ISLAMIC VENTURE CAPITAL INDUSTRY IN MALAYSIA

The Securities Commission (SC) announced on 7^th May 2009 new guidelines and best practices aimed at helping the country's Islamic venture capital industry meet the international benchmark.

Managing director Datuk Nik Ramlah Nik Mahmood expects the new guidelines to enhance local and foreign fund interest in investing in syariah-compliant businesses. The two core components under the new guidelines are the requirement to appoint shariah advisers and the core business must be shariah-compliant.

As at end-2007, there were 98 venture capital corporations (VCC) and venture capital management corporations (VCMC) registered under the SC with total funds worth RM3.3bil.

Ramlah said the country's venture capital (VC) and private equity (PE) was driven by demand for equity funding from emerging and expanding businesses. She noted that the Government had allocated about RM1.6bil for the industry under the Ninth Malaysia Plan. In addition, the Capital Market Masterplan also introduced specific initiatives and tax incentives to encourage more foreign participation in VCCs and VCMCs.

Meanwhile, Malaysian Venture Capital and Private Equity Association chairman Azam Azman said the VC and PE markets in Malaysia and South-East Asia were still growing based on the influx of investments flowing into Asia from the Middle East recently.He said the funds committed to VC and PE asset classes both in Malaysia and globally had grown significantly over the past 10 years. From 2005 to 2007, the total number of VCCs and VCMCs in Malaysia grew by 13%. Azam noted that total VC investments rose to RM1.78bil in 2007 from RM1.59bil in 2006. There was also a 183% rise in the amount invested in investee companies from RM169mil in 2006 to RM479mil in 2007.

He added that investment in investee companies which traditionally focused on the information and communications technology sector were shifting to other areas such as life sciences, electricity and power generation, education, trading, transportation and finance.

The Government hopes more Islamic venture capital companies will be set up to support Malaysia’s aims of becoming the regional hub for Islamic finance.

Deputy Finance Minister Datuk Dr Awang Adek Hussin said Islamic venture capital was a new area in which the Government sought more investment.

“This is in line with the Government’s aspiration to promote Islamic finance, banking and capital markets as well as their related products such as Islamic venture capital and private equity,” he told a press conference after delivering the keynote address at the Islamic Venture Capital and Private Equity Conference 2009 on 20^th May 2009 organised by Malaysian Venture Capital and Private Equity Association (MVCA) and Islamic Banking and Finance Institute Malaysia (IBFIM).

He added that given the contracting global credit markets, the promotion of Islamic venture capital and private equity was both appropriate and timely.

To date, only one Islamic venture capital fund has been set up in Malaysia which is managed by Musharaka Venture Management Sdn Bhd, with a fund of RM35mil.

Musharaka was launched last July by Malaysia Venture Capital Management Bhd, the venture capital arm of Ministry of Finance, as part of its Second Outsource Partners Programme. According to MVCA vice-chairman Shaik Taufik Shaik Yusoff, Musharaka which had not made any investment yet, expected to find suitable companies to invest in this year as it is looking at a few deals currently.“The fund will primarily lean towards companies involved in information and communications technology as well as high-tech businesses,” he said.

On Islamic banking in Malaysia, Awang Adek said in his keynote address that the sector had registered double-digit growth in the last eight years with an average annual growth of 20% in terms of assets. “The share of Islamic banking assets in the total banking sector expanded to 16.7% last year compared with 6.9% in 2000. “And about 60% of the world’s sukuk issuance originated from Malaysia last year. In the first quarter of this year, another RM6.4bil was issued that has made Malaysia a leader in the global sukuk market,” he said.

NEWS UPDATE FROM BAHRAIN

Extracted from The Daily News, Bahrain

News 1 : Islamic securities markets grow despite turmoil

The prospects for growth in Islamic securities markets are positive despite global credit crunch and economic slowdown.

"Part of this reflects the windfall from higher commodity prices," Central Bank of Bahrain director of financial institutions supervision Abdul Rahman Al Baker told delegates at the opening session of the two-day fifth Annual World Islamic Funds and Capital markets conference at the Gulf Hotel.

"It can also be attributed to the rapid expansion and increasing sophistication of the GCC financial markets themselves," he said

"The geographical spread of Islamic securities products and activities is likely to grow in the UK, Indonesia, Hong Kong, Singapore, France, North Africa and the energy-rich Central Asian states.

"Even jurisdictions where Muslims are a small minority are displaying interest in Islamic investment.

"In Bahrain, the mutual funds industry is one of the fastest growing segments of the overall financial sector.

"With over $11 billion in assets under management, through more than 2,600 funds, the industry has been growing at an annual average of about 20 per cent in recent years.

"Overall, there are 98 Islamic funds incorporated and registered in Bahrain with total assets of $1.8bn as of the end of 2008."

"The CBB, having pioneered the development of sukuk, remains active in the sovereign sukuk market, with a total of $1.69bn medium to long term sukuk issued, complemented by a regular programme of short term issuance," he continued.

"The CBB will issue its third international sukuk soon, which will be listed on the London Stock Exchange.

"It is the CBB's hope that such initiatives will go a long way in harmonising market practices and creating a deep and vibrant Islamic capital market.

"Generally, the potential size of the Islamic finance market is vast, and the accelerated establishment of Islamic finance hinges on attracting the flow of these potential funds into Islamic investment," he added.

"However, it is important to ensure that Islamic investment industry has a solid foundation for future development and growth.

"In order to further strengthen the Islamic investment industry and enhance its growth, there are several factors that need to be taken into consideration.

"First, it is important to create adequate straightforward regulation for Islamic investment instruments which industry players can use to grow their activities," he said.

"Such regulation should create the necessary framework for investment instruments targeting small investors, medium size investors, as well as professional or high net-worth individuals, who would like to invest their funds in accordance with Sharia principles.

"This regulatory framework should also cater for wide range of Sharia-compliant investment products that include equity, sukuk, various types of Islamic funds with moderate risks, as well as high risk funds, Islamic real estate investment trusts and other alternative investments," he said.

"Basically, addressing all types of investors and investment products will guarantee the wide spread of Islamic investment not only in the region, but also internationally," he added.

News 2 : Shariah-compliant asset management industry grows to $736 Billion

Shariah sensitive investable assets in the GCC and Asia last year touched $736 billion, a report reveals.

The third annual Ernst & Young Islamic Funds and Investments Report (IFIR 2009) was released yesterday at the World Islamic Funds and Capital Markets Conference in Bahrain.

That was up from just $267bn in 2007.

This translates into a potential annual revenue pool of $3.86bn for the Islamic asset management industry.

Fund sizes, however, remain small, with over 50 per cent having assets under management of $20 million or less.

But there has been a slowdown in growth in the industry as Islamic indices have performed poorly worldwide.

A total of 25 Islamic funds were liquidated last year and the first quarter of this year. Just 18 were liquidated in all of 2006 and 2007 combined.

The number of new funds launched has dropped from 271 in 2006 and 2007 to only 89 last year and first quarter of this year.

The largest concentration of Islamic funds remains in the Middle East and equity funds lead the field for choice of asset type, according to the report.

In total 19% and 23% of Islamic funds are domiciled in Saudi Arabia and Malaysia respectively.

Saudi Arabia holds $19.28bn in total assets under management for Islamic funds. Malaysia holds $4.579bn in assets.

"Islamic indices have performed poorly worldwide - we see the average return from Islamic equity funds fall to minus 39pc in 2008 as compared to a 23pc return in 2007," the report states.

"In the first quarter of 2009, the average return stood at minus 3.7pc. Average Islamic fixed income fund return dropped from 3pc in 2007 to 1pc in 2008 and the first quarter of this year."

Sukuk issuance has slowed as spreads widen - sukuk worth $15.5bn were issued last year as compared to $47.1bn in 2007.

Ernst & Young's IFIR 2009 report estimates that sukuk around the value of $27.5bn will be issued this year.

"Last year, we highlighted the phenomenal rate of growth experienced in the Islamic asset management industry," said Ernst & Young head of Islamic financial services group Sameer Abdi.

"The landscape has changed significantly now, yet the fundamentals of the Islamic fund industry remain strong.

"With almost $50bn in fund assets under management and a large, expanding and untapped Muslim population, there are likely to be considerable opportunities in the future.

"This is a time when strategic choices have to be made and market participants have to adapt to survive."

"The business risks landscape for Islamic asset management has changed substantially since 2008," he added.

"Revisions of expected returns have caused some investors to withdraw capital and previously robust business models have struggled to cope with extreme market events. The economic downturn, a reduction in investor risk appetite and unclear valuations will be the most pressing business risks in 2009."

Notwithstanding the present situation of international financial markets, opportunities continue to exist for Islamic investments and the Sharia compliant funds industry can catalyse the next phase of growth, the report adds.