273 35 271 306
Conventional 29 179 208 29 205 234
Islamic 6 59 65 6 66 72
Units in circulation (million) 53,716 64,911 118,627 55,082 73,427 128,509
Number of accounts (million) 8.745 1.680 10.425 8.839 1.777 10.616
Net asset value (NAV) (RM million) 50,090 37,295 87,385 52,059 41,240 93,299
Conventional 49,651 30,974 80,625 51,642 34,036 85,678
Islamic 439 6,321 6,760 417 7,204 7,621
NAV/Bursa Malaysia market value (%) 6.94 5.17 12.11 7.18 5.69 12.87

1
Refers to funds already launched.

Source: Securities Commission.

to further grow, given that the penetration level

CHART 4.10 as measured by the ratio of NAV to market
Unit Trust Industry: capitalisation of the stock exchange remains
NAV, Units in Circulation and Number of Funds low at 12.9% at end-July 2005. The liberalisation
to allow unit trust companies to invest 10% of
Units in circulation (billion) Number of
NAV (RM billion) funds
the NAV overseas in April 2004 and enhanced
150 350 to 30% in April 2005 has enabled Malaysian
Units in circulation
investors to further diversify their portfolio
Net asset value (NAV)
investment. As at end-July 2005, 34 funds
Number of unit trust funds
125 amounting to RM207 million have been launched
280
to invest in overseas markets.

100 A positive development in the fund management

210
industry is the introduction of REITs, which use
a professional management team to buy, develop,
75 manage and sell real estate assets by offering
common shares to the public. The advent of
140 REITs augurs well for capital market development
50
in Malaysia by providing investors with an
alternative investment opportunity besides
unlocking the value of properties. The Government
70
25
has also provided attractive tax treatment for
REITs in Budget 2005, including tax exemption
on income distributed to unit holders and tax
0
credit for accumulated income that has been
0
2000 2001 2002 2003 2004 20051 taxed and subsequently distributed. As at end-
1
As at end-July 2005. August 2005, 4 REITs have been listed on Bursa
Source: Securities Commission. Malaysia.
 103

Derivatives Market implementation in 2004. In Phase II of the CMP

(2004-2005), efforts will be geared towards further
Lower turnover of KLCI and CPO futures… strengthening key sectors in the capital market,
promoting market efficiency through the usage
The performance of products traded on Bursa of technology in market processes and further
Malaysia Derivatives was generally more liberalising market access. As at end-July 2005,
subdued in the first eight months of 2005 with 63% of the 152 CMP recommendations have
trading volume declining by 7.1% to 1,652,821 been fully implemented while the remaining
contracts (January-August 2004: 42.6%; recommendations are still in progress.
1,778,446 contracts). Crude palm oil (CPO)
futures maintained its dominance as the most In efforts to further strengthen domestic
actively traded product accounting for about half intermediaries, branching restrictions and capital
of the total volume transacted. Reflecting the framework have been further relaxed enabling
developments in the physical palm oil markets, stockbroking companies to offer the full range
total turnover of CPO futures was, however, lower of corporate advisory services. Meanwhile, the
with volume traded declining by 12.2% to 794,600 domestic investment management industry has
contracts (January-August 2004: -0.4%; 905,183 bright prospects with the recently relaxed
contracts). Average CPO futures prices declined investment rules allowing investment companies
by 21.1% to RM1,388 per tonne in the first eight to invest abroad up to 30% of NAV of resident
months of 2005 (January-August 2004: RM1,759 funds as well as the increase in the amount of
per tonne), due to increased CPO production EPF funds outsourced to local fund management
and lower soyoil prices in the world market. to RM6 billion over the next three years.
Investment restrictions for the takaful industry
Similarly, the performance of KLCI futures was have also been liberalised to facilitate greater
also weaker with total turnover down by 2.3% mobilisation of takaful funds into the Islamic
to 735,993 contracts (January-August 2004: capital market.
409%; 753,174 contracts). The slower
performance of KLCI futures was attributed to To further enhance the position of Malaysia’s
lower investor participation in the futures market capital market in the global financial landscape,
in the first half of 2005, following lack of volatility the Government has permitted greater foreign
in the benchmark KLCI during the period. The participation in the stockbroking, futures broking,
market, however, rebounded in July and August fund management and venture capital industries.
due to renewed investor interest in the equity As at 23 September, two foreign stockbroking
market. Financial futures performed better, with companies have commenced operations, while
the 3-month Kuala Lumpur Interbank Offered the other three are expected to do so by year
Rate (KLIBOR) futures registering an increase end. Meanwhile, one foreign fund management
of 9.4% to 108,751 contracts (January-August company has also started its operations in the
2004: 19.2% 99,434 contracts), due to flushed domestic market. As for the futures broking
liquidity in the interbank cash market as well as industry, three foreign futures brokers have
market anticipation of a domestic interest rate obtained approval to become trading participants
hike in the second half of 2005. Total turnover of Bursa Malaysia Derivatives. In addition,
of MGS futures, however, declined by 33.4% multilateral development banks and multilateral
due to limited MGS issuance in the underlying financial institutions are now allowed to raise
market. ringgit bonds in the domestic capital market. To
date, three supranationals have raised ringgit
bonds totalling RM1,660 million (Asian
Progress of the Capital Market Development Bank, RM400 million; International
Finance Corporation, RM500 million; and the
Masterplan World Bank, RM760 million). The issuance augurs
Significant progress with more than 60% of well for the growth and development of Malaysia’s
CMP recommendations completed… bond market as well as reflects the confidence
of international organisations in the domestic
The Capital Market Masterplan (CMP) launched capital market. Meanwhile, efforts to
in 2001, entered its second phase of internationalise the Islamic capital market were
104

Key Capital Market Measures

Continuous improvement efforts through capacity building, increasing performance standards

and enhancing efficiency…

Capital market measures introduced in the first seven months of 2005 were aimed at further strengthening
the capital market and the intermediation process as well as enhancing capacity building. The key
measures include the following:

Restructuring of the Stock Exchange

• On 18 March 2005, Bursa Malaysia was listed on the Main Board. The listing completed
the restructuring process of the stock exchange, which involved consolidation, demutualisation
and listing of the exchange. The restructuring exercise is aimed at promoting capital market
efficiency and enhancing competitiveness.

Enhancing Capacity Building

• The Capital Market Development Fund (CMDF) was established in November 2004 for
the purpose of development and promotion of the Malaysian capital market. The CMDF
was allocated 30% of the value of the exchange upon demutualisation. Among the aims
of the CMDF are to assist in capacity building of skills, knowledge, research and education
to enhance the standards of expertise and professionalism. In January 2005, the first
project of the CMDF, the CMDF-Bursa Research Scheme (CBRS), was launched to widen
coverage and raise the profile of domestic companies. Currently, the scheme has 100
participating companies covered by ten research houses. The CBRS reports are expected
to spur greater interest among investors as well as broaden the daily trading base across
a spectrum of counters.

Improving the Quality of Public Listed Companies

• On 1 January, Guidance Notes relating to Policies and Guidelines on the Issue/Offer of

Securities were released to facilitate the injection of assets into distressed listed companies.
Among others, the guidance notes also liberalises the requirements in relation to acquisitions
of foreign assets by Malaysian companies.

Strengthening Bond Market

• On 28 March, the National Bond Market Committee (NBMC) removed restrictions on the
utilisation of proceeds from bond issues, other than those relating to foreign exchange
requirements in BNM’s Exchange Control Guidelines on PDS for Lead Arrangers. The lifting
of restrictions will encourage more issuance of bonds to finance property development
projects.

• On 31 March, Securities Commission (SC) and BNM issued an Information Note to facilitate
the issuance of ringgit-denominated bonds in Malaysia by multilateral development banks
or multilateral financial institutions.

• On 6 April, SC issued a Practice Note on the Guidelines on the Offering of PDS to facilitate
the issuance of negotiable instruments of deposit with tenure of more than five years by
licenced institutions or Islamic banks.
 105

Facilitating Introduction of New Products

• On 3 January, the Guidelines on Real Estate Investment Trusts (REITs) were released
in efforts to accelerate its growth and establish a vibrant and competitive REIT industry
in Malaysia. The guidelines supercede the earlier Guidelines on Property Trust Funds
issued on 13 November 2003.

• On 28 June, the Guidelines on Exchange Traded Funds (ETFs) were released to facilitate
the introduction of ETFs as a new investment instrument. Apart from expanding the
product range in the capital market, ETFs are expected to enhance liquidity in the equity
market.

Enhancing Capacity and Capability

• On 1 July, BNM and SC issued the Guidelines on Investment Banks. The guidelines
outline the salient features of the framework on investment banks including process and
procedures for its establishment, scope of activities that can be conducted and the co-
regulatory and supervisory framework by BNM and SC. The establishment of investment
banks involves the integration and rationalisation of merchant banks, stockbroking companies
and discount houses within a banking group. Entities involved in the rationalisation
exercise are given one year from 1 July 2005 to transform into investment banks. Foreign
equity for investment banks is also increased to 49% from 30% previously to strengthen
global linkages. The creation of investment banks is to enhance the capacity and capability
of domestic capital market players in competing in an increasingly liberalised and globalised
environment.

Strengthening Market Intermediaries

• On 17 February, SC amended the securities regulations to facilitate the launch of the

Electronic Licensing Application System (ELA). The ELA allows applications and renewals
of capital market intermediary licences to be made via the Internet.

• On 15 March, the Guidelines on Compliance Function for Fund Managers were issued
for fund managers to further strengthen the level of investor protection and promote
market integrity. The guidelines require fund managers, among others, to comply with
the Anti-Money Laundering Act 2001 and adhere to best practices for trading and portfolio
management. The introduction of these guidelines will assist fund managers to strengthen
internal controls and increase overall standards of ethical and prudential conduct in the
investment management industry. All fund managers are given a grace period of one
year to comply with the guidelines.

• On 25 March, the SC announced further relaxations for stockbroking companies that have
merged with at least one other stockbroking company and have shareholders funds of
at least RM100 million. These stockbroking companies will be allowed to undertake the
full range of corporate advisory services, operate futures broking activities within the
stockbroking entity and have unrestricted branching from 2006.

• On 28 April, the Guidelines on E-Contract Notes were issued to provide stockbrokers

with guidelines on minimum safeguards that must be put in place before offering their
clients the option of receiving contract notes electronically.

• On 29 June, the Guiding Principles for Outsourcing of Backoffice Functions for Capital
Market Intermediaries were issued to facilitate market intermediaries to achieve greater
efficiency, reduce administrative burden and to operate in cost effective manner by
allowing the outsourcing of backoffice functions by intermediaries to external service
providers, which functions are otherwise undertaken by the internal staff of the market
intermediaries.
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• On 29 June, the Guidelines on Performance of Supervision Functions at Group Level

for Capital Market Intermediaries were issued. The guidelines permit the supervisory
functions currently performed at the market intermediary level to be carried out at the
group level, subject to certain requirements.

• On 18 July, BNM issued the Guidelines on Access to Interbank Market by Universal

Brokers, which allows universal brokers to participate in the interbank money market,
subject to prudential requirements that must be complied with.

Promoting Venture Capital Industry

• On 14 April, the revised Guidelines for Annual Certification for Tax Incentives for the
Venture Capital Industry were released, which became effective from assessment year
2003. The revised guidelines aimed at assisting the venture capital industry in their
application to the SC for annual certification in order to enjoy the tax incentives provided
for the sector, namely tax exemption for venture capital companies and tax deduction
for any company or individual that has provided venture capital funding subject to certain
criteria.

Enhancing Investor Protection

• On 28 February, SC released the Plain Language Guide for Prospectus to encourage

the use of simple English in prospectus to enable investors to grasp vital information
and make informed investment decisions.

Liberalising Market Access

• On 29 April, revisions were made to the Guidelines for Dealers and Dealer’s representatives
and the Guidelines for Fund Managers and Fund Manager’s Representatives under the
Securities Industry Act 1983. The revisions are to facilitate the licensing of fully foreign-
owned stockbroking and fund management companies permitted to establish operations
in Malaysia, following the liberalisation measures announced in Budget 2005 to allow
up to five foreign stockbroking companies and five foreign fund managers to operate in
Malaysia.

Facilitating Listing Process

• Effective 1 January, SC will approve all applications for listing and corporate proposals
on the MESDAQ market while Bursa Malaysia will continue approving admission to the
Official List and quotation for trading of securities on the MESDAQ market.

• On 14 February, amendments were made to the listing requirements and MESDAQ Market
listing requirements to facilitate the transfer of Second Board and MESDAQ listed companies
to the Main Board.

• On 28 June, a Practice Note was issued to clarify the requirements of the Prospectus
Guidelines on Public Offerings relating to the listing of companies with foreign-based
operations/subsidiaries/associated companies or companies involved in acquisition of
foreign securities and assets.
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further enhanced with the signing of two sectors of the economy, especially SMEs. Growth
memorandums of understanding (MOUs) by the of the insurance industry is expected to continue
Labuan Financial Exchange (LFX) with the to be spurred by the strong demand for
International Islamic Financial Market (IIFIM) and investment-linked and endowment insurance
the Bahrain Stock Exchange (BSE). The MOUs products.
will enhance the position of LFX as an international
financial exchange that could bridge the Islamic financial services in Malaysia are set to
requirements between Europe, Middle East and further expand with the transformation of Islamic
Asia in Islamic financial instruments. windows of domestic banks into Islamic
subsidiaries as well as the entry of foreign players.
The presence of foreign Islamic financial
Outlook for 2006 institutions as well as higher foreign equity in
domestic Islamic subsidiaries is expected to
Monetary policy to continue to support growth, further spur competition and accelerate the global
aided by a more competitive and efficient integration of the Malaysian Islamic banking
financial market… system. Meanwhile, some Malaysian financial
institutions are gearing to be important financial
Monetary policy in Malaysia in 2006 will take players through their presence in regional markets
into consideration both global and domestic as well as plans to expand to other growth areas,
developments, and will continue to focus on such as the Middle East.
ensuring that monetary conditions remain optimal
for sustainable economic growth with price The capital market will continue to remain an
stability. The fundamental factors that supported important source of financing for the economy.
the Malaysian economy in 2005 are expected With successful completion of financial
to remain in 2006. Private consumption and restructuring in Malaysia, PDS issuance is
investment will continue to drive economic activity. expected to be largely used for business
As for inflation, the Government will continue expansion and new activity in tandem with the
to monitor conditions to avert any potential build- rebound in private investment. The issuance of
up in domestic inflation, while maximising the ABS is set to grow, supported by the
growth potential of the economy. Malaysia’s strong securitisation of Government staff housing loans.
economic fundamentals, efficient financial market Other ongoing initiatives will further drive the
and a strong record of policy prudence provide development of Malaysia’s capital market, such
a strong base for monetary policy to be as the proposed Bursa Malaysia-Singapore
implemented effectively. Exchange tie-up, a common trading platform for
equities and derivatives and an electronic
The stronger and more resilient banking system exchange for trading in bonds, as well as the
is well-poised to meet the growing financing creation of a regional index series involving five
needs of the economy as well as cope with Asean stock exchanges, including Bursa Malaysia.
rising competition. Following efforts in realigning Meanwhile, regional economic and financial
the activities and institutional structure of the cooperation under the Asean Bond Markets
DFIs, particularly the establishment of Bank SME, Initiative (ABMI) is set to further accelerate with
DFIs now have greater focus in providing financial efforts in exploring securitisation and cross-border
and non-financial support to identified strategic bond issuance.