Introduction of Malaysia Bond Market

4467 Words Apr 12th, 2013 18 Pages
INTRODUCTION

1.1 WHAT IS BOND?

In finance, a bond is an instrument of indebtedness of the bond issuer to the holders. It is a debt security, under which the issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay them interest (the coupon) and/or to repay the principal at a later date, termed the maturity. Interest is usually payable at fixed intervals (semi-annual, annual, and sometimes monthly). Very often the bond is negotiable, i.e. the ownership of the instrument can be transferred in the secondary market.
Thus a bond is a form of loan or IOU: the holder of the bond is the lender (creditor), the issuer of the bond is the borrower (debtor), and the coupon is the interest. Bonds provide the
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More importantly, Malaysia, among the key Islamic financial centres, offers a wide variety of Islamic bonds that are based on Shariah compliant concept. As at end-Dec 2010, Islamic bonds accounted for 39% of total bond outstanding.

1.3 BOND MARKET DEVELOPMENT IN MALAYSIA * With the shift in public policy in the 1980s to consolidate public sector activities and promote the private sector as the engine of growth, a new financing pattern emerged. With this transformation of the economy, the decline of public sector borrowing was compensated by an increase in financing by the private sector. The private sector has relied on the banking system for its financing needs, of which a large portion was intermediated through the banking system - the ratio of bank credit to gross domestic product (GDP) in Malaysia was high at 149% in 1997. Nevertheless, the ratio of bank deposits to GDP was also high at 154% and therefore banks were able to finance their lending operations from their deposits. * As the banking sector was heavily exposed to the economic crisis that struck the nation in 1997, it was very cautious in extending new credits. In the post-crisis period, loan growth was low; for example in 1998 and 1999, growth was less than the target of 8% proposed by the government. * The malignancy of the Asian financial turmoil was derived from the externally-driven currency crisis with the internally induced banking crisis. In other

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