Newspaper Article

Wakaf, or a religious endowment for a charitable cause, is a lesser-known component of Islamic wealth management. It can be viewed as a way of doing good, giving back to society, or earning pahala (divine reward). These endowments have usually involved immovable assets such as buildings and land, but they can also be in the form of movable assets such as furniture and jewellery - as long as they are not forbidden in Islam. Setting up a cash wakaf, or trust fund, is another way to make an endowment. Cash wakaf, which is based on the concept of mudarabah, has been around since the 8th century. But the Islamic authorities have recently established a legal framework for such endowments in an effort to develop the segment. As a result, some new schemes have been implemented.

What is really "new" about New Malaysia? The term "New Malaysia" connotes new thinking, new ideas and new solutions based on a new paradigm. New Malaysia warrants a new mindset, but some pronouncements by politicians, on both sides of the divide, show that they are still unable to delink themselves from the past.

The capital structure decision is a highly important one for corporations. Capital structure refers to the combination of debt and equity (and other hybrids) that a company uses to fund itself. Going by finance theory, each corporation has its optimal capital structure. This optimal mix of debt and equity maximises the firm's market value by minimising its weighted average cost of capital. As debt is always cheaper than equity and has a tax shelter advantage, a firm's cost of capital reduces as it uses more debt in lieu of equity. However, risk increases as the proportion of debt increases. It is this trade-off between risk and return/value that gives rise to a minimal point for cost and a corresponding maximum for firm value. Thus, one firm's optimal debt-equity ratio may be 40/60 (40% debt and 60% equity) while another's 20/80 and so on.

Sukuk, which is probably Islamic finance's most popular product, has of late gone through a fair bit of innovation. As opposed to their earlier structures which were nothing but Shariah-compliant straight debt, some of today's sukuk come with a variety of features. Broadly speaking, there are two broad thrusts in the innovation that have taken place. First, the use of embedded options for better risk management/proling. Second, innovation seeking to overcome limitations like the need for physical underlying assets. Though options - especially the exchange-traded variety - are still anathema to a majority of the fuqaha (Shariah scholars) fraternity, their use within sukuk structures appears to be booming. A wide range of sukuk, originating from diverse geographic jurisdictions, come with embedded options.

Events earlier in the year in Australia show the extent to which cross-border capital flows can arbitrage regulatory hurdles. It appears that in an effort to rein in a burgeoning housing bubble, the Australian central bank, the Reserve Bank of Australia (RBA) has placed caps on bank lending to real estate developers. The policy, aimed largely at curbing purchases of Australian homes by foreigners through domestic borrowing, initially was effective. In addition to foreign speculators, domestic housing developers too were hit hard. Such regulation would have essentially taken the wind out of a domestic housing bubble, had it not been for foreign hedge funds and private equity. Given free capital flows, these foreign entities, which are really shadow banks, stepped in to provide the needed funding, obviously at higher interest rates. At that point of time, the foreign lenders appeared to be making huge profits from the large interest spreads. For both the foreign lenders and the foreign speculators of Australian property, the ability to sidestep the regulation appeared to be a win-win.

In a book aptly titled 'This Time Is Different', Rogoff and Reinhart, two prominent economists, show that every single financial crisis over the last 800 years has had a single root cause - excessive debt. It appears that what begins as borrowing for the funding of development infrastructure can, as it builds, lead to a spiralling of debt and financial crisis. There is a circular and reciprocal relationship between debt, leverage, vulnerability and financial distress. This applies to all borrowers, governments, corporations or other entities.

Muslim-majority nations like Turkey, Indonesia, Egypt and even Malaysia have seen their currencies depreciate and come under pressure in the recent past. Turkey and Egypt have had to increase domestic interest rates substantially to ease the exchange rate pressure. Indonesia, too, had to raise rates, albeit of a much lower magnitude. The choice of an exchange rate policy - whether pegged, free floating or managed - depends on the trade-off preference. Fixed or pegged exchange rates offer stability, but this has to be traded off against the lack of independence in monetary policymaking. A freely floating currency has the advantage of providing full flexibility in policymaking, but has to be traded off against the lack of exchange rate stability. Faced with these trade-offs between fixed and free floats, many countries chose to be in between the two, with managed floats.

The Islamic banking and finance (IBF) sector appears to be at a crossroads. Over the last three decades, growth has been impressive, with total assets estimated at about US$2 trillion (RM8.32 trillion). Looking back, this impressive early growth appears to have been the low hanging fruit. Rapid growth came from filling an existing latent demand. Geographically speaking, even this early growth has been uneven. Growth had been most impressive in countries such as Malaysia and Bahrain, but slower in larger nations such as Turkey, Indonesia and even Saudi Arabia, where it has only recently begun to make an impact. In much of the Arab world, countries like Egypt, Tunisia and the like, IBF is yet to make a serious presence. Where IBF has succeeded, government support and favourable policymaking has made the difference.

In 2018, the global economy began with much promise. The prior year had seen fairly strong and synchronised growth across the US, Western Europe and industrialised Asia. Stock markets rose to reect this steady stable growth. The S&P 500 had one of its most consistent and strongest runs in the 10-month period leading to October 2018. The broad-based index reached its historic peak in late September. Since then, from October, both the global economy and stock markets appeared to have gone through a series of jolts. Risk and volatility appear to have returned with a vengeance. The last quarter (4Q) of 2018 was tumultuous from an economic viewpoint. Why the sudden turn of fortune? For one thing, the bull run in the US stocks has aged. The post-crisis recovery is now 10 years old. The monetary stimulus is a spent force, but the resulting build-up in global debt remains.

If well-developed equity markets can contribute hugely to national growth, underdeveloped ones impose a huge cost on national competitiveness through higher required risk premiums and higher equity costs to firms. The high cost of equity has the added disadvantage of incentivising firms to leverage their capital structure with debt. Thus, the common phenomenon of developing countries with infantile stock markets and highly leveraged economies. Retarded stock markets offer perverse incentives, both to managers of firms and shareholders. So, how do the equity markets of the Islamic world stack up? To address this, we examined the performance of the Muslim world's top eight stock markets against two global benchmark indices, the MSCI World and the S&P 500. The annual performances of the main stock indexes of the eight stock markets were compared to that of the two benchmarks. The percentage annual returns and volatility over the 16-year period 20012016 was studied. With the exception of Malaysia, which had returns and volatility (standard deviation) very much in line with the benchmarks, the other markets showed interesting results.

What a month March had been. Over a three-week period, four mid-size US banks had to be rescued and one large Swiss bank had to be folded into another. Meanwhile, a German bank had to suffer serious erosion of its equity value. It started with Silicon Valley Bank (SVB) needing to be rescued following a run by its depositors, on news of its loss of some US$2 billion (RM8.8 billion) from the sale of US government bonds it had been holding. It appears that SVB was holding a huge portfolio of long-dated government bonds - a clear case of a serious duration mismatch. Surprisingly, no one, not even the banking regulators, seemed to have been watching interest rate risks, even as the US Federal Reserve had been raising rates rapidly. Rising rates affect the value of items on a bank's balance sheet. Both assets and liabilities are affected, with the impact being determined by the duration of each item. Given the intermediation function of banks, the duration of assets is invariably longer than that of liabilities, a large part of which would be deposits. Thus, a bank holding large amounts of long-dated bonds would have a disproportionately large asset side duration and. accordingly, a large duration gap, making it highly susceptible to even small interest rate rises.

Of late there has been much hand wringing about the performance of the Malaysian ringgit. The ringgit's depreciation has been steady and sustained against several key currencies, in particular the US dollar. Indeed, there is cause for concern as exchange rates do matter for the long-term well-being of a nation. The experience of countries like Japan, South Korea, Taiwan and China show that cleverly managed exchange rates can be the enabler for national growth and prosperity. Yes, a nation needs much more than just exchange rate policies to succeed. But a well-formulated exchange rate regime can enhance competitiveness, incentivise the right type of industry formation, enable the macroeconomy to evolve as needed and optimise allocative efficiency. On the other hand, an ill-conceived exchange rate regime can stunt economic progression and nudge countries into a low-value-added, low-income trap.

It was the Ricardian theory of comparative advantage that provided the rationale for why nations should trade among themselves and how it can be beneficial to all. Steady growth in trade led to increased economic integration between countries and the resulting globalisation. The post-war years, from 1945 onwards, saw extensive growth in cross-border movement of goods, services and capital. This peace dividend, which sustained over the next decades, received a major boost in the 1980s with the integration of China and the former Soviet bloc nations into the global trading system. The subsequent formation of the World Trade Organization also helped further the globalisation process by establishing a framework of rules and norms. Over the years, despite the ebbs and flows, there is no disputing the many benefits that have accrued to the global community. Globalisation enabled poorer countries to catch up and pull themselves up through export-oriented growth. As a result, at least a billion people have been estimated to have been pulled out of poverty. Nations became closely integrated as production became increasingly specialised in the name of economies of scale and cost efficiencies. As output efficiencies reduced product costs and increased affordability, the poorest segments benefited. Further, as outsourcing of manufacturing and services from high cost to lower cost nations became necessary for competitiveness, skilled and semi-skilled labour in developing countries benefited. China became the world�s factory and India the provider of its backroom support systems. Despite these obvious benefits of globalisation, a recent International Monetary Fund (IMF) policy paper points at rising discontent and dysfunctional policies initiating a process in reverse thrust. The inflection point according to the paper was the post-global financial crisis period from 2009.

De-dollarising seems to be in vogue these days. China, Russia and their BRICS (Brazil, Russia, India, China and South Africa) partners may have initiated the narrative but the desire to remove or at least reduce the US dollar's hegemony has spread. Many nations, including Malaysia, have openly articulated their desire to move away from US dollar dependence for their trade. Though it has been a long time coming, the rising disdain of the US dollar is in no small part due to American policy hubris and abuse of its reserve currency status. As the only country that can repay its foreign debt in its own currency, it has run years of current account deficits, created a mountain of debt surpassing US$30 trillion (RM136 trillion) and effectively piggybacks on the rest of the world with its autarchic monetary policies.

For at least the last two decades, a presence in China was seen by Western firms as a distinct competitive advantage over their peers. Now, all that seems to be changing. American and European suspicion of China has been rising as China seeks to control its technological destiny. For as long as China was a low-cost, low-value-added producer of basic goods, it fit into Western needs for cheap consumer products. But as China moved up the value chain and made known its intention to master and indigenise advanced technology under its Made in China 2025 policy, Western backlash followed. A China seeking technological parity with the West, particularly in key industries like artificial intelligence, 5G, semiconductors, aerospace and bio�technology was simply not acceptable to Western policymakers. What began as the imposition of tariffs evolved into outright sanctions, particularly against Chinese tech giants like ZTE and Huawei.