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A Dual Banking System To Transform Malaysian Society

Cagamas Berhad (Cagamas), the National Mortgage Corporation of Malaysia, was established in 1986 to promote the broader spread of home ownership and growth of the secondary mortgage market in Malaysia. It was established at a time where there was a huge maturity mismatch of asset and liabilities in Malaysian financial institutions that resulted in less financing extended to people who want to buy houses. 

Cagamas plays an intermediary role in bridging the capital market in order to provide long term funding to the house market.

Cagamas issues corporate bonds and sukuk to finance the purchase of housing loans and receivables from financial institutions, selected corporations and the public sector. The provision of liquidity at a reasonable cost to the primary lenders of housing loans encourages further financing of houses at an affordable cost.

Cagamas’ contribution towards transformation of the society is basically delivered through refinancing of approximately 2 million houses from the primary market and participation in Government schemes – the My First Home Scheme and Youth Housing Scheme, as a result of which financial institutions are more willing to finance the purchase of houses in the housing market.

The dual banking system of conventional and Islamic adopted by the country is also applied by Cagamas, where corresponding instruments will be used to facilitate the purchasing of assets/receivables and issuance of sukuk/bond. Although both financial systems are served by Cagamas, there is clear demarcation of the cash flow i.e. no co-mingling of funds between the two.

The proportion of issuances of bonds and sukuk by Cagamas depends on the underlying assets that Cagamas purchases. The Malaysian financial system which comprises conventional and Islamic banking has grown from a proportion of 93:7 as at end-2010 to about 70:30 currently and Cagamas has an almost similar proportion.

Cagamas foresees that future purchases of Islamic assets and issuance of sukuk may increase with the expansion of Islamic finance in Malaysia, especially with growth of the Islamic home financing segment. In view of its recent exploration around the globe, Cagamas is also aware of the challenges concerning the different interpretations of Shariah by the Shariah boards of financial institutions. Nevertheless, Cagamas has always approached this matter with caution starting from initial product development process by ensuring Shariah-based products meet globally accepted standards.

The Cagamas model is well regarded by the World Bank as the most successful secondary mortgage liquidity facility.

Cagamas is the largest issuer of corporate debt instruments in the Malaysian capital market and since incorporation, Cagamas has cumulatively issued circa RM306.4 billion worth of corporate bonds and sukuk.

Cagamas’ ability to attract investment in its bonds and sukuk has been underpinned by its strong credit rating, track record of strong capitalisation, robust asset quality and stable profitability. For the year 2017, RAM Rating Services Berhad (RAM) has assigned Cagamas’ Global, ASEAN and national-scale corporate credit ratings at gA2/Stable/gP1, seaAAA/Stable/seaP1 and AAA/Stable/P1 respectively. In addition, Malaysian Rating Corporation Berhad (MARC) has also assigned Cagamas’ bonds and sukuk issues ratings at AAA/MARC-1 and AAAIS/MARC-1IS respectively. Moody’s Investors Service (Moody’s) has also assigned Cagamas’ local and foreign currency long-term issuer ratings at A3 which is in line with Malaysian sovereign ratings.