Generally, the financial industry in first-tier countries accounts for about 6-7% of overall GDP. This indicates that the development of the financial industry is essential for the second-tier countries on their way to becoming the first-tier. In the financial industry, corporate financing plays a key role, not only promoting the expansion of scale through financing, but also promoting related service industries such as law, accounting and information technology. Corporate financing is usually in the form of stocks (commonly known as IPOs) or bonds issuing. At present, Malaysia Securities Market ranks fourth in the ASEAN Securities Financing Market, with Singapore, Thailand, and Indonesia in the front, and Philippines behind. In terms of market share (see Figure 1), countries are evenly divided. Malaysia has no obvious advantage.
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Financial Advantages of Malaysia
However, in terms of bonds, especially Islamic bonds, Malaysia’s advantage is outstanding. Since the 1980s, Malaysia has taken the lead in building up the Islamic financial system. In 2005, Malaysia International Islamic Finance Centre (MIFC) founded the Islamic Banking and Finance Institute Malaysia (IBFIM) and constituted the Islamic Financial Services Act. MIFC has established a relatively complete financial system, covering education, professional certification of licenses, and market development. By 2018, Malaysia’s issuance scale of Sukuk (Islamic bonds) has accounted for 55.5% of the global market (see Figure 2), and the size of related assets (including deposits, bonds, funds, etc.) reached 415 billion USD.
The Revival of Islamic Finance
In the past, the biggest problem with Islamic finance was the lack of integration. Therefore, liquidity and cognition were confined to professional investors. However, in recent years, the Sino-US trade war has driven risk aversion. In addition, Islamic investment tendencies have been carefully evaluated and therefore the quality of assets is reliable (for example, the non-performing loan ratio of Islamic bank is less than 1%). It is slowly becoming sought after by amateur investors. From 2004 to 2018, the USD-denominated Sukuk outstanding rose 68 times.
Muslim Demographic Dividend
You may think that because of the doctrine restrictions on Islamic finance, the audience for its investment products is limited. In fact, the Muslim population has skyrocketed. If you remember the Arab Spring of 2011, it brought a large number of Muslim immigrants to Europe. In the context of political and economic stability, the birth rate of the Islamic population has been rising. The Muslim population in Britain alone has reached 5 million today from 1.5 million in 2002, accounting for 8% of the total British population, with nearly 33% under 15 years old. The future demographic dividend will further promote the needs for Islamic finance.
TRX’s Integration of Absolute Advantages
Under the overall trend, Malaysia has spent 26 billion MYR on TRX for the Economic Transformation Programme (Greater Kuala Lumpur). Through the development of physical infrastructure, the market, law, and talents are re-integrated and repackaged for promotion. The unified standards and highly transparent environment will effectively increase market liquidity and depth. In addition, the main developer of TRX is TRX City Sdn Bhd, a company wholly owned by Ministry of Finance Malaysia, who offers attractive incentives regarding policies such as tax and lease. Based on the current market share, with its central location in ASEAN, TRX is very likely to become a world-class Islamic financial trading center.
However, a superior location does not mean that all projects and units are worth investing in. In the next article, we will share our analysis on the advantages of various projects in TRX.
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