What If We Allowed Retail Investors to Directly Invest in Malaysia’s Government Bond?
Sukuk Prihatin, the Malaysia’s first digital sukuk received an overwhelming response from public investors with the demand hit RM 666 million. The sukuk was first opened for issuance size of RM 500 million and a profit rate of 2% with a maturity period of two years. Investors can directly subscribe Sukuk Prihatin with a minimum principal of RM 500 through digital banking platforms of 27 banks in Malaysia, with Maybank as the primary distributor. The success of Sukuk Prihatin, being the first to offer digital subscription to the public retail investors open a question whether we can apply the similar method of issuance for other government bonds like Malaysia Government Securities (MGS) and Government Investment Issue (GII)?
Government bond is fundamentally low risk offering fixed return which makes it suitable for risk averse investors. Looking at the government benchmark yields, the yields of MGS and GII have been hovering between 2.50% - 3.50%. The government yields exceed the 12-month interest rate of fixed-deposit which range below 2%. Providing avenue for retail investors to invest in government bonds broaden the investment choices for them besides bank fixed deposits. Furthermore, investors also receive back the principal at maturity when investing in government bonds.
The need to provide access for retail investors to directly invest in government bonds is more critical in this time of pandemic. Globally, the total issuances of government bond in 2020 surged to a new record as a huge funding was needed to support the economy and society affected by the COVID-19 pandemic. The gross issuance of MGS and GII was at RM 151.92 billion in 2020, almost 30% higher from prior year. There is also a growing trend in social bond issuances. According to Bloomberg, social bond issuances have increased by 170% since the beginning of the year 2020. This trend might be sustained into post-pandemic to support the expenditure for recovery. The COVID-19 pandemic impact put pressure on government’s expenditure book and necessitates a tremendous amount of bond issuance from the government. Hence, there is a need to widen the investor base to retail investors to secure a continuous demand for government bond.
Regional Developments in Retail Government Bonds
If we look at other regional capital markets such as Singapore and Indonesia, the government retail bond development had been initiated in those countries since a decade ago. In Singapore, retail investors can bid for government bond in primary market auction via local bank’s ATM and internet banking. They can also purchase Singaporean Government Bond in the secondary market through exchange. Indonesia first issued retail government bond, Obligasi Negara Ritel Indonesia (ORI) in 2006. The ORI is distributed to retail investors through sales agents across countries consisting of banks and securities firms.
Most recently, the Reserve Bank of India (RBI) announced that they permit retail investors direct online access to government bonds in the primary market. The retail investors can open gilt investment account with the RBI and directly buy and sell government bonds. In the Philippines market, a digital initiative based on blockchain technology, Bonds. PH was introduced to enable retail investors to purchase Philippines’s retail treasury bond via mobile app. The minimum amount to invest in this retail treasury bond is PHP 5,000 or equivalent to RM 431.30 (PHP 1 ~ RM 0.086). The blockchain technology facilitates the retail bond distribution by reducing time and costs associated with manual verification and settlement processes.
Retail Government Bond Landscape in Malaysia
Currently, retail investors in Malaysia do not have a direct access to invest in government bond. Government bonds are sold in the primary market via auction or private placement. For auction issuing method, only eligible participants such as bank dealers are allowed to submit their bids for government bond. Private placement is an issuing method that only offer the bond to a certain individual. In the secondary market, institutional investors and high-net worth individuals are the majority holders of government bond given the minimum amount to invest is RM 250,000.
Sukuk Prihatin was the first to be offered exclusively to retail investors in Malaysia’s capital market history. The big institutional funds such as the Employees Provident Fund (EPF), Tabung Haji, and Permodalan Nasional Berhad (PNB) were not allowed to subscribe. Thus, the fact that the Sukuk Prihatin was oversubscribed substantiate that retail investors are interested to invest in government bond. The convenience to subscribe the sukuk via mobile banking app, tax incentive, and fixed profit rate draw the interest from retail investors to invest in the sukuk. The success of Sukuk Prihatin could be a benchmark for making other government bond issuance to retail investors feasible.
Retail investors participation in the capital market is crucial to diversify our investor’s base and improve liquidity in the market. For the past year, we have seen the positive outcome from retail participation in Malaysia’s equity market. The retail participation in Bursa Malaysia surged from 20.8% in 2019 to 32.4% in 2020 in terms of value traded. The net buying from local retail investors in 2020 amounted to RM14.3 billion, surpassed institutional investors with a net buying at RM 10.3 billion. The large retail participation helped to offset the net selling from foreign investors. The benchmark FBMKLCI index also outperformed its regional peers in 2020. The same positive impacts could happen to the bond market if we allowed direct participation of retail investors. Despite persistent foreign inflow to MGS and GII recently, at some point in the future, there could be a constraint in the demand. As fiscal need is growing amid the COVID-19 crisis, having retail investors to directly purchase government bond could provide other alternative source of funding.
Allowing retail investors to directly purchase government bond requires a structural reform which cannot be done overnight. There are some key aspects that we need to consider. Firstly, we need to further the studies on the retail investors demands for government bonds. While Sukuk Prihatin already support the point, we can also gauge the demand from retail investors by studying the investment flow to other fixed income-based products such as bond unit trust and mutual fund. Based on data provided in the Securities Commission Malaysia website, for the past four years, there is a significant increase in net inflow to bond/sukuk unit trust from RM 1,988.60 million in 2017 to RM 13,734.34 million in 2020. As at the end of 2020, the net asset value (NAV) bond/sukuk unit trust constituted 11.36% of the total NAV of all asset categories.
Source: Securities Commission Malaysia
Source: Securities Commission Malaysia
Secondly, we need to think how to provide facilities for retail investors to manage risks associated with bond investment such as liquidity risk and interest-rate risk. The risks will become a concern when it comes to bonds with longer maturities. Some investors might not be interested to hold the bond until maturity; hence we should facilitate them to minimize these risks. Referring to an example in developed market, the Order Book for Retail Bonds in the United Kingdom has designated market makers who provide two-way prices throughout trading day, and they are always on standby to buy and sell bonds with retail investors.
Third, we need to assess the infrastructures needed to support the trading ecosystem for retail investors from trade processing and settlement to information resources to facilitate investment decision-making. There have been some developments by regulator in establishing the infrastructures to encourage retail participation in the Malaysia’s bond market. For instance, the Seasoning Framework was introduced to facilitate the distribution of corporate bonds or sukuk that were originally issued to sophisticated investors in the primary market to retail investors in the secondary market. Currently there is an eligible distributor (iFAST) that provides an electronic trading platform for retail investors to access the season bond market. As the bond market is dominated by institutional and sophisticated investors, they have more advantage in getting detailed information and data of bond and sukuk securities. Hence, a Malaysia’s bond and sukuk information hub, BIX Malaysia, that is accessible to both institutional and retail investors was created to level the playing field.
Retail investors can bring a good force in creating a diverse investor base and liquidity to the capital market. Looking forward, the capital market should be evolved into an inclusive market where every level of investors has the opportunity to invest in various financial assets. Allowing direct participation of retail investors in government bonds is a one step forward towards inclusivity and diversity in the capital market. Technologies such as digital platform can be enabler to bring retail investors to directly invest in government bond. Therefore, it is worth to explore more on this issue in the future.
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