Malaysian Finance Minister Tengku Zafrul Tengku Abdul Aziz continued the tradition of government support for the Islamic finance sector in his National Budget 2021 presented to parliament on 6 November 2020.
For someone who has been in the job for only nine months and coming in from the private sector, Tengku Zafrul’s proposals serves to reinforce Putrajaya’s on-going support for Malaysia’s Islamic finance proposition and industry. The stated objective is for the Islamic finance system to have a 50% market share by 2030, operating side-by-side with the conventional system, cooperating but not co-mingling.
While Budget 2021, with its theme ‘Stand United, We Shall Prevail’, comes under unique global and national circumstances due to the ongoing health and economic impact of the COVID-19 pandemic, Tengku Zafrul, former CEO of CIMB Group, has come up with a spate of direct and indirect measures aimed at incentivising the Islamic finance industry and alleviating the burden of those affected by job losses, health consequences of the virus, and the impact of Movements of Controls. In general, several of these measures are mirrored by similar measures in the conventional finance sector, given Malaysia’s dual banking system.
“The spread of COVID-19,” reminded Tengku Zafrul, “has not only taken people’s lives but stifled economies. There are no guidelines nor precedence that can be used as reference because this is an unprecedented crisis.” According to the IMF, the global economy is projected to contract by 4.4% in 2020 and global trade by 10.4% – making 2020 the worst economic crisis since the 1930s’ Great Depression. The Malaysian economy too is expected to contract by 4.5% in 2020, but with GDP growth projected to recover to between 6.5%-7.5% in 2021.
Due largely to the impact of COVID-19, Tengku Zafrul was forced to downsize the Government’s revenue projections by RM18bn to RM227bn in 2020, against a projected expenditure of RM314.7 billion, an increase of RM17.7 billion compared to the original projection. This leaves a projected budget deficit of 6% of GDP compared to the original target of 3.2%.
With the effects of the COVID-19 pandemic set to continue to be felt in 2021, Government revenue collection for the year 2021 is expected to increase to RM236.9 billion against a projected total expenditure of RM322.5 billion – the largest budget expenditure in the nation’s history.
In the Islamic capital market (ICM), Malaysia has led from the front in pushing the sustainability, ESG and socially responsible investments (SRI) agenda in the Islamic debt market. Ever since the Securities Commission Malaysia (SC) introduced its SRI Sukuk Framework in 2014, the first of its kind in the global ICM, Malaysia has pioneered facilitating SRI and Green Sukuk, and ESG products, primarily through tax exemptions and other incentives.
According to Tengku Zafrul, the government is committed to the UN’s Sustainable Development Agenda. “The Government through cooperation with the UN,” revealed the minister, “will establish the Malaysia-SDG Trust Fund or MySDG Trust Fund with an initial allocation of RM20 million, which will coordinate financing from various public and private sources systematically. Thus, various parties can contribute and be involved in efforts to ensure the SDG is achieved by 2030. Towards creating a Sustainable Financial Hub, and positioning Malaysia as a regional hub for a sustainable lifestyle, the Government will continue to formulate its long- term efforts for this purpose.”
In August 2020, the Government issued its first digital Sukuk online, the RM500m (US$123.4m) Sukuk Prihatin, which was oversubscribed to the tune of RM666m. This will be followed by Putrajaya’s first Sustainability Bond in Malaysia for environmental and social initiatives in 2021.
Furthermore, the Government will also continue the Green Technology Financing Scheme 3.0 with a fund size of RM2 billion for two years up to 2022 which will be guaranteed by Danajamin, the state-owned financial guarantee insurer of bonds and Sukuk, to encourage the issuance of SRI Sukuk.
In Budget 2021, Tengku Zafrul is keen to further encourage the issuance of SRI Sukuk and bonds that meet green, social and sustainability standards in Malaysia. As such, he is extending the existing income tax exemption on grants amounting to RM6 million to finance the external review expenses, limited to RM300,000, for Green SRI Sukuk to all SRI Sukuk and bonds which meet the ASEAN Green, Social and Sustainability Bond/Sukuk Standards approved by the SC; and extending the income tax exemption period by 5 years. These exemptions are for applications received by the SC from 1 January 2021 to 31 December 2025.
In a similar move, Tengku Zafrul is also extending stamp duty exemption on contract notes for trading of exchange traded funds (ETFs) for another 5 years. These are for the trading of ETFs executed from 1 January 2021 to 31 December 2025.
There are 19 ETFs listed on Bursa Malaysia, including a number of Shariah-compliant ETFs, with total assets under management at end August 2020 of US$551.16 billion. An ETF is a pool of stocks that is traded like a stock. They were pioneered in 2007 in Malaysia by i-VCAP, a wholly owned subsidiary of Valuecap, which in turn is equally owned by Khazanah Nasional, Permodalan Nasional Berhad and Kumpulan Wang Persaraan (Diperbadankan).
Its flagship product, MyETF Dow Jones Islamic Malaysia Titans 25, was launched in 2008; followed by other offerings such as MyETF MSCI Malaysia Islamic Dividend, MyETF MSCI SEA Islamic Dividend, MyETF Thomson Reuters Asia Pacific ex-Japan Islamic Agribusiness, and its latest product, MyETF Dow Jones Islamic Market U.S. Titans 50 in 2018.
Other Islamic ETFs include Affin Hwang AM’s Sharia Gold ETF, launched in partnership with Wahed Invest, the US-based digital Sharia’a-compliant wealth platform, in 2019; and the Shariah Global Edge Fund, and ETF launched by Zurich Takaful Malaysia and BlackRock.
There is also an extension of the period for stamp duty exemption on the purchase of Perlindungan Tenang products covering life, fire and flood Takaful with an annual premium or contribution value not exceeding RM100 for another 5 years. This says the Finance Minister is to further encourage more low-income groups to have insurance and Takaful coverage. The effective date for the extension for insurance policies and Takaful certificates issued is from 1 January 2021 to 31 December 2025.
Other measures pertinent to the Islamic finance sector include:
i) For corporate companies involved in highly skilled industries such as oil and gas and aerospace, the Government has allocated guarantees of RM3 billion under the Danajamin Prihatin Guarantee Scheme. This scheme will be extended by another year until ends 2021 with improved terms and conditions.
ii) Micro credit financing worth nearly RM1.2 billion will be provided through TEKUN, PUNB, Agrobank (the Sharia’a-compliant agricultural bank) serving mainly rural and small farmers, BSN and other financial institutions. This includes a RM110 million Micro Enterprises Facility under BNM to encourage entrepreneurship among gig workers and self- employed and to support the iTEKAD Programme, which was launched on May 2020, by combining micro and social financing to empower micro entrepreneurs from the B40 low income segment to generate sustainable income and contribute to society. The iTEKAD programme will be expanded with participation of additional financial institutions and collaboration with more state religious authorities and delivery partners in 2021.
iii) The Government is also allocating RM100m from the proceeds of the Sukuk PRIHATIN for the conduct of research relating to infectious diseases covering vaccine development as well as treatment research and diagnostics.
iv) To empower women entrepreneurs, RM95m is allocated for special micro credit financing through TEKUN, MARA and Agrobank. In addition, RM50m will be provided to the Islamic Economic Development Foundation (YaPEIM) to support Islamic pawnbroking through Ar-Rahnu BizNita.
v) The Government will also enhance the management of Wakaf (Emdowments) through collaboration between Yayasan Waqaf Malaysia with Federal Government agencies, GLCs and Government Linked Investment Companies (GLIC). In this respect the Government is in the process of developing a National Wakaf Masterplan to ensure a more efficient endowment management to maximise the mobilization of future endowment assets, and
vi) The state-owned Permodalan Nasional Berhad (PNB), through the Sharia’a-compliant Amanah Saham Nasional Berhad (ASNB), will introduce Wakaf services to all ASNB unit trust holders. Under this service, unit holders can endow some of their units into the ASNB Wakaf Fund which would be offset by an income tax deduction. Returns from the Wakaf Fund will be channelled to Wakaf projects of national interest that will be identified by PNB.
The insurance/Takaful sector, says Tengku Zafrul, has a low penetration rate in Malaysia and it is among factors that undermine financial security for individuals and families. As such, EPF, the state pension fund, has been given the go ahead to allow members to withdraw from EPF Account 2 to purchase insurance and Takaful products which are approved by EPF relating to life and critical illnesses coverage for themselves and their family.
The Government also plans to expand the social protection for the B40 group through the Perlindungan Tenang Voucher Programme. Under this Programme, all B40 aid recipients will be given a RM50 voucher as financial aid to purchase Perlindungan Tenang products such as life Takaful and personal accident Takaful. At the same time, the Government will also extend the stamp duty exemption period on all Perlindungan Tenang products with an annual premium or contribution value not exceeding RM100 for another 5 years until 2025.