What new initiatives is Sage 3 Capital involved in?

ZAHARI: Sage 3 Capital is the single largest debt reconstructing company in Malaysia that provides long term funding for our clients, and we’re involved in quite a lot of new projects right now. We are starting new projects specifically in oil and gas and in resorts. Sage 3 Capital has worked on over $4.5bn worth of assets doing reconstructing work. We have advised multinational companies and governments, and a lot of our clients are actually owner entrepreneurs. Our new initiatives are very much driven by client needs. For our clients, we do a lot of funding which is mainly long term funding. We generally have a very good relationship with the banks because we are in a very niche market, so the banks have a lot of confidence in what we do and our due diligence processes.

What is Malaysia’s competitive advantage when it comes to Islamic finance?

ZAHARI: The global Islamic finance assets have now grown past the $1trn mark. Malaysia’s total contribution to that is a great deal. Malaysia has issued $117bn into the $189bn global sukuk market. In Malaysia, the total banking assets are about $162bn, and the Islamic banking assets are about 20% of that. The global Islamic finance assets have grown up to 20% every year, and Malaysia plays a very big role in this particular market.

Global Islamic finance markets, and GCC markets in particular, have become larger and better financed. How has that impacted the Islamic finance markets in Malaysia?

ZAHARI: In the global financial market and the GCC, Malaysia is a big player. Malaysia is growing very strongly in infrastructure with the government regulators, the market participants, and the players all having a keen interest in growth in this particular area. In Malaysia and in the Gulf there have been subtle differences between how we actually perceive Islamic finance, so there is a gap. Malaysia works to bridge the gap between the gulf and Malaysia, and as the gap narrows you will see the whole market and the whole global Islamic finance market will grow.

What are the key gaps at the moment?

ZAHARI: What is shari’ah compliant by Malaysian standards and what is shari’ah compliant by Gulf standards is different. The Gulf is very purist in the way they see Islamic finance. In Malaysia, there are subtle differences from that. For example, we allow for a company to have debt which is conventional if it does not impact the total debt of a particular company. Say there is 5% or 30% between debt that is Islamic or non-Islamic. Islamic finance has a screening process to go through and in Malaysia we’ve gone through our own shari’ah screens of what we think is shari’ah compliant by our standards. Of course the Gulf has their standards, as well. There are opportunities within the Gulf and within Malaysia to bridge those gaps and with this there is a huge business for Islamic finance.

What are the key challenges facing the Islamic financial services sector on a global scale?

ZAHARI:Key challenges are always human resources. Islamic finance deals with the shari’ah scholars who say what shari’ah compliant is and what is not. At the end of the day the bankers have to convince the shari’ah scholars that whatever they do and the innovative products they come out with are shari’ah compliant. Ultimately, it is the investor who decides how shari’ah compliant he or she wants to be. You have to tailor make your product or structure towards your client, and then convince the shari’ah scholar that this is shari’ah compliant. In Malaysia, we recognize that there is a gap between people who understand business and people who understand shari’ah law. In fact, the Central Bank has allocated a huge fund for INCEIF (International Centre of Education in Islamic Finance) and ICLIF(for leadership and governance) to educate and allow people to study this particular area more deeply. You will have parallel businesses: one conventional and one shari’ah compliant. However, to say one is conventional and one is shari’ah compliant is not to say the shari’ah compliant is non-conventional. It is conventional, but in a shari’ah compliant way. This is where human resources are key. As the base for Islamic finance grows and the market grows, there will be a lot of depth in the market and there will be a lot more people all around the world interested in this. It is not just how different is shari’ah investing to social responsibility investing because basically it is the same thing. It is just a different kind of convention, and this market will grow deeper and deeper. With an asset base of $1trn and increasing 20% every year, it is now something you must take into account when growing your business.

How likely are we to see a unified world body for Shari’ah compliance and the governing principles?

ZAHARI: At this moment in time there is the AAOIFI (Accounting and Auditing Organisation for Islamic Financial Institutions) that has the governing standards, the IIFM (International Islamic Financial Market), and there is also the IFSB (Islamic Financial Services Board) which is based in Malaysia. These bodies are working towards standardization so people understand how to treat shari’ah complied products. For example, how to treat dividends, how to treat profits in a shari’ah compliant way, and how to have proper documentation. It is all about documentation when you come into Islamic finance, and there are gaps here. With shari’ah scholars, as well, there are gaps. You will have the extreme shari’ah scholars who have a very purist point of view. You will have others who are more open to ideas say when an idea of a derivative product being introduced into Malaysia. For example, when I was with the stock exchange, I was in the derivative exchange, and we had the first shari’ah compliant futures contract. How do you make a futures contract shari’ah compliant? The issue was making it deliverable to the scholars and allowing technology to actually mitigate the challenges and the gharar, which means you don’t know what is going to happen tomorrow. We made sure that there was very good discussion and understanding with the shari’ah scholars when we delivered it. They do not want you to come in, and you do not want to go in, and come up with a product which is speculative. Instead of using the product for speculative purposes, if you didn’t hedge your position wouldn’t that be more risky? At the end of the day, it is how you see the situation and how you use this product. When running a derivatives exchange and derivate products it is necessary to understand where to put the brakes. You must understand where the internal controls are, a lot of which has to do with education and understanding what is niat. It is necessary to know for what purposes it will have, either speculative or hedging.

What are your projections for bond and sukuk issuance in 2012?

ZAHARI: At the moment, the issuance of Islamic bonds is about $180bn in the global market. Malaysia has issued $117bn, or 65%, of that. In the projects to come there has been a lot of emphasis and drive to issue sukuks as opposed to conventional bonds in the market. There is a project Malaysia is working on which is to have Malaysia as the global center of Halal cosmetics products. This project will have halal production and sukuk funding, which is a very exciting project and we are looking forward to working on this.

How would you describe the market for either high grade sovereigns or strong corporate debt at present?

ZAHARI: As far as sukuks are concerned, there is always a big demand for sukuks because there are not enough papers into the market. The difference is between the sukuks issued in the Gulf and in Malaysia. In the Gulf, they are purely ijara and musharaka based; whereas in Malaysia, it is more commodity based, or rabaha and ijara.  Once there is an acceptance of the various sukuks into the market you will see tradability, more liquidity, and more papers being issued. The problem now is there are so little sukuks. So once someone gets a hold of a paper, they do not want to let it go. The issue is becoming less because now, to encourage more into the market to be traded, we are allowing more papers. There are enough long term projects coming in Malaysia in the future. For example, they will be coming with 50 year papers, and there may be 100 year papers. So soon there will be enough long term papers issued into that market.

In what ways are Malaysian financial instruments becoming more sophisticated?

ZAHARI: In Malaysia, there are many Islamic instruments, and there are various aspects in Malaysian Islamic finance apart from securities and debt. Now there are a lot of takaful operators coming in. There are enough products in the market doing good business selling vanilla products, whether in general or in family takaful, so there really is no need to go into innovative products. However, it is a process of evolution and time will tell. Currently, there is commodity in rubber which is an instrument to be traded and obtain overnight money, which is incredible. Malaysia’s experience in Islamic finance is not recent. It has evolved over 20 years, so this is not a sudden spike into the market. There will be more innovative products in the future. When I tried making a futures contract, like a salaam sale, shari’ah compliance was an innovative way of looking at things. Malaysia may be saying that it is innovative in our market, and some people or other jurisdictions may say that is completely risky. The various conferences, dialogues, and discussions that regulators have will actually mitigate a lot of these insecurities and misunderstandings.

What is your general economic outlook for Malaysia?

ZAHARI: It’s good. I am not just saying that because I am very bullish, but I believe the outlook is good. The Economic Transformation Project, which was launched by the government, is the single greatest influence and boost into the financial market in Malaysia. There are a lot of projects in Malaysia that require funding. In terms of lifestyle, Invest KL is allowing and promoting Malaysia as a great place to live. You can live and work in Malaysia, and children have great schools because there are a lot of projects going into education. All of these projects are making Malaysia a hub for Southeast Asia. There is connectivity with the MRT (Mass Rapid Transit) projects now, and they are employing 500 expatriates for that project. All these people have families, and all these people want to bring their families and have Malaysia be a great place to live. To coin a very young phrase, this makes Malaysia a very happening place.