Malaysia Plans Indonesia Shariah Stock Trading Link by 2017

Updated on
  • Talks focus on ‘how we can pool Islamic liquidity:’ Jamaluddin
  • Bursa Malaysia also seeking partnerships in Asia, Middle East

Malaysia’s stock exchange operator is discussing a tie-up with Indonesia’s bourse and plans further alliances to mobilize funds targeting the world’s almost $12 trillion in Shariah-compliant equities.

Bursa Malaysia Bhd. is in talks with the Indonesia Stock Exchange to explore various forms of cooperation such as allowing cross listings and hopes to start collaborating by mid-2017, Jamaluddin Nor Mohamad, Bursa’s Islamic capital market director said in an interview in Kuala Lumpur. Bursa plans to forge partnerships with exchanges in Asia and the Middle East to develop the Islamic capital market, he said.

“We are trying to figure out with exchanges on how we can pool Islamic liquidity in a more efficient manner,” said Jamaluddin. “It is time for us to not just look at the needs of the domestic investors.”

The linkages may support the $2 trillion Islamic finance industry, amid a forecast from S&P Global Ratings that the sector will remain subdued next year due to depressed crude prices and regional growth. The MSCI World Islamic Index of shares, which has a market capitalization of $11.7 trillion, has climbed 3.8 percent in 2016, set to outperform its conventional peer for the first time in five years.

Malaysia already tightened compliance rules for Shariah stocks in 2013 as it sought to draw overseas funds who have a stricter view on permitted investments. Shariah law forbids investments in shares of companies involved in activities considered unethical such as gambling, prostitution, alcohol and pork-related businesses.

Some 669 stocks, or 74 percent of the total shares listed on Bursa Malaysia, comply with Shariah principles, according to the Securities Commission. The market regulator reviews the list twice a year based on the companies’ audited financial statements.

Malaysia, which pioneered Islamic finance more than three decades ago, revamped screening guidelines for Shariah stocks to require companies to limit debt and cash not conforming to Koranic principles to less than 33 percent of their total assets. There were no restrictions in place previously.

The stricter methodology, which also contained curbs on the contribution of non-Islamic activities to a company’s profit, resulted in a fifth of stocks being dropped from the list of Shariah-compliant equities.

Under Indonesia’s screening criteria for Islamic stocks, a company’s debt-to-asset ratio mustn’t exceed 45 percent and the contribution of non-halal revenue to the total is capped at 10 percent.

Creating Volume

“The challenge is always on the acceptability of designated stocks and securities as Shariah-compliant on a universal basis by all investors,” said Abas A. Jalil, chief executive officer of Amanah Capital Group Ltd., a consultancy in Kuala Lumpur. “The most important aspect that both parties have to really work on is to create more volumes of trading.”

In other initiatives, Bursa this month started a platform for the listing, trading, clearing and settlement of Shariah-compliant stocks, bonds, real-estate investment trusts and exchange-traded funds. It also set up a trading system dedicated to commodity Murabaha called Bursa Suq Al-Sila in 2009. In a Murabaha contract, goods are bought and then resold with a pre-agreed mark-up.

“With Indonesia holding the largest Muslim population in the world and Malaysia being at the forefront in industry innovation and product development, this collaboration is highly positive,” said Samina Akram, managing director of Samak Ethical Finance Ltd. in London. “Lack of awareness of Islamic bonds and stocks within the wider conventional market is still a major problem. However, these recent steps by Bursa Malaysia indicate the challenges are recognized.”

(Updates levels in fourth paragraph.)
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