Mandy Chiang
- MGII are Shariah-compliant government bonds, offering similar returns to MGS with growing investor interest.
- Foreign participation in MGII has increased due to improved liquidity and global sukuk market expansion.
- MGII now rival MGS in market size, making them a viable investment for diversified portfolios.
Malaysian Government Investment Issues (MGII) are the Shariah-compliant (Islamic finance) counterpart to conventional fixed-rate Malaysian Government Securities (MGS). MGII are now a RM571bn ($130bn) market, attracting growing institutional and foreign interest.
Using data from the FTSE Malaysian Government Investment Issue (MGII) index, in this article we explore the characteristics of MGII. We compare them with traditional government securities and analyse the issuance trends, investor profile, liquidity and risk/return characteristics of both categories of Malaysian government bond.
MGII as Sukuk
MGII are a form of “sukuk”, a debt instrument that is structured to comply with the principles of Islamic finance, such as a prohibition on interest and an avoidance of unethical activities. Sukuk are designed to meet Islamic mandates around the globe and can reflect different Islamic concepts, depending on local market standards. Nowadays, many investors also view sukuk as a type of ethical fixed income investment due to its Shariah-compliant nature.
The global sukuk market has experienced remarkable growth over the past decade. The total value of sukuk in issue grew more than 100% from 2015 to 2024, while the conventional fixed income market grew 52% over the same period. This growth has mainly been driven by a surge in public sector sukuk issuance, coupled with steady growth in the corporate sukuk sector.
According to Malaysia’s central bank[1], the country’s sukuk market is the largest in the world (with a 43.3% share of the global sukuk market as at end-2022). Government bonds, in the form of MGII, accounted for 40% of Malaysia’s sukuk market as at June 2023, contributing significantly to the total.
MGII may appeal to investors seeking Islamic finance mandates or wishing to access potentially improved risk-adjusted returns within Malaysia’s bond market.
Similarities between MGII and MGS
MGII are long-term securities issued by the Government of Malaysia and based on Islamic principles. They provide the same effective cash flows and nature as fixed income instruments and, in many aspects, MGII mirror conventional Malaysian government bonds (MGS).
For example, both MGS and MGII are issued by the government of Malaysia on a pre-announced schedule and using the same primary market issuance mode. They rank equally as unsecured direct obligations of the government. Their transaction mechanisms and regulations are also the same.
| Similarities between MGS and MGII | |
|---|---|
| Primary Market Issuance Mode | Competitive multiple-price auction |
| Primary Market Participants | Principal Dealers and Islamic Principal Dealers |
| Issuance Calendar | Pre-announced |
| Coupon/Profit Rate Type | Fixed |
| Issued Tenor | 3 to 30 years |
| Redemption | Bonds are redeemed at par upon maturity |
| Debt Obligation | Pari passu (equal in priority) |
| Listed Exchange | Bursa Malaysia |
| Settlement | RENTAS, Euroclear, Clearstream |
| Taxation | Exempted from withholding tax. No capital gains tax. |
| Secondary Market | Over-the-counter |
However, MGII play a critical role in supporting Malaysia's dual banking system (where the Islamic banking system operates in parallel to the conventional banking system). They also serve as a benchmark to grow and strengthen the domestic sukuk market.
Though so far not as widely recognised by international investors as traditional MGS, MGII have significantly increased in supply over the years. They attained a comparable scale to MGS by the end of 2024 (RM571 billion in MGII versus RM641 billion in MGS--see Exhibit 1).
Exhibit I: Historical Amount Outstanding of MGS and MGII
Source: Bank Negara Malaysia. Data as of January 2025. Please see the end for important legal disclosures.
Between 2008 and 2015, MGII issuance was characterized by a larger average issue size than MGS, combined with a less frequent issuance schedule. In recent years, MGII issuance patterns have converged with those of MGS, with synchronized average issue sizes and issuance frequency (see Exhibits II and III).
Between 2020 and 2024, the average issue size of MGS and MGII was about RM4bn, and the frequency of issuance (including the reopening of existing issues) was 18-20 times per year.
MGII were issued with original maturities of 3, 5, 7, 10, 15, or 30 years, aligning with those of MGS. Exhibit IV provides an overview of the supply across all tenors, ranging from 1 year to 30 years, for both MGS and MGII.
Exhibit II: Historical Average Issue/Reopening Size of MGS and MGII
Source: LSEG. Data as of January 2025. Note: The average issue size of MGS and MGII is calculated by summing the total annual issuance divided by the number of successful issues/reopening of issues in the year. Please see the end for important legal disclosures.
Exhibit III: Issue/Reopening Frequency of MGS and MGII
Source: LSEG. Data as of January 2025. Please see the end for important legal disclosures.
Exhibit IV: Maturity Profile of MGS and MGII
Source: FTSE Russell. Data as of January 2025. Please see the end for important legal disclosures.
Together, MGS and MGII represented 57% of the Malaysian bond market at the end of January 2025 (LSEG data), reflecting their role as the benchmarks of Malaysia’s dual banking system.
Distinctions: The Shariah-compliant component, investor base and yield differential
However, despite the similarities we have outlined, there are also differences between MGS and MGII.
One key distinction is that MGII are Shariah-compliant instruments, structured to comply with Islamic finance principles, such as the prohibition of interest and avoidance of unethical activities. MGII are issued under the “Murabahah” concept, which ensures that the cash flows of MGII are derived from asset-based sales transactions between investors and the Government of Malaysia, with deferred payment dates. The issuance concept of MGII can evolve over time to meet the regulatory objectives and developments in Islamic finance.
For conventional bond investors, regardless of the underlying issuance concept, MGII can be viewed as similar MGS, since they offer comparable cash flows, trading mechanisms and government backing. However, the Shariah-compliant component of MGII creates a distinct investor base from that of MGS, resulting in different market supply-demand dynamics.
For example, Exhibit V shows how MGS have attracted a broader mix of domestic and foreign investors, while MGII have appealed more to Islamic finance mandates. Islamic banks are the biggest holders of MGII, with a market share as high as 48%. The demand for MGII comes from Islamic banks’ need to manage liquidity and meet regulatory requirements for liquid assets, while also adhering to Shariah-compliant investment principles. On the other hand, MGS are preferred by foreign investors, with a 43% share of foreign holdings (see Exhibit VI).
Exhibit V: Investor Profile of MGS and MGII
Source: Bank Negara Malaysia. Data as of September 2024. Please see the end for important legal disclosures.
Exhibit VI: Foreign holdings of MGS and MGII
Source: Bank Negara Malaysia. Data as of September 2024.ata as of September 2024. Please see the end for important legal disclosures.
Over the past decade, MGII have seen a moderate increase in foreign participation (from 5.4% to 9.4%) due to their improved liquidity and a growing global interest in sukuk bonds. However, when compared to MGS, the relatively lower trading volumes have up to now made MGII less attractive to foreign investors.
Exhibit VII shows the trading volume and turnover ratios for MGS and MGII from 2020 to 2024. The higher turnover ratio for MGS shows that this category of bond has been more actively traded than MGII (the trading volume of MGII is typically only 50%-60% that of MGS).
According to the Malaysian Islamic Financial Market Report, the lower trading volume in MGII is also due to the limited repo facilities for onshore sukuk participants, which results in limited market making activities and lower liquidity.
Exhibit VII: Annual Turnover Ratio of MGS and MGII
| MGS | MGII | |||||
| Year | Total Trading Volume | Average Outstanding | Annual Turnover Ratio | Total Trading Volume | Average Outstanding | Annual Turnover Ratio |
| 2020 | 656,148 | 427,250 | 1.54 | 353,126 | 393,725 | 0.9 |
| 2021 | 490,913 | 474,934 | 1.03 | 252,535 | 441,492 | 0.57 |
| 2022 | 439,998 | 523,436 | 0.84 | 202,502 | 490,200 | 0.41 |
| 2023 | 534,331 | 567,486 | 0.94 | 296,557 | 543,600 | 0.55 |
| 2024 | 550,843 | 623,139 | 0.88 | 380,194 | 574,633 | 0.66 |
Source: Bank Negara Malaysia. Data as of January 2025, in RM million. Note: Turnover ratios are calculated as trading volume (sales amount only) divided by average value of outstanding bonds during the period.
Historically, MGII have offered a yield premium over MGS, which was typically regarded as compensation for their lower levels of liquidity. However, the yield gap has closed significantly in recent years. Exhibit VIII shows the average yield to maturity by tenors in December 2019 and December 2024: in 2019, the short-term yield premium of MGII was 2-5 basis points (bps) and the long-term yield premium was about 10 bps. By 2024, the short-term yield premium had disappeared and the long-term yield premium had dropped to 3bps.
Exhibit VIII: Average Yield to Maturity of MGS and MGII
| December 19 | |||||||
|---|---|---|---|---|---|---|---|
| Average Yield | 1-3yrs | 3-5yrs | 5-7yrs | 7-10yrs | 10-15yrs | 15-20yrs | 20+yrs |
| MGS | 3.08 | 3.2 | 3.33 | 3.44 | 3.66 | 3.76 | 4.02 |
| MGII | 3.1 | 3.24 | 3.39 | 3.5 | 3.78 | 3.89 | 4.12 |
| MGII-MGS | 0.02 | 0.04 | 0.05 | 0.05 | 0.12 | 0.13 | 0.1 |
| December 24 | |||||||
| Average Yield | 1-3yrs | 3-5yrs | 5-7yrs | 7-10yrs | 10-15yrs | 15-20yrs | 20+yrs |
| MGS | 3.43 | 3.57 | 3.73 | 3.81 | 3.93 | 4.04 | 4.14 |
| MGII | 3.39 | 3.57 | 3.71 | 3.82 | 3.92 | 4.07 | 4.17 |
| MGII-MGS | -0.04 | 0.01 | -0.02 | 0.01 | -0.02 | 0.03 | 0.03 |
Source: FTSE Russell. Data as of January 2025, in %. Past performance is not a guide to future returns. Please see the end for important legal disclosures.
Performance
Exhibit IX: Cumulative Returns of MGII and MGS (2020-2024, inclusive)
| Summary Metric | Total Return | Annualised return | Annualised Volatility | Sharpe Ratio | % Positive Months | Max Drawdown |
|---|---|---|---|---|---|---|
| MGS | 18.60% | 3.47% | 4.88% | 0.71 | 65% | -6.07% |
| MGII | 19.39% | 3.60% | 4.62% | 0.78 | 65% | -5.29% |
MGII are an increasingly accessible option
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