Law and Society in the Evolution of Malaysia's Islamic Capital Market Regulation

Law and Finance in (South)East Asia

1.

INTRODUCTION

In recent years, Islamic capital markets have seen strong growth comparable with conventional markets and at times outperforming them.¹While Islamic capital markets have flourished in countries with predominantly Muslim populations, Western countries and firms are increasingly participating in the issuance of Islamic bonds or sukuk. In 2014, Britain issued sovereign sukuk of £200 million,²while Luxembourg's issuance of [euro]200 million sovereign sukuk was more than two times oversubscribed.³Hong Kong raised US$1 billion through its sale of sovereign sukuk which attracted orders of US$4.7 billion.⁴The growth of Islamic capital markets has been accompanied by the corresponding development of the regulatory framework comprising components drawn from sharia and common-law regulation.

Although Malaysia is often regarded as a common-law country,⁵it has been at the forefront of Islamic capital market regulatory development, creating a hybrid framework comprising corporate law drawn from its common-law heritage and sharia principles. The distinguishing feature of Islamic capital markets is the compliance with Islamic law with its distinctly different jurisprudence and regulatory style from the common-law system. ⁶The development of the Islamic capital market regulatory framework poses a challenge to the legal origin thesis⁷which asserts the powerful influence of the common-law legal tradition over legal development.⁸The increasing prominence of sharia in the Malaysian legal system appears to refute claims of time-invariant path dependence in accordance with the common-law tradition.

This article examines the sociocultural values and interrelated political and economic influences which have propelled the development of the hybrid Islamic capital market regulatory framework and precipitated the shift away from common-law traditions. It considers the phenomenon by reference to two theories of legal development, namely theories of legal origin and legal evolution. Malaysian Islamic capital market regulation has evolved in a context of legal pluralism in which common law and sharia have coexisted for over a century. Minimal consideration has been given to the issue of legal pluralism in legal origin debates. ⁹

This article analyses the interaction between the common-law system and sharia. The analysis finds that the sharia component of Islamic capital market regulation has evolved along a different and seemingly inconsistent trajectory from its common-law counterpart. While Malaysia's...