Economic Update
This week, Malaysian Stock Exchange operator Bursa Malaysia launched the FTSE Bursa Malaysia EMAS Shariah index in collaboration with London-based global index provider FTSE Group (FTSE). The specific aim of the new measure is to provide investors with a broad benchmark for Shariah-compliant investment for the Malaysian market.

By leveraging on FTSE’s global criteria for Shariah compliance, Bursa hopes that the new measures will narrow the gap between Malaysia and other Islamic capital markets, supporting Malaysia’s goal of becoming Asia’s leading Islamic capital market centre.

The index takes the constituents of the FTSE Bursa Malaysia EMAS Index, which has been free float weighted and liquidity screened, and overlays the Malaysian Securities Commission’s Shariah Advisory Council’s (SAC) screening methodology to create an index that Bursa considers more transparent and investor-friendly.

The new index will run parallel with the existing Shariah index (KLSI) until the KLSI is deactivated in November. The FTSE-Bursa Malaysia EMAS Shariah Index will be the primary benchmark index for Malaysian Shariah-compliant investments. The new index consists of 247 stocks picked from the FTSE Bursa Malaysia EMAS Index, a number significantly smaller than the 518 constituent stocks in the KLSI.

Bursa Malaysia CEO Yusli Mohamed Yusoff said that the new index represents a first step towards the creation of more Islamic products. “With the new FTSE Bursa Malaysia EMAS Shariah Index, we can now work on creating a tradable Shariah index which in turn allows us to introduce Islamic structured products.” Yusli told reporters after the launch that a tradable Islamic index could be introduced in the latter half of 2007.

About the index, “It uses globally-adjusted criteria that make it easier for institutional investors to track our Shariah-compliant investment offerings more effectively. This is critical to ensure our Shariah market continues maintaining its competitiveness with other international Shariah investment destinations,” he said.

Attracting Middle Eastern investors flush with funds is a high priority for Bursa. In an interview with OBG, Yusli said, “we know that public equity is not something very high on the list of Middle Eastern investors, but we’ve seen how their markets have performed on the back of the extra petroleum revenues they’ve earned and it has taken their equity markets to record highs. So as they are getting more exposure to public equity we are hoping to get some spill over from that market into ours as well.”

And there are other reasons that suggest more Middle Eastern investors might be on the way. Rushdi Siddiqui, Global Director of Dow Jones Islamic Market Index Group, told OBG that Middle Eastern investors bring their money to Asia for several reasons, including Shariah complaint opportunities on real estate and corporate acquisitions. Increasing familiarity with the region is also a good sign.

In addition to the new index, Bursa Malaysia has actively sought products that will appeal to Middle Eastern investors interested in property and bonds. According to Siddiqui, “Islamic Real Estate Investment Trusts (REIT) in Malaysia are on the radar screen of Gulf investors.” It is a relatively new business that has caught on quickly. The world’s first publicly traded Islamic REIT was listed on Bursa’s main board only in August 2006. In February 2007, the first Islamic plantation REIT will be listed, and is projected to generate RM34.51m ($9.8m) over the next two years.

Such innovation has also been evident in Malaysia’s success with Islamic bonds, or Sukuks. By adopting its own Shariah interpretation, the country has been able to draw investment in bonds transferable into shares of shariah-compliant companies at a certain price. Most of these are listed on the Bursa-administered Labuan International Financial Exchange (LFX). Rusmin Jaafar, the head of offshore and Islamic capital markets at Bursa, told OBG that market capitalisation of Islamic instruments on LFX is $2.75bn (18.6%). This year the exchange saw the world’s first convertible Sukuk. Issued by Khazanah Nasional, the government’s investment body, the bond is expected to raise $750m over the next two years. The bonds are convertible into shares of government-linked Telekom Malaysia.

Malaysia could also benefit from an increasingly open market for Islamic financial institutions. Over the course of 2005 and 2006, three Islamic banks from the Middle East began operations in Malaysia while Malaysian banks such as CIMB have established offices in the Middle East.