The Role of Sukuk in Islamic Capital Markets

Box 3.6: Depth of Malaysia’s NBFIs

Malaysia’s focus on the development of its NBFIs has had a multi-fold effect in building a stronger capital

market. As at end-2016, the aggregate assets of NBFIs accounted for about 39.4% (2015: 38.8%) of the

overall financial system’s assets. Provident and pension funds along with the fund-management industry

accounted for the bulk (83%) of the NBFIs’ assets. The 7 largest NBFIs made 68% of their total assets. The

financial-intermediation activities of NBFIs mostly take the form of financing and investment in “plain

vanilla” debt and equity instruments. These comprised a smaller 98.6% of GDP in 2016 (2015: 101.9%),

reflecting the slower growth of investment funds (2016: +4.3%; 2015: +6.0%) and a weaker equity market.

Among the larger NBFIs, their share of investments in equity has remained mostly stable, constituting 29%-

72% of their respective asset bases. Similarly, the share of investments in debt securities has been stable,

ranging between 4% and 41% of their total assets. These entities continue to play an important role in

supporting the liquidity of their domestic financial markets, including amid heightened selling pressure by

non-resident investors. In recent years, NBFIs have been gradually increasing their investments in real

estate, infrastructure projects and private equity, in a bid to improve yields and diversify investment risk.

However, such investments remain relatively small at less than 10% of the total assets of individual NBFIs,

although this is expected to trend higher following the announced intention of several large NBFIs to elevate

investments in these asset classes over the next few years. The share of overseas assets has also remained

broadly unchanged, ranging between 7.3% and 28.4% of the total assets of individual NBFIs.

Source: BNM (2016)

In our analysis of the buy side of selected Asian countries, reference has been made to the

McKinsey Asian Capital Markets Development Index to evaluate the level of intermediation,

with a focus on countries that have raised sukuk in the past (refer to Figures 3.8 and 3.9).

Malaysia is ranked the highest among its peers with a score of 3.25 (out of 5) in terms of: (i)

funding at scale; (ii) investment opportunities; and (iii) pricing efficiency. Indonesia recorded a

score of 2.20 and Pakistan 1.30.

The key data points in the scores include the following:

Financial depth of the primary market - Malaysia is ranked as moderate compared to

Indonesia (shallow) and Pakistan (very shallow).

Availability of long-term debt – Malaysia is ranked as “deep” compared to Indonesia (very

shallow) and Pakistan (shallow).

Availability and stability of outstanding foreign portfolio investments (FPIs) against GDP –

Indonesia is ranked FPI > 25%, followed by Malaysia (FPI < 25%) and Pakistan (FPI <

10%).

Availability of investment opportunities across asset classes – Malaysia is considered

“deep” (> 240%), with Pakistan and Indonesia deemed “very shallow” (< 80%).