Indonesia, Malaysia stock exchanges in Islamic finance MoU

The Indonesian and Malaysian stock exchanges have signed an agreement to jointly explore ways of collaborating in the development of the Islamic capital markets in their respective countries.

A statement on the website of the Malaysian stock exchange, the Bursa Malaysia Berhad, noted that the new memorandum of understanding followed an earlier MoU, which was signed between what was then known as the Jakarta Stock Exchange and the former Kuala Lumpur Stock Exchange in 1996, on communication and the sharing of information, which was subsequently renewed in 2006.

Separately, the two Southeast Asian countries agreed to give their banks greater access to each other’s markets, which was seen as potentially benefiting the Islamic banking sectors of both countries, since access to the Indonesian banking sector in particular by foreign institutions has until now been fairly restricted.

In a joint statement, Indonesia’s financial regulator and Malaysia’s central bank said the agreement was aimed at “reducing an imbalance in the market access and banking activities of both countries through the presence of banks that fulfil certain conditions in each jurisdiction, based on the principle of reciprocity”.

Both agreements were signed during the 12th World Islamic Economic Forum at the Jakarta Convention Centre earlier this month.

Indonesia is Malaysia’s seventh largest trading partner, and the third largest ASEAN country, based on 2015 data, the joint statement noted. The combined populations of the two countries is almost 300 million.

Growing global market

As numerous recent reports have indicated in recent years, the global Islamic finance industry has been growing faster than conventional banking, but has tended to remain mainly concentrated in the Middle East (particularly in Iran and Saudi Arabia) and in Malaysia.

With the world population of Muslims estimated at around 1.7 billion, and relatively young by global standards, the sector is seen as under-developed, with significant potential for development.

According to Indonesia Investments, a Jakarta-based investment company, Indonesia’s financial authorities are considering the easing of existing foreign ownership limits on local Islamic banks, as a way of encouraging the faster development of the sector. Currently, foreign investors cannot own more than 40 percent of local Islamic banks.

New, Shariah-compliant financial tools are also being considered, Indonesia Investments went on, noting that in in April 2015, Indonesia’s national Shariah board approved Shariah-compliant “currency hedging tools”. A standard contract template for Shariah-compliant repurchase agreements, which provides for the use of government-issued Sukuk as collateral, was also launched by the country’s Islamic banks, Indonesia Investments added.

According to the 2015/2016 edition of ThomsonReuters/Dinar Standards’s  State of the Global Islamic Economy report, the combined value of all Islamic markets’ assets around the world is estimated at around  US$1.81trn. About US$295bn of that amount is said to constitute the outstanding value of Sukuk (Islamic bonds), which the report noted see an average annual growth rate of 6%.

The report foresees a growth in the value of global Islamic financial market assets to US$3.24trn by 2020.

In the photo, above: Datuk Seri Tajuddin Atan, chief executive of Bursa Malaysia, with Tito Sulistio, president Director of IDX, accompanied by, from left, Tun Musa Hitam, chairman of World Islamic Economic Forum (WIEF) Foundation, YAB Dato’ Sri Mohd Najib Tun Abdul Razak, prime minister of Malaysia, Sri Mulyani Indrawati, Indonesia’s finance minister; and Bambang Brodjonegoro, Indonesia’s minister of National Development Planning.

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