Securitization markets in Malaysia

This page updated regularly deals with securitization developments in Malaysia. If you have any news or development to contribute to this, please write to me.

Till Jan 2002, there have been 3 ABS deals in Malaysia: worth a total of RM1.23 billion have been sold in Malaysia to date. The issuers were all financial institutions, namely Arab Malaysian Merchant Bank Bhd, Commerce International Merchant Bankers Bhd, and bad debt management agency Pengurusan Danaharta Nasional Bhd

Soon after the publication of securitization rules by the SC, there have been several proposals for securitization in Malaysia - see our pages here and here.

An article on securitisation market in Malaysia and the role of Cagamas was published in June issue of Bankers Journal - see news item and comments here.

The origin of securitisation in Malaysia can be traced to 1986 when the Government set up a mortgage financing body called National Mortgage Corp (Cagmas Bhd). Cagmas is by far the most important issuer of securitised instruments in Malaysia. Cagmas was formed on the model of Fannie Mae and Freddie Mac of USA. Accordingly, Cagmas functions as a special purpose vehicle between the house mortgage lenders and investors of long term funds. The securities issued by Cagmas have acquired the name "cagmas bonds" in Malaysian market.

In end-1996, the size of the Malaysian securitisation market was estimated at RM 45.5 billion (article of Datuk C Rajandram, CEO Rating Agency Malaysia in Corporate World Feb. 1998).

The issue of CAGMAS debt is detailed as under:

Apart from mortgages securitised by Cagmas, securitisation market for other assets has not been very strong in Malaysia still. Even Cagmas bonds have full recourse to the originators of the loans and therefore the market has not reached a maturity where it can stand on the rating of the underlying portfolios.

Securitisation guidelines of the Securities Commission

On April 10th, the Securities Commission came out with guidelines on asset securitisation. The full text is placed on our site here.

The SC's guidelines are based on FSA, UK's guidelines and on market interaction. Compliance with the guidelines is mandatory and is not linked with any capital relief or such advantage. The guidelines permit only companies incorporated in Malaysia to offer asset-backed securities in Malaysia, either on public basis or on private basis. In other words, even a private issuance of ABS is covered by the guidelines. This may sound strange as portfolio transfers, between willing seller and buyer, and not resulting into issuance of any "security" as such, does not call for any intervention by the SC.

Malaysia is one of the few cases where guidelines modelled on bank regulators for capital relief have been made a part of generic regulation. For example, the prescription that the originator should not hold any equity in the SPV is understandable as a part of bank regulations, but should not be a part of generic regulations. Further, the regulation that the originator cannot provide any recourse but can be a subordinated participant, is also an artificial restriction.

The guidelines apply only to existing asset securitisation which may also be a handicap.

Legal system in general

The Malaysian legal system is partly on Roman Dutch law and partly on English common law. Sec. 4 (3) of Malaysian Civil Law Act, 1956 requires that the assignment of a debt be notified to the debtor. Since this is not mostly practical, the alternative is equitable assignment (See box).

As usual with most countries, the Malaysian companies law contains provisions for avoiding a transfer made in contemplation of bankruptcy. This, however, can be resolved by establishing that the transfer took place at fair values.

In case of an offshore SPV, numerous exchange control issues will also arise - the Malaysian Exchange Control Act 1953 will be applicable.

Specific accounting standards have not been notified as yet.

Stamp duty:

There is a stamp duty implication of 4% on transfer of receivables. Current practice is to defer the duty implication by executing and keeping outside the country the deed of assignment. This would however lead to stamping when the SPV has to file a suit against the obligor for enforcement. There is a temporal exemption from stamp duty granted by the Govt. See here for a proposal to abolish stamp duty completely. Subsequently, in Budget 2001, the Stamp duty has been abolished - see the text of the Notification in our Securitisation laws section - click here. The real property gains tax, on transfer of assets, has also been exempted in case of SPVs.

However, the SPVs, in order to avail of the exemption, need to be approved by the SC. The SC is yet to come out with the guidelines based on which the approval will be granted/denied.

Another technique adopted is to avoid entering into any agreement by keeping the agreement incomplete: that is, the originator offers to assign the receivables, which the SPV agrees by mere payment and not by a formal acceptance of the agreement. These devices, it is clear to understand, are only the result of an impractical duty regime.

Taxation laws

There are no specific provisions in the income-tax law on securitisation. Pass through SPVs are expected to be tax exempt based on conduit rules, but other securitization SPVs are likely to come for entity-level taxation.

Malaysia currently does not have any tax on capital gains. Hence, if the sale of receivables or assets by the originator can qualify for a capital gains treatment, it can escape upfront taxation of profits on securitization.

Withholding tax:

A withholding tax of 15% is applicable on interest payments to non-resident persons. Normal practice for Malaysia is to incorporate the SPV in Labuan, an offshore financial centre, in which case the withholding tax is not applicable.

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