Malaysia revises Islamic equity standards

Malaysia's securities commission is revising its guidelines for equities which qualify for Islamic investment, in a move that could increase the appeal of the country's sharia-compliant funds industry to Gulf investors.


Under the previous standards, investment was banned or restricted in companies that were involved in industries deemed to be unethical, such as gambling, alcohol and tobacco.


These restrictions are now being made more stringent, so that a lower level of exposure to those industries is unacceptable for Islamic investment, according to a statement by the securities commission on Monday.


The revised guidelines also include two new financial standards which filter out excessively cash-rich and debt-ridden companies, in order to limit exposure to interest payments and pure monetary speculation, which are unacceptable in Islam.


Enhancing the "robustness" and "competitiveness" of Malaysia's fund management industry at the domestic and international levels was a motive behind the revisions, the commission said in a statement.


The new guidelines will come into effect in November, and Islamic fund managers will then have six months to comply with them.


The attractiveness of Malaysia's sharia-compliant funds to investors from the Gulf has been limited by the fact that Malaysian standards have been less strict than those advocated by many Islamic scholars in centres such as Bahrain and Saudi Arabia. The new Malaysian guidelines should help solve this problem, fund managers said.


"This is a step in the right direction," Monem Salam, president of investment firm Saturna Sdn Bhd in Malaysia, told Reuters, adding that the move would help harmonise industry practices across the globe.


Malaysia's methodology is still less strict than the Gulf's, but the inclusion of too many standards could hurt equity portfolios, so the regulator opted for a moderate approach, he said.


In practice, Islamic fund managers have additional standards of their own on top of the ones dictated by the securities commission, which will cushion the impact of the revision.


Salam said it was now up to regulators in the Gulf to respond to Malaysia's initiative in a way that would encourage cross-border investment. "The GCC (Gulf Cooperation Council) countries should take note and meet them half-way."


As of April 30 there were 165 Islamic mutual funds with assets of 29.9 billion ringgit ($9.5 billion) in Malaysia, out of a total of 595 mutual funds of all descriptions, according to securities commission data.


The securities commission's move follows the launch last month of an Islamic interbank facility by the Malaysian central bank, an innovation seen as making the country's money markets more appealing to Gulf-based Islamic banks.