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Malaysia's RM100b pension offshoot set to boost Islamic finance
[KUALA LUMPUR] Malaysia's Islamic finance market is set for a much-needed boost when the country's largest pension fund launches a RM100 billion (S$33.5 billion) Islamic fund in January, offering a potential boon for asset managers.
The Employees Provident Fund's (EPF) sharia-compliant pension plan opened to acclaim this week with Malaysians lining outside its offices to invest.
The allocation represents about 15 per cent of the EPF's total investments of RM681.7 billion as of March.
Having a standalone pension fund of that size is a rarity in Islamic finance, even for majority-Muslim Malaysia, and it is expected to draw interest from foreign asset management firms with homegrown players also upbeat about the prospects.
"The benefits are multifold, to us and to the industry," said Mohamad Safri Shahul Hamid, CIMB Islamic senior managing director and deputy chief executive officer.
"As EPF allocates more into the sharia fund, surely they would want to progressively deploy more of their funds into sharia-compliant investments."
This would include the market for Islamic bonds, or sukuk, with demand gradually increasing as the EPF hires external firms to manage its bespoke funds, Mr Safri said.
Ancillary businesses such as Islamic securities services would also benefit, as well as Islamic money markets, he said.
The EPF plans to allocate an additional RM20 billion to 30 billion in 2018 to its Islamic fund, depending on the availability of sharia-compliant investments.
The new fund would attract foreign competitors into Malaysia but also widen the opportunities for incumbents, said Mohammad Hasif Murad, investment manager at Aberdeen Islamic Asset Management Sdn Bhd.
"This announcement might be a good value proposition for foreign players to jump on the bandwagon. We expect EPF to continually assess the response from the market and gradually increase the allocation for Islamic in the medium term."
Islamic fund managers screen their portfolios according to religious guidelines such as bans on alcohol and gambling, similar to socially responsible funds in Western countries.
Close to a fifth of total assets under management in Malaysia are now managed this way.
As of December, fund management companies in Malaysia held RM132.4 billion worth of Islamic assets, up 19.7 per cent from a year earlier, according to Securities Commission data.
While the benefits of a standalone Islamic retirement fund trickle down to fund managers, the outlook for Malaysia's sukuk market is also improving.
A healthy supply of sukuk is expected for the rest of 2016, on track to exceed the US$34.5 billion of sukuk issued in Malaysia last year, CIMB's Mr Safri said.
"We expect an active second half, in terms of total size of the corporate sukuk market, which will grow to US$40 billion at the minimum," he said.
Growth in the fixed income market would outpace equities, as investors seek more stable returns, he added.
"Investors are more conservative now as preservation of capital is key. I expect to see this trend happening in the near to medium term."