Kuala Lumpur: Islamic fund managers in Malaysia have 20 per cent fewer investment options after the market regulator tightened compliance rules for stocks to draw more overseas capital.
The new methodology stipulates that companies must limit debt and cash not conforming to Islamic principles to less than 33 per cent of their total assets, in line with the requirements of the Dow Jones Islamic Market World Index. While the restrictions reduced the pool of qualified equities to 653, Aberdeen Asset Management and RHB Islamic International Asset Management said the benefits outweigh the drawbacks.
The measures were put in place to help boost inflows as Prime Minister Najib Razak seeks to finance his $444 billion development program to build railways, roads and power plants. The initiative comes as investors face the prospect of an outflow of funds as the Federal Reserve begins paring stimulus that's increased appetite for emerging-market securities.
"The rules had to be applied to help strengthen Malaysia's position as a global Sharia-compliant capital market," Gerald Ambrose, who oversees the equivalent of $2.6 billion as managing director of Aberdeen Asset, said in an interview in Kuala Lumpur. "They will aid convergence of Sharia financial products worldwide."
Malaysian companies have six months to comply with the new ruling, starting from November 29, in order to be deemed as Sharia-compliant. No restrictions were previously in place in a nation that pioneered Islamic finance more than 30 years ago.
Sharia law forbids investments in shares of companies involved in activities considered as unethical such as gambling, flesh trade and alcohol. Islamic finance also requires risk-sharing on the basis of equity and fairness.
Conditions for inclusion in the Dow Jones Islamic gauge are that a company's debt, receivables, cash and interest-bearing securities must be below 33 per cent of the corporation's average market value in the past 24 months, according to the Standard & Poor's Dow Jones Indices website.
The Dow Jones Islamic index of shares, which has a market capitalisation of $16 trillion, is down 1.5 per cent so far this year, compared with a drop of 1.3 per cent in the MSCI World Index of conventional equities.
"There will be wider acceptability with the possibility of more capital inflows," Noor A Rahman, the chief executive officer of RHB Islamic in Kuala Lumpur, who oversees the equivalent of $1.2 billion, said in an interview. "It just gets better because it incorporates the screening methodology used in other parts of the world."
Islamic equities make up 71 per cent of all the stocks traded on Bursa Malaysia's exchange, according to a November 28 statement from the Securities Commission.
Under the new ruling, which also contains curbs on the contribution of non-Islamic activities to a company's profit, stocks such as budget carrier AirAsia, oil and gas services provider Bumi Armada and beverage maker Dutch Lady Milk Industries have been excluded, according to a November 29 research report from Hong Leong Investment Bank.
Malaysia's stricter rules are coming on board as worldwide sales of sukuk fell to $43 billion last year, after reaching a record $46.4 billion in 2012, according to data. Offerings of ringgit-denominated debt that comply with the Islamic ban on interest dropped 49 per cent to 49 billion ringgit ($15 billion) in 2013.
The nation's Islamic stocks in the FTSE-Bursa Malaysia EMAS Sharia Index, which has a market capitalisation of 883 billion ringgit, dropped 1.8 per cent so far this month.