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MALAYSIAN ECONOMY: An Overview
DEBT MARKET IN MALAYSIA: AN OVERVIEW
Tan Ai Lian; August 2007


In 1980s, Malaysia implemented a huge transformation of financial market where the new financing pattern emerged, notably the rapid development of private debt market. The debt securities were not exits in Malaysia until in 1980s as the debt market was consisted of Malaysian Government Securities (MGSs). Financial Institutions such as banks, financial company and insurance company were prescribed to invest part of their funds in MGSs and those financial institutions tends to hold MGSs until maturity due to the reason of not exiting secondary market at that time. In the late of 1986, government began to realize the importance of secondary market, thus, liberates the MGSs market and allows market widening the range and distributions of the MGSs as well as started develop the Malaysia’s debt securities market.

Before the development of debt market in Malaysia, the private sector was heavily relies on the banking system for their financing purpose. On October 1987, Malaysia corporate bonds market was launched and the first corporate bonds were issued by Cagamas Berhad with nominal value of RM 100 million and the features of five-years maturity, fixed interest rate and unsecured bonds. This opened a new alternative for corporate to finance their funds needed. After a few years developing of debt market, various types of bond come forth to fulfill the company specific needs, such as convertible bonds, mortgage-backed bonds or securitization bonds and callable bonds. All variety types of bond can be provided at lower cost to finance corporate capital needs. Furthermore, the interest payments of the bonds are tax deductible. Therefore, the activity in the bonds market will be more efficiency to promote and spur the activity of primary as well as secondary market such as a high volume of transaction and liquidity in the capital market.

However, this facility was indirectly incurs the financial problems to the government and corporate. During the 1997 until 2000, government debt was more than 50% per GDP and most of the corporate fails in their business due to rely heavily on the short-term debt. Malignancy of the Asian financial crisis causes the foreign capital flow out and many investors lost their confidence to the capital market performance. In order to recover the Malaysia economy, government establishes the Nation Economic Action Council (NEAC) on Jan 1998. The priority action of this council is to restore the stability of currency and capital market (including the bonds market) as well as to strengthen the fundamentals of economic and financial market. As a result of this implementation, the market was needs a more efficient fund-raising framework to govern the manner of government and corporate in financing their capital. For the purpose to aid the economy recovers from the crisis, besides this, the private enterprises need to concern themselves actively in the capital market to stimulate the economic growth.

To ensure the efforts of government performs in bonds market development are well-coordinated, the government announced the Securities Commission (SC) is the only regulatory authority in controlling the corporate bonds market. On the other hands, the high-level National Bond Market Committee (NBMC) was established in 1999 to govern the government debt. The roles of the NBMC were to provide overall policy direction for the orderly development of the corporate bond market, conducts detailed studies on issues relating to corporate bond market development, and identifies and recommends appropriate implementation strategies. On 2000 July, the SC becomes the solely regulator for all funds rising activities which including financed by share. At the same year, the SC acts on the behalf of NBMC and declared the “NBMC Negative List” (refer to http://www.sc.com.my/eng/html/bondmkt/bonres_NBMC.html) was denotes the circumstances where the utilization of proceeds from issuance of private debt securities is not allowed. Furthermore, a few guidelines for funds rising was announced by SC to ensure the financial market is in well develop.

Nearly three decades of the development has deepened and widen Malaysia bonds market. By 2007, two new types of bonds noticeably grew strongly in the market. They are foreign currency denominated bonds and the Islamic bond, known as sukuk. Sukuk is the Arabic name for the securities which comply with the Islamic law and principles. For the report done by Abdulkader Thomas (2007), the sukuk al ijare issuances in 2006 were 2.36 times greater than 2005 and the gross market size double from $25.9 billion to $ 52.6 billion. The entire facilitative provided and regulatory framework denotes the Malaysia’s continuous putting effort to develop the bonds market and enhances the Malaysia position as an International Islamic Financial Centre (MIFC).

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Har Wai Mun @ 2007