4.3

1. Product Development —Case Study of Malaysia 4.3 Case Study of Cagamas Malaysia From Chiquier, Loïc; Olivier Hassler; and Michael Lea (2004) ―Mortgage Securities in Emerging Markets‖ World Bank Policy Research Working Paper 3370, August 2004. Cagamas Berhad was created in 1987 following a recession and liquidity crunch that restricted credit for housing, particularly for moderate income households. The purpose of Cagamas was to provide more liquidity to mortgage lenders, reduce market risks, assist social housing finance, sustain construction sector, and develop private fixedincome markets. Cagamas purchases mortgage loans (the principal balance outstanding) from mortgage originators, with full recourse to the primary lenders, at a fixed or floating rate for 3 to 7 years. This is in effect a secured financing with Cagamas looking first to the credit of the financial institutions when mortgage loans default. Cagamas issues debt securities to investors, in the form of fixed or floating rate bonds, Cagamas notes, or Cagamas Murabaha (Islamic) Bonds. The debt is amortized independently of the mortgages. Cagamas is the largest non-government issuer of debt in Malaysia. Its securities are rated AAA by the Malaysian Rating Agency and subject to only a 10% risk weight for bank investors. As of the end of 2002, Cagamas had outstanding debt securities exceeding 24.9 billion Ringgit (approximately $6.6 billion) [Cagamas Berhad 2002]. Cagamas has successfully pioneered a number of products in the market including fixed and variable rate, longer maturities, recourse and non- recourse, Islamic debt, and leasing/commercial property lending. Cagamas receives a number of significant privileges from the Malaysian government, without which its refinancing activities would not have been perceived as sufficiently attractive for primary lenders. Loans sold to Cagamas are not subject to the Central Bank reserve requirements. Its securities are eligible as liquid assets (banks and finance companies must keep an additional 10% of assets in liquid form). Cagamas securities carry a risk weighting of 10%, compared with a 50% rating for housing loans, for investing credit institutions. 74