Law and society in the evolution of Malaysia’s Islamic capital market regulation

In recent years, Islamic capital markets have flourished in countries with large Muslim populations, while sukuk, or Islamic bonds, have gained traction internationally.  Although Malaysia is regarded as a common law country, it has spearheaded the development of Islamic capital market regulation, creating a hybrid framework comprising corporate law drawn from its common law heritage and sharia principles. These initiatives, together with the increasing prominence of sharia in the Malaysian legal framework, pose a challenge to the legal origins thesis which asserts the powerful influence of inherited common law traditions over legal development.

My article on the topic considers the development of Islamic capital market regulation against the backdrop of sociocultural values, political rivalry and historical factors in Malaysia. One of the catalysts for Islamisation in Malaysia is the competition between major political parties UMNO (United Malays National Organisation) and PAS (Pan-Malaysian Islamic Party) for the votes of constituents.  Islam is central to the identity of the Malay majority. Political rivalry in demonstrating commitment to Islam has heightened social awareness of Islamic values, leading to widespread and deeply personal commitment to the Islamic ethos in large sections of the community.  While UMNO led the ruling coalition from independence in 1957 to May 2018, its capitalist leanings and economic policies based on Western ideologies have been criticised by PAS as Western, secular and un-Islamic.  The religious leaders of PAS advocate an Islamic world view which encompasses an economic, legal and political system premised on Islamic values. 

Faced with the challenge of convincing its constituency of its authenticity as a champion of Malay-Muslim interests, UMNO incorporated an Islamic rhetoric in its policies, advocating a progressive Islam, compatible with technological advancement, economic development and a capitalist economy.  State initiatives actively sought to extend Islamic principles to the existing common law system, incorporating Islamic values into areas previously regulated exclusively by secular law. 

The quest for post-colonial identity has ostensibly provided further impetus for the shift towards a greater role for sharia.  Sharia was in Malaysia before the intervention of colonial powers and reflects indigenous values more closely than the Western values embodied by English institutions.  Professor Shad Saleem Faruqi emphasises the counter-culture inherent in the shift towards the establishment of sharia-compliant institutions.  According to Faruqi, ‘many Muslim scholars see the resurgence of Islam as the correction of an imbalance; as a counter to the hegemonic influence of the dominant Western civilisation.[1]  Islamic capital markets were also highlighted by the Securities Commission Malaysia as a niche market with potential for growth, meeting the need to revitalise Malaysia’s capital markets in the face of increasing global competition.[2] 

In seeking to establish a regulatory framework for globally competitive Islamic capital markets, Malaysian law reformers have drawn from common law regulation which reflects international standards.  Law reformers have aspired towards a level of efficiency comparable to that of secular law.  Drawing from secular law is expedient and permissible provided that such laws do not conflict with Islamic principles.  Where necessary, law reformers have removed inconsistencies with Islamic principles and infused Islamic values, creating hybrid regulations which comprise a blend of sharia and secular law. 

When viewed through the lens of the legal origins thesis, the development of the hybrid regulations appears rather anomalous.  The sharia and common law components have evolved along two separate and seemingly inconsistent trajectories.  While the common law component continues to reflect the influence of regulation from other common law countries, the increasingly significant sharia component represents a distinct shift away from common law traditions.  Sharia’s jurisprudence and regulatory style differ markedly from that of the common law system.  Islamic jurisprudence is theocratic, and the Quran is its primary legal source.  Islamic legal scholarship and the traditions of the Prophet are referred to in interpreting the Quran.[3]  Authoritative interpretations are made by sharia scholars on the basis of ijtihad or the reasoning of qualified scholars.  Decision-making processes in the sharia courts diverge substantially from the common law courts.

The expansion of sharia regulation suggests that the influence of the common law tradition on Malaysian legal development is limited.  Nevertheless, the weak form legal origins thesis concedes that legal origin is one of several influences on legal development and may at times be outweighed by economic and political factors.  Theories of legal evolution which emphasise the co-evolution of law with political, sociocultural and economic influences in a given context provide a stronger explanation for the development of the hybrid Islamic capital market regulation.  A possible reason for the seemingly inconsistent trajectories in the development of sharia and common law components lies in aspirations that Islamic capital markets should reflect authentic sharia principles and be competitive at the same time.  The hybrid regulatory framework builds on the country’s strengths of sharia proficiency and its common law corporate regulation.  Hybrid common law and sharia regulations merge authentic Islamic values with international regulatory standards, presenting investors with a competitive alternative to Western institutions.