Zeti Akhtar Aziz: The development of the Malaysian bond market
Remarks by Dr Zeti Akhtar Aziz, Governor of the Central Bank of Malaysia, at the Launch of
the Electronic Trading Platform by Bursa Malaysia, Kuala Lumpur, 29 April 2008.
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Let me first of all thank Bursa Malaysia for inviting me to say a few words on this occasion of
the launch of the Electronic Trading Platform. This initiative marks another important
advancement in the development of the Malaysian bond market. The Electronic Trading
Platform will take over the function that was previously performed by the Bond Information
and Dissemination System (BIDS). Bank Negara established BIDS ten years ago, in 1997 to
provide market information on domestic debt securities. BIDS was developed as a
centralized database that provided information on the terms of the issue, details of trade
done and the relevant information on the various debt securities, to facilitate increased
transparency and efficiency in the bond market. BIDS therefore aided the price discovery
process thereby promoting secondary and primary activities in the bond market. BIDS was
revolutionary in its time as authorities in other jurisdictions subsequently launched similar
initiatives in their respective markets.
This Electronic Trading Platform is a significant enhancement to the mechanism in the
development of a more vibrant bond market. Indeed, this development is timely because the
Malaysian bond market is now at the threshold of its next stage of development. Several
factors have brought the development of the bond market to this threshold. Firstly, large
investment projects of long-term gestation by the private sector can now source financing
mainly from the bond market as opposed to only relying on the banking system. As a
consequence, the expansion of the private debt securities market has now exceeded the
public debt securities market. With the recovery of private investment since 2003 and its
increased momentum there has been growing expansion of the bond market.
Secondly, the liberalisation of the bond market to allow non-residents to raise funds from our
domestic bond market has also contributed further to the growth of the market. Thirdly, an
important development of Islamic finance in Malaysia is the development of the sukuk
market. In 2007, the sukuk issuance has exceeded the issuance of conventional bonds. This
has increased the diversity of asset classes and instruments in the Malaysian bond market.
Fourthly, there has been a major structural enhancement in the capital market intermediaries
with the introduction of investment banking in 2006. With the permitted foreign interest in
investment banking raised to forty-nine percent, foreign participation is encouraged. In
addition, Islamic banking institutions, including Islamic subsidiaries may conduct investment
banking activities. These capital market intermediaries are also reinforced by the
strengthening of the institutional investors and the fund management industry. The growing
sophistication of investors has resulted in increasing diversification of portfolios with growing
interest in the bond market. Foreign holdings of debt securities outstanding have also
increased from less than 1% in 2000 to 15% in 2007. And finally, these developments have
been continuously reinforced by the strengthening of the financial infrastructure, the
settlement system, the legal and regulatory framework to ensure the robustness and
vibrancy of the bond market.
Malaysia has benefited immensely from the development of the bond markets. As an
important source of financing, it contributes to the economic growth process. It also allows for
more efficient mobilization and allocation of financial resources. With greater efficiency in the
intermediation process, it reduces the cost of financing. It also allows for the increased
diversification of risks both for issuers and investors. In addition, it enhances financial
stability through potential diversification, increased transparency and greater market
discipline. The development of the bond market also enhances the transmission mechanism
of monetary policy. Finally, and most importantly, the more developed bond market has
enhanced our resilience to the implications of increased volatility in the international financial
markets.
The Malaysian bond market has several distinguishing features. Firstly, it comprises both the
conventional and Islamic bond market. Secondly, the secondary and repo market is now
growing in significance. Turnover volume in the secondary market has been steadily
increasing over the years marking the active participation in the bond market by investors. In
2007, total annual turnover volume increased by 46% to RM777 million.
There is also an increased diversity of instruments being issued ranging from asset-backed
bonds, bonds bearing features such as stepped-up coupons and "floaters" and pass-through
ABS. Malaysia is also a leader in the development of sukuks and its pioneering efforts have
seen the introduction of innovative structures such as the exchangeable sukuk musharakah,
exchangeable sukuk as well as sukuk based on istisna' and ijarah. This is reinforced by the
diversified tenures of the issues. Malaysia's strong financial links to the traditional and
nontraditional markets such as in the Middle East also allows issuers to diversify their investor
base. Malaysia therefore continues to remain an important destination for international
financial flows that are traded on the New Silk Road.
In concluding my remarks, I wish to congratulate all those involved in crystallizing the
Electronic Trading Platform that is being launched today. This is a further step to create a
more vibrant bond market. The growing role of the bond market in mobilizing and allocating
funds not only in the domestic financial system but also across borders, to and from other
parts of the world, has demonstrated the maturity of the Malaysian bond market. This has not
only strengthened international financial inter-linkages but has increased the potential for
greater economic integration and shared prosperity.