Newsletter & Bulletin

An abstract is written in Arabic.

Islamic venture capital is a strategic tool to enhance cooperation in the Muslim world. This is because it helps form smart partnership among the members of OIC countries. Venture capital is an investment in highly risky projects in return for potential high return focusing mainly on technology. For more than a decade, the trend has shown tremendous changes; hence venture capital investment records increasing interest of the investors in other sectors such as agricultural production, medical instruments and others. Islamic venture capital has been running in parallel with the mainstream in Malaysia. There are several reasons supporting the emergence of Islamic venture capital namely, attraction of Middle East investors and underutilisation of surplus in the Muslim world. This paper traces the development of Islamic venture capital in Malaysia, identifies the regulatory bodies, and the policy initiatives, and the pioneer corporations. In conclusion, it examines three phases of the development of Islamic venture capital in Malaysia namely, the evolutionary process, the degree of incorporation and developmental patterns. The applied Shariah mechanisms are hybrid of musharakah, mudarabah, and wakalah. It suggests that the balance between supply side and demand side, public friendly regulation may actualise the Malaysian industrialisation dream. In addition, refocusing long-term investment, reorientation of SMEs towards venture capital investment, establishment of private-oriented venture capital industries, creation of cash waqf and/or Islamic social bank are some suggested solutions in promoting Islamic venture capital in Malaysia. They may also be of help to other jurisdictions.

The doctrine of judicial precedent plays an empirical role in common law, but it has only persuasive value in European continent countries which are practicing civil law system.It has not been recognised as having binding force in Islamic judicial system. In Islam, each case has to be decided based on its own merit and previous decisions can only be considered as guidance for the future cases. This position is still being maintained by some countries such as Malaysia and Saudi Arabia. In Pakistan and Nigeria the doctrine of judicial precedent is applied in deciding cases. Due to this contradiction among Islamic judicial system in various countries, a question arises relating to the feasibility of the application of the doctrine of judicial precedent in Shariah courts. Accordingly, in this paper, the factual nature of the judicial precedents in Islamic judicial systems have been examined comparatively in some details with reference to some selected countries such as Malaysia, Nigeria and Pakistan. This paper points out that the doctrine of stare decisis and judicial precedent can be applied in Shariah courts as guiding precedents but not as binding since there is no express prohibition in Shariah to take judicial guidance from previous decisions.

The development of the Takaful industry in Malaysia has been encouraged by three main factors. First, the Malaysian Muslim population of more than 60% of the country's population cannot be ignored. Statistics have shown that the Muslims in Malaysia now have greater affluence and are educated; and have developed greater skills. The per capita income of the Malays has grown from 60% of the average per capita income in Malaysia in 1970 to 80% of the average per capita in 2000, attributed mainly to the implementation of the New Economic Policy (NEP) which was designed to eradicate poverty and restructure society, put in place in 1971. Takaful is necessary for Muslims as a replacement for conventional insurance. Having said that, one must hasten to add that Takaful is beneficial not only for the Muslims but also non-Muslims, as it adds variety and widens the choices.

Islamic banking has experienced some success globally, with an annual double digit growth rate (an average of 15% to 20% annually) in the last decade. But to maintain the momentum, the industry has to improve on a number of pertinent aspects. For instance, establishing a common regulatory, legislative, tax, and legal foundation, addressing cost-efficiency and integration issues for all Islamic financial markets in general and the Islamic banking sector in particular. Retrospectively, Malaysia, a rapidly developing vibrant economy has positioned itself as an international hub for Islamic banking and finance. The research interest on Islamic banking in Malaysia has been intensive but on a piece-meal basis, without a comprehensive focus to chart the needed direction to support the government's initiatives to further develop this niche sector. This article takes stock of the past documented research on the Malaysian Islamic banking sector and deliberates on the required future direction.

With financial turmoil of 2007 to 2009, the collapse of Wall Street on 28th October 1929 known as 'Black Monday', economic disaster also known as 'Great Depression' shook the capitalistic economy brutally and compelled many economists as well as societal intellectuals to find solution and reconcile carefully the soundness of the economic system. Consequently, the world experienced several severe economic disasters, which stimulated serious thinking on economic matters (ul Hassan, 2005). With the failure of communism, capitalism had spread, many people think that capitalism in which interest plays a very important role, is the best economic system for the present world. These include banking, finance houses, business, industry and agriculture. Modern society think capitalistic economic system cannot exist without paying or charging of interest and no economy of the present world can survive with strict prohibition on the interest (ul Hassan, 2005).

The mutual fund industry observed a remarkable growth of two distinct types of mutual funds during the last two decades, namely, Shariah-compliant funds (SCFs) and Socially responsible funds (SRFs). These alternative investment avenues were created for investors who are keen on investments that are Shariah-compliant and have better ethical standards than conventional funds. To fulfil these needs, the funds' investment strategies incorporate specific non-financial screening criteria based on ethical and religious guidelines, besides the typical risk-return financial screening.

Shadow economy and tax evasion are two inseparable phenomena. The existence of the former suggests the present of the latter and vice versa. The presence of shadow economy reduces the tax base and thereby eventually reduces government tax revenue. Since the activity of the shadow economy is excluded from the official gross domestic product (GDP) statistics, thus, official GDP statistics will provide wrong indicators for macroeconomic policy decisions. On the other hand, tax evasion is a growing concern to the government as the tax revenue loss has serious economic consequences. By evading taxes the government is deprived from providing adequate financing for public services, infrastructure, human capital development, best health care services and other facilities that would benefit the society. Furthermore, the loss of tax revenue may result in slow economic growth, the proper functioning of the government as the ability to finance its basic expenses is threatened. Thus, fighting shadow economy and tax evasion should be an important agenda for any government. In this study, we propose to estimate the size of the shadow economy and tax evasion for 10 ASEAN economies and further to determine factors affecting both shadow economy and tax evasion.

Numerous attempts have been made to discover the effect of competition on banking stability, before and after the recent global financial crisis. Despite the rich theoretical and empirical literature on the topic, two contradictory views are observed; the competition-fragility view and the competition stability view. On one hand, the former view argues that higher competition leads to more pressure on profits and hence induces banks' management to take higher risk strategies. On the other, the supporters of the competition-stability hypothesis argue that banks in more competitive markets tend to charge lower rates, which reduces the entrepreneurs' cost of borrowing and increases the success rate of entrepreneurs' investments. Consequently, banks will face lower credit risk on their loan portfolio in more competitive markets, which should lead to more stability.

Recent success in the technology sector has witnessed the transformation of start-up companies with relatively small or no seed capital into billion-dollar companies within a very short-space of time. The application of technology in the financial sector has 'disrupted' the traditional "brick-and-mortar" style distribution channels and if not embraced would cause the current financial sector to lose a substantial (estimated between 20 to 40%) portion of their businesses to the firms using 'fintech'.

The rapid development of the Islamic banking sector in many Muslim countries especially in Malaysia and the Middle East and its increasing acceptance in non-Muslim world has captivated much interest in recent years. Its alleged resiliency during the recent global financial crisis has prompted some to offer the Islamic banking model as a solution to the malaise of the present interest rate-based banking system, normally dubbed as the conventional banking system. A pre-dominant view among Muslim professionals and policymakers holds Islamic banking to be more equitable and more stable, aspects well-noted to be critical for societal well-beings. This view is principally based on the belief in the Islamic banking business model as prescribed by Islamic laws or the Shariah. Islamic banking is free from interest rate and gharar, which are the root of injustice, speculation and uncertainty.

The purification of wealth through charity is considered a significant part of the trusteeship of wealth or wealth management. In the Quranic verses 17:26-27 & 29-30, Almighty Allah clarifies the right that the deserving and the needy have over the wealth entrusted to man, further instructing that these rights be fulfilled as a financial obligation. For example, hoarding excessive wealth (wealth that is not invested) is actually irrational as zakat is charged on all financial and real assets, resulting in a negative rate of return (zakat rate) Al-Jarhi (1985).

The issues of earning management has received attention from practitioners and academicians since the last couple of decades in banking sector. It is evident that bank managers practice the discretion in estimating loan/finance loss provisions for various motives such as reducing earnings variability (Agarwal, Chomsisengphet, Liu & Rhee, 2007; Kanagaretnam, 2004). Majority of the studies have been focusing on conventional banks, and only a few studies have focussed on Islamic banks, for instance, Zoubi and Al-Khazali (2007) and Othman and Mersni (2014). The significance of examining the issues in the context of Islamic banks stems from the fact that Islamic banks should not manage their earnings the way their conventional banks do. This is because the underlying theoretical basis of Islamic banks are based on Shariah principles which is different from conventional banks.

The advantage of large numbers is well known in many success stories. This is not to deny that quality of the individuals can be more important than mere numbers. We have seen in history especially that of Islam, where many times the early Muslim army was outnumbered by the opponents by three, four or even ten times, yet they won almost every battle. For instance, in the first battle with idolaters of Makkah better known as Battle of Badr, in the second year of Hijrah, the Muslim army managed to gather only about 317 people, with only two horses and 70 camels for transport. The Makkans came with 1,300 strong, 100 horsemen, 600 soldiers with mail armour and many camels. Yet this first ever battle between the two sides was won by the smaller army mainly due to the quality of the individuals in the Muslim army. They killed 70 men and brought back 70 more as captives.

In her book, Payback, 2008, Margaret Atwood claimed: "In Heaven, there are no debts, all have been paid, one way or another; but in Hell there's nothing but debts, and a great deal of payment is exacted, though you can't ever get all paid up. You have to pay, and pay, and keep on paying. So Hell is like an infernal maxed-out credit card that multiplies the charges endlessly." Publication of this book coincided with the Crisis of 2007/2008. Since then, there has been a proliferation of books on the subject of debt, beginning with a book by Reinhart and Rogoff, This Time Is Different. In the book, the authors argued that "though labeled as banking or currency, or even balance of payment crises--all financial crises are at root debt crises. Massive accumulation of private speculative debt in the run up to the 2007/2008 crisis showed that this time was no different". Aside from many books, well-researched theoretical and empirical papers published since then have established a nexus between credit, debt, leverage and onset of financial crisis.

INCEIF - The Global University of Islamic Finance - organised a two-day executive education programme titled ‘Why Islamic Finance Makes Business Sense’ - in Tortola, British Virgin Islands. At the request of the Financial Services Commission of the British Virgin Islands, the INCEIF senior team led by its President & CEO Mr Daud Vicary Abdullah, Deputy President Academic Prof Datuk Dr Syed Othman Alhabshi, INCEIF Chair of Islamic Finance Prof Dr Abbas Mirakhor and Director Centre of Research & Publication Assoc Prof Dr Baharom were on ground to provide insight into how Islamic finance creates equitable economic growth.

The Organisation for Economic Co-operation and Development (OECD), in their Recommendation on Principles and Good Practices for Financial Education, argues that, in the contemporary world, financial literacy is related with standard of living and that, in the deficiency of financial knowledge, individuals and households are more exposed to indebtedness and bankruptcy (OECD, 2005). The World Savings Bank Institute (WSBI) in support for children's financial education stated that, "not only to support their habit building, but also because children are key actors of change for their families" (2009). Despite of its importance, financial literacy still remains poorly explained and imperfectly measured (Holzmann, 2010). Professionals and scholars have contended with competing theoretical frameworks for research on financial education. Moreover, comprehensive strategies for instructing children to be effective managers of money and successful participants of a complex financial marketplace have not yet emerged (McCormick, 2009).

The Islamic finance industry has shown an extraordinary accomplishment in the last decade. A major contributor to this success can be attributed to a significant increase in sukuk issuance: from US$ 1.172 million in 2001 to US$ 138 billion in 2013. Malaysia is the world's largest sukuk market with about US$ 430.579 billion of the total US$ 551.357 billion of domestic sukuk in the financial world, a whopping 78.09% of the total global domestic sukuk market. This significant development has necessitated the need for an effective credit rating mechanism for the Sukuk issuance. Credit rating has become an important instrument to assesses the creditworthiness of an issuer, most often based on the history of the issuer's borrowing and repayment, its underlying assets, its outstanding liabilities and its overall business performance (Arundina, Azmi Omar, & Kartiwi, 2015).

The rights of individuals are very much important in societal living, as it is with these rights that an individual man has the authority or capacity to carry out actions within the jurisdiction already specified to him by Shariah. It is within this specific boundary of rights that a man is confined to what is rightfully to be appropriate in action, which in the meantime will not cause him to harm another individual. This means that once he transgresses his specified rights, he is therefore subject to the law by any means necessary. Financial rights, among others is another right that is important to an individual, partner, neighbour as well as to others where the situations deemed suitable. It is the rights on assets which are of financial value as acknowledged by the Shariah.

Capital market behavior and the effects of varying sources of capital on share price has long intrigued finance theorists (Brown & Warner, 1980) and the choice of conventional capital market instruments based on investor reaction, has been researched extensively (Abdul Rahim, 2012). Profit-driven firms focus on profit maximization and the creation of shareholder wealth. However, opting for internal funds over public fund-raising has been shown to signal quality to the market, thereby affecting overall company value (Ross, 1977). The introduction of Sukuk instruments since 2001 has also influenced market reaction (Ashhari et al., 2009). Therefore, we investigate the effects of Sukuk announcement based on different underlying structures and specific sample traits of size and tenor. The results also account for an empirically determined crisis period for each of the three largest corporate Sukuk issuing countries: Malaysia, Indonesia, and Saudi Arabia. Over the last decade and a half, Islamic capital markets have developed in regulation, market reach, and product structures.

Market discipline is one of the main pillars for stability and resiliency in banking system (Basel II, 2004). The mechanism of market discipline primarily relies on the role of depositors who receive timely information and act accordingly through their respective accounts. Empirical evidence shows the presence of market discipline, whereby non-insured depositors react to risk factors of the bank accordingly by either withdrawing their deposit (quantity mechanism) or demanding higher return (price mechanism). In tandem with conventional banking system, Islamic banking also emphasize on market discipline, signified by the global standard number 4 issued by Islamic Financial Services Board in 2007. However, unlike conventional banking, market discipline in Islamic Banking is conjectured to work via profit-loss sharing system. That is, the role of Profit Sharing Investment Account (PSIA) holders who are exposed to the variability of profit generated from their investment. The intriguing question of whether PSIA would be more effective and efficient in implementing market discipline remains an ongoing debate. Even there is no empirical study attempts to address this issue. Therefore, we perform empirical research to discover it.