Development of Islamic Company Regulation in Malaysia

DEVELOPMENT OF ISLAMIC COMPANY REGULATION IN MALAYSIA By: Prof. Dr. Mohd. Ma’sum Billah masum2001@yahoo.com applied-islamicfinance@yahoo.com

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Introduction

Malaysia as a developing country and most progress in its economy growth has developed and discovered new things relating in economics field. As one of Islamic country, the development syariah based rules and regulations relating to Islamic economy and syariah based company are also going parallel. It started on 1983 where for the first time, Islamic based banking commenced in Malaysia. It was governed under Islamic Banking Act 1983 separately from BAFIA. From that point further and further development in Islamic banking either in its systems, products or services.

And then we always hear about mudharabah, musyarakah, bait-bitamil-ajil and Arabic words relating to banking system. Now after quite sometimes the establishment of Islamic based banking system, the development of syariah based regulations has been expended to company. The expansion of this regulations give the great impact in Malaysia economics growth specifically and Islamic world generally. The recent development in Islamic company regulation is the approval of 11 syariah-based trust funds, bringing 44 funds in the market.

Besides, the expansion of the regulatory framework due to the promotion product innovation, mobilization of Islamic assets and enhancement of expertise.

Sources in general

Sources can be considered as an important factor where new ideas can be discover. In terms of establishing an Islamic company, sources will act as a guideline that the company is following the Shariah principle. They are two categories, which is the primary sources and secondary sources.

Primary sources

The Holy Quran The most important sources that we as a Muslim shouldn’t left it behind. It is a code of conduct for every Muslim from cradle to grave. There are five hundred verses in the Holy Quran, which deal with the legal sanctions. There are indeed a number of Divine injunctions in the Holy Quran, which justify the validity of a contract. The Holy Quran encourages Muslim to enter a contract, which binds them to perform their responsibilities and obligations. It also mentioned about the hardship and facing unexpected risk and peril, so to ensure Muslim worked hard for a comfortable life.

All this is justified by the Quranic principles. It is concluded that the Holy Quran is the principal guidance to provide a clear justification for the application of contract, as the Holy Quran is the plain statement and guidance for mankind for their success.

“… it is a plain statement to man, a guidance and instruction to those who fear Allah SWT…”

The above ayath describe the opportunity for mankind to work and practice so long as one does not violate the law.

Sunnah The Sunnah or the traditions of the Holy Prophet (SAW) is the second source immediately after the Holy Quran. There are indeed numerous traditions justifying the validity and permissibility of its concept and practices For example, a company must work hard in overcoming unexpected future risk or peril before leaving the fate and destiny in the hands of Allah (SWT), this concept has been clarified in one of the traditions of the Holy Prophet (SAW) which reads to the effect: “…Narrated by Anas bin Malik ( R ), the Holy Prophet (SAW) told a Bedwin Arab who left his camel untied trustina to the will of Allah (SWT) : Tie the camel first then leave it to Allah (SWT)…”

Secondary sources

After primary source as a true reference of Muslim in deriving any rules relating to company regulation, Ijmak and Qiyas as secondary source being main reference to them. At this era, new things have been discovered that not all of their reference can be directly found in primary source.

Ijmak Ijmak is main secondary source in its hierarchy. It is because ijmak actually are derived from any acceptable opinions of all Islamic scholars in respective issues. All Islamic scholars that contributed their opinion or view must be fulfilled certain criteria in order to be one of the acceptable scholar. Indeed, the most trusted persons or Islamic scholars were from earlier age of Islamic era. They were all companions (sahabah) who received direct lessons and understandings from prophet himself.

After that, all companions taught what they received from prophet to the next generation which was called attabi’in. Next this group delivered what they got to the next generation called tabi’ attabi’in. Including this group was four persons who established four schools of thought (Iman Malik, Iman Abu hanifah, Iman As-syafie and Ahmad Ibn Hanbal) This generation actually has been certified by The Prophet in his tradition which means; “The best persons is in my era and then next era and in the next era.” (Narrated from Imam Bukhari, Tirmizi, Ibn Majah and Ahmad)

Qiyas Qiyas is something that similar to ijmak. It derives any new opinions by referring to the main sources and Ijmak. If, there is no any opinion that can solve or relate to the particular problem, than qiyas can be used. But what make qiyas differs from Ijmak is that, qiyas uses single opinion (companion) instead of group or consensus opinions like Ijmak.

Types of Company under Islamic Law

Under the rules of Islamic Law (Shariah), companies are divided to two main classes:

Property Companies is a type of company involves the ownership of property and is in turn usually classified. Voluntary is a company established by two or more persons agree jointly to own property, Mandatory is a company established by two or more persons who find themselves in a situation where ownership of property is forced upon them, for example by inheritance or through endowment.

Contractual Companies are established on the contract and are divided into two main categories. Mufawadha means ‘negotiation’ or ‘delegation’ and is considered established when the partners have equal shares in the company as well as equal rights and benefits in profits and management. Aanan means ‘reins’ and can be explained, as partners of the shares are variable and not distributed equally between the members.

In addition to the general categorization referred to above, contractual companies are classified into three types:

1. Capital Companies: are defined as a company where each of the partners provides a specific share in the capital of the company to conduct a trade together or separately and share in the profits. 2. Work Companies: established by two or more partners providing efforts as capital for the conduct or performance of a specific work or profession and share in the fees or consideration for such efforts. 3. Personal Companies: are defined as a company where two or more partners join together to conduct trade based on the trust and goodwill enjoyed by them in the business community.

Its establishment does not require the provision of a specific capital. The object of this company is to achieve a profit in the conduct of its business based on such goodwill.

Basic requirement to form a company under Shariah regulation

According to National Shariah Council, they usually evaluate the business operation first, what kind of dealings they usually made. Example as follows:- • operations based on riba (interest) such as activities of financial institutions like commercial and merchant banks and finance companies;

• operations involving gambling; • activities involving the manufacture and/or sale of haram (forbidden) products such as liquor, pork and meat not slaughtered according to Islamic rites; and • operations containing elements of gharar (uncertainty) such as the conventional insurance business. For companies with activities comprising both permissible and non- permissible elements, the National Shariah Council will be applied several additional criteria, which are: • the core activities of the company must be activities which are not against the Syariah as outlined in the four criteria above.

Furthermore, the haram element must be very small compared with the core activities; • the public perception or image of the company must be good; and • the core activities of the company have importance and maslahah (benefit in general) to the Muslim Ummah (nation) and the country, and the haram element is very small and involves matters such as `umum balwa (common plight), `uruf (custom) and the rights of the non-Muslim community which are accepted by Islam. The National Shariah Council also will take into account, the level of contribution of interest income received from conventional fixed deposits by the company, as part of the criteria in the analysis of the approved securities.

Once they have evaluate

Why we chose Islamic Capital Market?

There are many types companies establish under the Syariah regulation. We chose this because it is one of the components in the overall capital market in Malaysia. It plays similar important role as other capital market components in generating the economic growth of the country. The Islamic Capital Market represents an assertion of religious law in the capital market transactions where the market should be free from the involvement of prohibited activities by Islam as well as free from the elements such as usury (riba), gambling (maisir) and ambiguity (gharar).

It has functioned as a parallel market to the conventional capital market and broadening Islamic banking in Malaysia.

Introduction to Islamic Capital Market

A capital market is typically a place where capital is being traded between those having surplus capital and those requiring funds for their investment needs. “Capital markets have also been a very important medium to raise necessary amount of public funds to affect the privatization programs of governments.” In principle, the objectives of the Islamic capital market are again based on the Islamic shariah, which in essence should be treated as an important and necessary medium to transfer funds from surplus to deficit units.

This will ensure an equitable allocation of capital to sectors, which would give best of returns to the owners of capital. Thus, this will contribute towards the overall growth and expansion of the economy. “It is also the objective of the Islamic capital market to ensure that there exists a means of attracting surplus funds for worthwhile investment in accordance with the owners’ preferences. Without the capital market, investor could not find enough opportunities to invest for short term.” Islamic capital market is a need of the present and future, more and more Muslims invest in the capital market will surely increase the funds.

The existence of Islamic capital market is to challenge and compete with the conventional market that have been charge us so-called “interest”.

Recent development in Islamic company regulation

Malaysia is one of the Muslim countries that are committed in not only developing Islamic banking system but also a complete Islamic financial system. The Islamic banking system in Malaysia started in 1983 when the first Islamic Bank, Bank Islam Malaysia Berhad (BIMB) commenced its operations. It was the objective of the Malaysian government to develop Islamic banking system parallel to the conventional system. Securities Commission and Bank Negara played a major important role in developing the Islamic capital market.

They are the pioneers when it comes to help the country economic growth and equitable wealth distribution. Recent Star publication online, date 31 May 2003, the Islamic capital market in Malaysia is progressing well. In the article it mentioned, “Malaysian Islamic Capital market witnessed encouraging development last year as the Securities Commission, in collaboration with market participants, took further steps to promote the continued expansion the Islamic capital market.” The expansion is due to the promotion which product innovation, mobilisation of Islamic assets, enhancement of expertise and development of regulatory framework.

Securities Commission usually organised a forum in June on the global Islamic capital market for government related entities, corporate advisers, rating agencies, policy makers and regulators. The purpose of this forum is to discuss and exchange opinions regarding the Islamic Capital Market. It is beneficial forum where it can improve the quality of the product where they can analyse the strength and weakness from all views from each party. Once the weakness is already highlighted they can work hard to improve it.

Another recent development is that last year; Securities Commission approved 11 syariah-based trust funds, bringing to 44 Islamic funds in the market. The net asset value (NAV) of Islamic funds amounted to RM3.2 billion compared with RM2.42 billion the previous year. This accounted for 6% of the industry’s total NAV. Securities Commission also enhance the regulatory framework, they issued two sets of practice notes in relation to the management of syariah-based unit trust funds last year. The Securities Commission has addressed the development of the Islamic Capital Market at two fronts.

The first step was establishing the necessary support infrastructure. What was done was Securities Commission has established the Islamic Capital Market Unit and the Syariah Advisory Council to support its work. The Islamic Capital Market Unit comprises both researchers trained in fiqh muamalat and capital market practices to undertake research in product origination and Islamic capital market operations. The Securities Commission is committed to build up the skills in fiqh so that these principles can be fully appreciated and incorporated into all aspects of market regulation and development.

The Syariah Advisory Council which comprises fiqh scholars, key market participants of the Islamic financial market and academics advises the Securities Commission on Syariah compliance matters on all aspects of Islamic capital market operations. The Syariah Advisory Council of Securities Commission is given the mandate to ensure that the running of the Islamic capital market complies with Syariah principles. Its scope of jurisdiction is to advise the Commission on all matters related to the comprehensive development of the Islamic capital market, and function as a reference centre for issues related to the Islamic capital market.

The second step was widening the product base. In order to wide the product base, Security Commission has been making concerted efforts to develop its Islamic bond market for the last ten years. It is in the Islamic bond market that much helps the finance of Malaysia and able to compete with the conventional market. According to Bank Negara Malaysia, a dedicated High Court has been established to handle cases on Islamic banking and finance. Furthermore a Law Review Committee has been formed. It is to conduct a comprehensive review on Islamic banking issues as well as to formulate Shariah guide for the innovation of Islamic banking products.

Current weaknesses and problems

The Islamic financial system has thus now reinforced its position as a viable and effective means in contribute the overall wealth creation. After two decades of Islamic financial industry there is still problem in this current issue. During the Star publication on 3rd July 2003 regarding the launching of CIMB Islamic, there still need to done in this Islamic banking. According to Mustapha Hamat, chairman of market and product development committee of the Bahrain based International Islamic Financial Market, “felt that the industry should also be more proactive and could help by coming up with proposals on the possible areas of review”.

It means that Islamic banking industry need new introduction of new products that can give better pay offs such as Ijarah(leasing), Salam (advance payment sale), Aarbun (down payment), Murabaha (cost plus), instruments related to Istithmar (investment) should be introduced in time to come. It seems that Al Bai Bithaman Ajil (buy and sale of assets) has long enough dominated the local scene, many expert feel that the Islamic capital needs new face but investors don’t want to take the risks of going beyond Al Bai Bithaman Ajil due to the uncertainty in the laws.

The second problem was tax and company law need to be resolved because when the laws were drafted it did not include the Islamic factor. “It is not that the existing legislation does not facilitate the issuance of Islamic securities; it is just that industry players like us would need a higher degree of certainty in the law to do more business” claimed by Mustapha Hamat. Moreover there is discrepancies in the definition of debenture under the Securities Commision Act 1993 which did not cover Islamic securities.

Under the act, debenture was defined as “?debenture, stocks, and any other evidence of indebtedness of a corporation for borrowed monies.” It is clear that the existing legal framework need to reviewed and need full support from the government to help the development of the Islamic financial market. We can conclude that without the introduction and promotion of new products and legislative review, Islamic capital market would be only delay Malaysia’s vision of becoming a global Islamic capital market.

Another primary concern is the liquidity, according to Mustapha Hamat was lacking and there were not many syariah based instruments floating in the global market. Whoever has got it keeps it, for he knows replacements for new issuances are slow to come by.” What it meant was that the current business is in slow growth mode due to few syariah based instruments. Since the law for Islamic capital market still needs to be finalized, it seems that public still prefers the conventional banks. A research done by a lecturer from Universiti Utara Malaysia Norafifah Ahmad and Sudin Haron, majority of the respondent prefer conventional banks services.

They prefer conventional banks services because that their knowledge in this system was limited. To say at least the majority of the respondents were non-muslim, they knew that Muslim were not allowed from using conventional banks due to the interest that was prohibited in Islam.

Future planning in Islamic company regulation

Since the weaknesses already been identified, the future plan was to strengthen the existing legal framework. Setting up a new unit to reviewing the act will further strengthen the Shariah framework. We should create awareness and education programmes to educate the public the importance of Islamic capital market since the current situation; the public seems to prefer conventional banks. There should be research unit team in discovering new issues or new product to release. A research unit team which are not from Securities Commission or Bank Negara Malaysia.

It should be from institution to do the research and propose to the Securities Commission or Bank Negara Malaysia. We can take the example of development of Takaful from various institutions such as BIMB Institute of Research and Training (BIRT) and International Islamic University Malaysia (IIUM). This could be done the same for Islamic company regulation and Islamic capital market.

Conclusion

After we have completed our research, Securities Commission and Bank Negara Malaysia have worked hard in this past year to ensure economical growth of Malaysia and the expanding of the Islamic Capital Market. Due to the changes of the regulatory framework, it has made a great impact towards the market. There has been significant progress in the development of new products and services of which there are now more than 40 Islamic financial products available, ranging from retail-based products to project financing.

Many efforts have been done to create more complex and sophisticated corporate financing products to meet the requirement of business. It is now that Islamic Capital Market is now entering next phase development, which is the maturity. It has already contributed a lot in the Malaysian Economy and it is a very important component of the Malaysian financial system. We hope that Securities Commission and Bank Negara Malaysia will continue to work hard and create new initiatives in the development of the financial infrastructure of the Islamic banking industry, to be exact, to strengthen the institutional structure of the Islamic banking Industry. ----------------------- Islamic Law (Shariah)

Property Companies

Contractual Companies

Voluntary

Mandatory

Mufawadha

Aanan