1. INTRODUCTION
In recent years, Islamic capital markets have seen strong growth comparable with conventional markets and at times outperforming them.Footnote 1 While 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,Footnote 2 while Luxembourg’s issuance of €200 million sovereign sukuk was more than two times oversubscribed.Footnote 3 Hong Kong raised US$1 billion through its sale of sovereign sukuk which attracted orders of US$4.7 billion.Footnote 4 The 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,Footnote 5 it 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.Footnote 6 The development of the Islamic capital market regulatory framework poses a challenge to the legal origin thesisFootnote 7 which asserts the powerful influence of the common-law legal tradition over legal development.Footnote 8 The 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.Footnote 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 common-law shareholder protection continues to reflect the influence of its common-law origin, the growth of the sharia component demonstrates a shift away from the common-law tradition.
This article begins by describing the Islamic capital market regulatory framework in Section 2. It examines sources of law and highlights the unique features of Islamic capital market regulation. Section 3 considers legal pluralism in the Malaysian legal system. Shifting jurisdictional boundaries and changes in the interaction between common law and sharia over time are briefly examined. The resurgence of sharia in Malaysian law and society which has led to the development of Islamic capital market regulation is analyzed in Section 4. Section 5 details the theories of legal origin and legal evolution. The development of hybrid Islamic capital market regulation is analyzed by reference to these theories in Section 6. Section 7 concludes.
2. REGULATION OF ISLAMIC CAPITAL MARKETS
Islamic securities may be distinguished from conventional securities by their compliance with Islamic ethical principles. These principles include the prohibition against usury or interest (riba) and excessive uncertainty (gharar).Footnote 10 Compliance with Islamic principles has entailed changes in the structure of investments such as profit-sharing or partnership arrangements in place of interest-bearing loans. Islamic bonds or sukuk are often asset-based or asset-backed.Footnote 11 Sukuk holders may own part of the underlying assets,Footnote 12 sharing the profits and losses flowing from these assets.Footnote 13 Islamic principles also require that the businesses should not involve gambling, alcohol, or other activities prohibited by Islam.Footnote 14
The regulation of Islamic capital markets emerged in Malaysia in the 1990s and saw strong growth after the Capital Market Masterplan was launched in 2001.Footnote 15 Islamic capital market regulation includes components from both sharia and common law. The sharia regulatory framework for Islamic securities largely comprises quasi-legislative guidelinesFootnote 16 issued by the Securities Commission.Footnote 17 Islamic securities are subject to the same continuous disclosure requirements and shareholder protection as conventional securities. Company legislation, common law, listing requirements, and codes which govern conventional securities also apply to Islamic securities.Footnote 18 The main difference is that Islamic securities are also subject to sharia regulations. Sharia differs fundamentally from common law in several respects. 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.Footnote 19 Authoritative interpretations are made by sharia scholars on the basis of ijtihad or the reasoning of qualified scholars.Footnote 20 Decision-making processes in the sharia courts differ from the common-law courts in that precedents are not binding and reference to legislation is uncommon. Sharia court judges often defer to the opinions of Islamic scholars.Footnote 21
The Securities Commission and its Shariah Advisory Council have a central role in the development and enforcement of the Islamic capital market regulatory framework. The Securities Commission issues guidelines and rulings based on the advice of sharia experts on the legitimacy of various aspects of commercial transactions from an Islamic perspective. The Shariah Advisory Council draws from the Quran and Sunnah as primary sources and Islamic jurisprudence as secondary sources. The guidelines have been given quasi-legislative force through the Capital Markets and Securities Act 2007, which stipulates sanctions for failure to comply with the guidelines. These sanctions include the prohibition against the trading of securities, public reprimand, and financial penalties.Footnote 22 Enforcement of the sharia regulatory framework is also facilitated by the presence of sharia advisers within issuers of Islamic securities whose role is to ensure compliance with Islamic principles. These sharia advisers are independent of the issuer and approved by the Securities Commission.Footnote 23
In practice, the regulatory framework relies on declarations of sharia compliance, or non-compliance, by the Securities Commission’s Shariah Advisory Council as a means of enforcing compliance with sharia regulations. Sanctions for non-compliance with sharia regulations take the form of naming and shaming, and to an extent financial repercussions flowing from investors’ disposal or avoidance of non-sharia-compliant securities. Securities lose their sharia-compliant status when they fail to comply with sharia regulations. The Securities Commission’s Shariah Advisory Council issues lists of sharia-compliant securities twice a year. The Shariah Advisory Council advises investors to dispose of securities which are not sharia-compliant within a month.Footnote 24 In addition, dividends paid after an investment is declared not to be sharia-compliant should not be kept by investors, but given to charity. While investors are not legally bound to comply with the Shariah Advisory Council’s advice, such advice from sharia experts is arguably perceived as authoritative from a religious perspective.
3. LEGAL PLURALISM
While the development of the hybrid sharia and common-law regulatory framework is a fairly recent development, the common-law system has coexisted with sharia and adat (customary law) in the Malaysian legal system for over a century. Prior to the reception of English law in Malaya, the governing laws comprised sharia and adat.Footnote 25 Sharia in pre-colonial times arguably differed from its modern form as syncretism with adat engendered a degree of inconsistency with present Islamic ideals.Footnote 26 Malaya received the English common-law system as the result of British influence. Colonial statutes and common law became the governing law and sharia was relegated to a subordinate position. Sharia continued to govern a limited range of issues relating to personal law such as family law and inheritance.Footnote 27 Sharia courts were subordinate courts in the judicial hierarchy. English statutes formed the basis of company legislation such as the Companies Ordinance enacted in the Straits Settlements in 1887. English common-law and equitable principles also applied in Malaya.Footnote 28
Legal pluralism has arguably fostered a degree of mutual influence between the common-law system and sharia. During the colonial period, sharia acquired several formal characteristics of the common-law system.Footnote 29 Codification in the form of colonial statutes was among the developments to Islamic legal institutions.Footnote 30 As sharia cases were heard in the courts set up by the British, written judgments and civil and criminal procedure were developed in relation to sharia court hearings.Footnote 31
Following independence from the British, sharia has become increasingly significant and its influence on the common-law system has become more evident.Footnote 32 The influence of sharia is reflected in the reference to sharia principles by common-law judges in their decisions.Footnote 33 Efforts to harmonize the existing legal system with sharia principles further reflect the influence of sharia on common law.Footnote 34 The Federal Constitution was amended in 1988, stating that the civil courts have “no jurisdiction in respect of any matter within the jurisdiction of the shariah courts.”Footnote 35 Since then, questions have arisen over the delineation of jurisdiction between the sharia and common-law courts, with conflicting decisions handed down by sharia and common-law courts giving rise to controversy.Footnote 36 Conflicts involving both Muslim and non-Muslim parties, as well as issues involving questions of sharia and common law, contribute to the complexity of jurisdictional conflicts.Footnote 37 Jurisdictional conflicts have been particularly acute in areas of family law and religious conversions.Footnote 38 Nevertheless, the recent decision of Viran a/l Nagapan v. Deepa a/p Subramaniam,Footnote 39 in which the Federal Court held that sharia courts have no jurisdiction to make orders on custody where one of the parties is a non-Muslim, appears to provide some clarity on the delineation of jurisdictional boundaries, at least in matters involving the custody of children. On a broader level, conflicting views as to the role of Islam in Malaysia and differences in the interpretation of the Federal ConstitutionFootnote 40 on this matter have remained contentious. The question as to whether Malaysia is a secular or Islamic state continues to be a vexed issue.Footnote 41
Although sharia has had an increasing influence on various aspects of the Malaysian legal system since independence, the regulation of companies in Malaysia has been modelled largely on UK and Australian lawFootnote 42 and continues to draw from developments in the common-law world.Footnote 43 International best practices and the need to remain competitive in the increasingly globalized markets have also had a significant influence on corporate law reforms since the Asian financial crisis.Footnote 44 Regulations which promote good corporate governance are consistent with sharia principles which, in turn, encourage ethical practices. Islamic capital market regulation builds on the foundation of corporate governance established pursuant to common law, and infuses financial instruments and their underlying investments with an additional level of ethics based on sharia principles. As stated above, these include structuring investments to avoid interest, excessive speculation, and activities prohibited by Islam. In practice, sharia-compliant investments are often structured as profit-sharing or sale and purchase transactions, while sukuk are in many cases asset-backed or asset-based.Footnote 45
4. THE RESURGENCE OF SHARIA IN MALAYSIAN LAW AND SOCIETY
The development of hybrid common-law and sharia Islamic capital market regulation constitutes part of the broader resurgence of sharia in Malaysian law and society. The shift towards the increasing significance of sharia in the Malaysian legal system may be attributed to several influences. The identity of the Malay majority is thought to be inextricably linked with Islam.Footnote 46 Hence, sociocultural factors contribute to the importance of Islam in Malaysian law and society. The Federal Constitution’s definition of “Malay” assumes the profession of the religion of Islam as an integral aspect of Malay identity.Footnote 47 Islamic revival in other parts of the world has further contributed to the Islamic revival within the Malay community.Footnote 48 Bidin attributes the growth of Islamic finance to the Islamic revival and consequential aspirations on the part of Muslims to comply with sharia principles.Footnote 49
Political implications flow from the primacy of Islam among Malaysia’s Muslim majority, and the resurgence of sharia has been attributed to political rivalry for the votes of Malay constituents. While political rivalry has heightened social awareness of Islamic values, it has also led to widespread and yet deeply personal commitment to the Islamic ethos in large sections of the community. Hooker underscores the intensely personal nature of individual Malay connections with Islam.Footnote 50
Scholars have argued that political rivalry between UMNO (United Malays National Organisation) and its opposition, PAS (Pan-Malaysian Islamic Party), has contributed substantially to Islamization.Footnote 51 While UMNO has led the ruling coalition since independence, its capitalist leanings and economic policies based on Western ideologies have been criticized by PAS as Western, secular, and, hence, un-Islamic.Footnote 52 In contrast, the religious leaders of PAS advocated an Islamic worldview which encompasses an economic, legal, and political system premised on Islamic values. Bakar argues that consistency with Islamic principles has significant implications for perceptions of political legitimacy.Footnote 53
Faced with the challenge of convincing its majority Malay-Muslim constituency of its authenticity as a champion of Malay-Muslim interests, UMNO incorporated an Islamic rhetoric in its policies. Former prime minister Dr Mahathir advocated a progressive Islam, compatible with technological advancement and economic development.Footnote 54 Religious leaders or ulama who opposed this progressive interpretation of Islam were denounced as retrogressive or extremist.Footnote 55 The Mahathir administration signified its commitment to the development of Islamic perspectives across economic, political, and social spheres, setting up the International Islamic University and introducing Islamic banking. Dr Mahathir’s advocacy of a progressive Islam extended beyond Malaysian shores, to the global Muslim community.Footnote 56 International recognition as an Islamic statesman further enhanced his standing as a defender of Malay-Muslim interests. According to Wain, Dr Mahathir “entered directly into Islamic competition with PAS, choosing consciously to fight Islam with more Islam, which had the predictable effect of intensifying Islamization in Malaysia.”Footnote 57
The Islamic rhetoric was further pursued by Dr Mahathir’s successor, Ahmad Badawi, who introduced policies of a modernist and moderate Islam known as “Islam Hadhari” or civilizational Islam.Footnote 58 At that time, Malaysia was the chair of the Organisation of the Islamic Conference. These policies not only had implications for domestic politics, but also contributed to the Malaysia’s profile internationally as a moderate Muslim state.Footnote 59
State initiatives actively sought to extend Islamic principles to the existing common-law system. Islamic revivalism has engendered the perception that Islamic principles should not be confined to specific areas of personal law.Footnote 60 Islamic values extend to family, commercial, maritime, penal law, and economic systems.Footnote 61 Efforts have been made to incorporate Islamic values into areas previously regulated exclusively by secular law,Footnote 62 on the premise that sharia was in Malaysia before the intervention of colonial powers.Footnote 63 Mohamad posits that “the role of Islamic law reform is crucial in the project for postcolonial state building – as a means for simultaneously resisting imperialism as well as claiming political autonomy.”Footnote 64 Sharia reflects indigenous values more closely than the Western values embodied by English institutions.Footnote 65 Faruqi emphasizes 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 with its massively successful appeal to hedonism, consumerism, and capitalism.”Footnote 66
The development of Islamic capital markets and the regulatory framework was driven substantially by state policy which, as reflected in the Capital Market Masterplan, encompassed economic objectives as well as the realization of Islamic values in Malaysia’s capital markets. The Capital Market Masterplan detailed strategies for Islamic capital market development, citing several economic objectives.Footnote 67 These included the need to remain competitive in the face of increasing global competition for capital and the need to revitalize Malaysia’s capital markets following the Asian financial crisis.Footnote 68 Islamic capital markets were highlighted as a niche market with potential for growth,Footnote 69 the Masterplan noting that Malaysia had in place the infrastructure required for their development.Footnote 70 The intention to position Malaysia as a key international provider of products and services which conform to Islamic principles was reflected in the following statement from the Masterplan:
Given these inherent strengths, Malaysia’s Islamic capital market—and indirectly, the overall capital market—would further benefit from a comprehensive strategic programme for enhancing its international competitive position. Taken in conjunction with the availability of an established market infrastructure and Islamic financial market within the country, coupled with the relatively nascent status of Islamic capital markets around the world compared to conventional markets, Malaysia is well positioned to be an international Islamic capital market centre. It is also well positioned to carve its position as one of the key players for providing Islamic capital market services and products.Footnote 71
The Masterplan set out the Securities Commission’s ten-year strategy for capital market development and served as a catalyst for growth of Malaysia’s Islamic capital markets. These policies were developed at the behest of the Minister of Finance and were endorsed by the state. The Securities Commission subsequently developed the sharia component of the regulatory framework for Islamic capital markets with the assistance of sharia experts.Footnote 72
Regulatory reformers have acknowledged the utility of borrowing from common law in developing a regulatory framework consistent with progressive Islamic ideals.Footnote 73 Existing capital markets have been premised on common-law regulation which has been developed in line with international regulatory standards.Footnote 74 Malaysia has been at the forefront of developments in the regulatory framework for Islamic finance and capital markets internationally,Footnote 75 drawing from the common-law regulatory framework, infusing Islamic values, and removing inconsistencies with Islamic principles where necessary.Footnote 76 Legislation has been enacted in an attempt to avoid jurisdictional conflicts with the common-law courts. The Capital Markets and Services Act 2007 states that, where sharia matters arise before the courts or arbitrators, these matters should be referred to the sharia authorities.Footnote 77 The rulings of the Shariah Advisory Council are binding on the courts and arbitrators.Footnote 78
5. THEORIES OF LEGAL DEVELOPMENT
Questions as to how and why law develops in particular ways have been central to several theories of legal development. Two broad categories of theories which examine the development of corporate law are theories of legal origin and theories of legal evolution. The legal origin theories assert the primacy of legal tradition in determining the way in which law evolves.Footnote 79 Theories of legal evolution emphasize law’s inextricable relation to its wider social, political, and economic context.Footnote 80
This article argues that the development of hybrid Islamic capital market regulation is inconsistent in several respects with the legal origin theories. The development of hybrid regulation, and in particular its sharia component, is arguably better explained by theories of legal evolution which assert the centrality of sociocultural, economic, and political influences in driving legal change. Interrelated political and economic influences provide a cogent explanation for the increasing significance of sharia and consequential hybridization of sharia and common law in the regulation of Malaysia’s Islamic capital markets. Subsection 5.1 examines theories of legal origin, while Subsection 5.2 considers the theories of legal evolution.
5.1 Legal Origin
Theories of legal origin centre on the primacy of legal tradition in driving legal development. Common-law and civil-law traditionsFootnote 81 are the focus of the legal origin theories. There are two strains of the legal origin thesis which differ on the strength of the legal origin effect and the mechanisms by which it operates. Proponents of the strong form thesis assert that legal originFootnote 82 has a powerful influence over the infrastructure of countries’ legal systems which persists over centuries.Footnote 83 Path dependence is thought to flow from the incorporation of distinctive institutions, beliefs, and ideologies into the legal and political infrastructure.Footnote 84 Differences in regulatory style are posited to affect the quality of investor protection which in turn influences financial outcomes.Footnote 85 The distinguishing characteristics of common law’s regulatory style arguably lie in its emphasis on private solutions and judicial independence.Footnote 86
The proponents of the strong form legal origin thesis, La Porta and his colleagues (“LLSV”), assert that English common-law countries have stronger shareholder protection and better financial outcomes than French civil-law countries.Footnote 87 The strong form legal origin theory has been influential on the policies of several international financial organizations,Footnote 88 such as the World Bank’s Doing Business.Footnote 89 Nevertheless, subsequent scholarship has questioned the veracity of LLSV’s claims and their underlying assumptions. Scholars have critiqued their description of legal families as “overstylized” and inaccurate.Footnote 90 Legal systems in many countries are influenced by more than one legal tradition.Footnote 91 Ramseyer cites examples of countries, such as Japan, which have borrowed from a number of legal systems across common- and civil-law traditions.Footnote 92 In observing the dearth of discussion on Southeast Asia in the law and finance literature, Harding remarks that legal families make little sense in this region, given their syncretic mix of customary law, Islamic law, and European law.Footnote 93
Criticisms have been levelled against LLSV’s methodsFootnote 94 which were premised on the quantitative measurement of the strength of law.Footnote 95 The time series studies by the Cambridge group sought to address some of the criticisms levelled at the methods which underpin the strong form thesis.Footnote 96 Their 35-year study of five countries found no distinct time-invariant differences between common-law and civil-law countries.Footnote 97 Hence, the time series studies refute LLSV’s claim that legal origins determine the strength of a country’s shareholder protection.Footnote 98 The time series studies have formed the basis for the development of the “weak form” legal origin hypothesisFootnote 99 which posits that the infrastructure of legal systems is more amenable to the influence of the economy than the strong form thesis claims. Armour et al. define the “legal infrastructure” as comprising:
The meta-level rules, norms and practices which determine, in a given national context, the mechanisms for law-making and dispute resolution, the competencies of legislatures and courts, and the conception of the role of government in the economy and society, among other things.Footnote 100
This broad concept of legal infrastructure extends beyond formal legal institutions, and acknowledges the influence of societal perceptions, norms, and practices on the legal system. Apart from legal origins, legal development may be affected by political, economic, and social institutions as well as forces towards convergence. Armour et al. posit that the co-evolution of legal institutions with economic and political institutions is more plausible than the one-directional influence flowing from the legal system to the economy.Footnote 101
The weak form thesis attributes path dependence in accordance with legal traditions to institutional complementarities.Footnote 102 The flow of ideas within legal families is facilitated primarily through “affinities of legal thought and language.”Footnote 103 Deakin et al. explain the differences between legal traditions by reference to historical influences.Footnote 104 Path dependence is viewed as an “efficient adaptation to the previously transplanted legal infrastructure.”Footnote 105
The weak form thesis perceives legal tradition as one of several influences on legal development.Footnote 106 Accordingly, legal origin is not posited to have a significant effect on economic outcomes. The influence of legal origin may at times be outweighed by other influences such as economic or political factors and forces towards transnational harmonization.Footnote 107 Nevertheless, the proposition that legal development may be influenced by interactions with economic or political factors is relatively nascent in the legal origin literature.Footnote 108 In contrast, theories of legal evolution centre on the interaction of law with economic, political, and sociocultural influences in shaping legal development.
5.2 Legal Evolution
The proposition that legal development is influenced by the political, economic, and sociocultural forces is premised on the interconnection of legal institutions with other institutions. Theories of legal evolution have been influenced by ideas which had origins in biological theories of evolution. While the early scholarship perceived processes of legal evolution as progressing towards a more advanced state, subsequent scholarship disputes assumptions of progression, emphasizing law’s adaptation to its environment.Footnote 109 Scholars such as Holmes assert that legal doctrines evolve to adapt to “the felt necessities of time.”Footnote 110 Legal development has been described as “a struggle for life among competing ideas,” culminating in the “survival of the strongest.”Footnote 111
Legal evolution has also been explained by reference to the memetic approach to the evolution of conceptual forms. The term “memes” applies to ideas or concepts and is analogous to genes in the social sphere.Footnote 112 In legal evolution, the memes or replicative units comprise legal concepts. Deakin posits that legal concepts embody “in shorthand form information about the social world which is filtered through the processes of legal argument and exposition.”Footnote 113 Legal concepts are replicated through communication. People involved in legal processes, judges, and law-makers are key agents in the transmission of memes.Footnote 114 Legal concepts are subject to natural selection through legal processes. Decisions as to whether to litigate or settle and interest group lobbying are examples of pressures on the selection process. In the memetic approach to legal evolution, natural selection facilitates adaptation to the social environment.
Like memetics, the theory of autopoiesis has its origins in biology and was subsequently extended to social systems.Footnote 115 Autopoietic social systems are self-referential and self-reproducing.Footnote 116 Communication is their primary mode of reproduction. The theory contemplates the existence of several social subsystems including political, economic, and legal subsystems. Each of these is “operationally closed.”Footnote 117 This means that their internal network is able to maintain the subsystem without reference to other social subsystems. Although operationally closed, the subsystems are “cognitively open.”Footnote 118 “Structural coupling” with the environment is thought to facilitate cognitive openness in the legal subsystem.Footnote 119 Hence, the legal subsystem is able to receive information from other subsystems in the context in which it operates. However, information from its context needs to be coded into legal language before it can be received into the legal subsystem.Footnote 120
As with memetics, legal rules are posited to co-evolve with their environment. Likewise, autopoietic theory concedes a degree of asynchronism between the legal system and its environment.Footnote 121 Teubner posits that the operational closure of autopoietic subsystems prevents them from responding directly to changes in the environment.Footnote 122 The processes of coding and decoding of information between subsystems contribute to the misalignment between social and legal norms. Some resonance in the memetic and autopoietic approaches is also evident in their perceptions of the role of legal concepts. Legal concepts play a vital role in the transmission of information and processes of replication and variation in both approaches. The role of legal concepts as memes is likened to that of codes in autopoietic theory.Footnote 123
Co-evolution with social, political, and economic institutions is thought to flow from the interconnection of legal institutions with other institutions. Scholars argue that the allocation of rights intrinsic to law inherently incorporates a specific ideological position on social or economic matters.Footnote 124 Law is perceived as being inextricably related to its wider context.Footnote 125 Harding asserts that, when Western legal systems are transplanted into Southeast Asia, they undergo a process of localization.Footnote 126 The legal systems interact with their contextual influences, forging their individual identities.
While scholars concede that the interaction between law and its contextual influences is central to legal evolution, there are differences in emphasis on the specific influences which drive legal change. A range of influences which include cultural values, historical experience, and political economy is thought to underpin the shape of law.Footnote 127 Deakin posits that there is a “powerful feedback loop” between the legal system and its environment.Footnote 128 Social norms are incorporated, at least to an extent, into the legal system. The legal system communicates information back to society in the form of legal norms, resulting in a mutual influence between law and its context.
Social norms and cultural values are thought to be among the key influences in legal evolution. North highlights the influence of “routines, customs, traditions and conventions” and their underlying cultural values in shaping the law.Footnote 129 Similarly, Holmes and Corbin underscore the effect of the community’s social norms on the development of law.Footnote 130 This resonates with Watson’s view that the people involved in legal processes are central to the processes of legal evolution.Footnote 131 Watson posits that the legal elite’s ideologies and familiarity with foreign systems invariably influence the character of law.
Other scholars assert the centrality of interrelations between political and economic institutions in the development of corporate law. Milhaupt and Pistor emphasize the role of the political elite, asserting that law is used instrumentally by the political elite to consolidate control over resources. They identify the demand for legal governance, propelled by changes in the political elite as the catalyst for legal change.Footnote 132 Political economy, or the power relations which affect economic outcomes,Footnote 133 is also thought to shape corporate law through corporate ownership structures. Corporate ownership structures affect the distribution of resources and, hence, the political power of interest groups. Political power over legal processes provides dominant interest groups with the opportunity to shape corporate law.Footnote 134 This, in turn, enables interest groups to reinforce their control over resources, consolidating their political influence. Kraakman et al. assert that “corporate law everywhere clearly reflects the institutional and political power of a country’s dominant corporate interests, whether they be banks, prominent families, investment funds, or unions.”Footnote 135
Like many East Asian economies, the Malaysian state has been actively involved in economic development and the corporate sector.Footnote 136 Wong’s analysis of legal development in Malaysia highlights the use of the legal framework and processes in implementing the state’s privatization policies.Footnote 137 Pistor and Wellons similarly emphasize the centrality of economic policy as a catalyst of legal change. Their study of legal development in six Asian economies underscores the role of law in facilitating the implementation of economic policy.Footnote 138
6. DISCUSSION
6.1 Limitations of the Legal Origin Theories
When examined against the development of hybrid Islamic capital market regulation, comprising common-law and sharia components, several limitations of the legal origins theories are apparent. First, the concept of legal tradition adopted by the legal origin theories is limited to Western legal traditions, and focuses on common-law and civil-law legal systems. The existence of sharia which predates the transplantation of Western legal systems through colonization is absent from the discussions. In addition, the assumption that legal systems may be categorized according to common-law or civil-law traditions fails to recognize the pluralism inherent in some countries’ legal systems. Such pluralism is exemplified in Malaysia’s parallel sharia and common-law systems.Footnote 139 Harding asserts that the diversity of legal systems in Southeast Asia defies any attempt at classification into legal families.Footnote 140 He describes Southeast Asian legal systems as pluralistic, syncretic blends of Western legal systems superimposed against a background of religious and customary law.
Second, the increasing influence of sharia in the Malaysian legal system is difficult to reconcile with the strong form legal origin hypothesis which posits that inherited legal tradition should have a powerful and persistent effect over legal development. The legal origin literature classifies Malaysia as a common-law country.Footnote 141 According to the strong form hypothesis, legal development in Malaysia should be path-dependent in accordance with the common-law tradition. The shift towards streamlining various aspects of Malaysian law with sharia principles and the hybridization apparent in Islamic capital market regulation are arguably inconsistent with the proposition of a powerful, time-invariant influence of common law on legal development.
Further, the hybrid regulation of Islamic capital markets incorporates a sharia component with a distinctly different regulatory style from that of common law. Proponents of the strong form thesis argue that the distinguishing characteristics of common law’s regulatory style lie in its emphasis on private solutions and judicial independence.Footnote 142 These characteristics are thought to facilitate the protection of private property from expropriation by the state.Footnote 143 They assert that civil-law systems are centred on policy implementation and tend toward extensive government ownership and regulation. As discussed, sharia regulation accords substantial authority to the interpretation of primary legal sources by Islamic scholarsFootnote 144 while judicial precedents are less significant. The growth of sharia and its influence on the common-law system suggests that the common-law regulatory style, with its distinctive institutions, beliefs, and ideologies, is probably not as deeply ingrained in Malaysia’s legal and political infrastructure as the strong form thesis asserts.
Proponents of the strong form thesis assert that common-law investor protection produces better financial outcomes than French civil law.Footnote 145 The Islamic capital market regulatory framework has its own version of investor protection based on Islamic conceptions of economics and ethics. These include prohibitions of interest or usury (riba) and excessive uncertainty (gharar). Strong growth in Islamic finance in recent years, comparable with conventional markets and at times outperforming them,Footnote 146 has raised questions as to the possibility of association between sharia’s investor protection and financial outcomes.Footnote 147 Further research is needed to better understand how Islamic finance fits in with the law and finance claims.
The weak form legal origin hypothesis attributes the influence of legal tradition to the “affinities of legal thought and language.”Footnote 148 Institutional complementarities are thought to facilitate a measure of path dependence.Footnote 149 The evolution of the sharia component of Islamic capital market regulation diverges from that of its common-law counterpart in this respect. Studies consistently indicate that Malaysian corporate law has continued to reflect the influence of common-law regulation and, in particular, UK and Australian law.Footnote 150 Transnational harmonization has also influenced the shape of law internationally and in Malaysia, suggesting a trend towards convergence with international standards.Footnote 151 While Malaysian reforms following the Asian financial crisis were influenced by transnational harmonization and the competition for capital, the Corporate Law Reform Committee looked primarily to other common-law countries’ regulation which was seen as embodying international standards.Footnote 152 UK and Australian law were often perceived as suitable models, leading to extensive borrowing from UK and Australian law, in line with Malaysia’s common-law origin.
A study of the evolution of Malaysian shareholder protection from 1965 to 2010 indicates substantial borrowing from UK and Australian shareholder protection consistent with the weak form hypothesis.Footnote 153 In particular, institutional complementarities, or, more specifically, the “affinities of legal thought and language,” account for the continued drawing from common-law regulation.Footnote 154 Scholars suggest that many of the Malaysian legal elite are familiar with common law as a result of their legal education in Britain and other common-law countries.Footnote 155 The tendency to emulate the laws of other common-law jurisdictions is attributed to Malaysia’s inheritance of the English common-law system and the legal elite’s familiarity with common law.Footnote 156 The English language is also widely used in the Malaysian legal system. Australian influence in the drafting of the first company legislation following independence is thought to have encouraged continued reference to Australian corporate law.Footnote 157
While the common-law component continues to reflect the influence of regulation from other common-law countries,Footnote 158 the increasingly significant sharia component represents a distinct shift away from common-law traditions. The analysis of hybrid regulation suggests that its sharia and common-law components have evolved along two separate and seemingly inconsistent trajectories. Familiarity with common law has not prevented the development of the sharia regulatory component with its distinctly different jurisprudence and regulatory style. Malaysia has led the development of Islamic capital market regulation despite its legal elite having been trained predominantly in common-law regulation. The growth of sharia in capital market regulation is part of a broader trend towards indigenizationFootnote 159 of the Malaysian legal system. Deference to sharia traditions and corresponding departure from familiar common-law traditions is reflected in the centrality of sharia scholars in framing the quasi-legislative guidelines for Islamic capital markets. Similarly, sharia’s influence on the common-law system is seen in the citation of Quranic verses by common-law judges.Footnote 160 Satkunasingam attributes the departure from familiar common-law traditions among Western educated judges to their adherence to Islamic values and sociopolitical considerations.Footnote 161 Shifting jurisdictional boundaries in favour of sharia and efforts to harmonize common law with sharia in specific areas of regulation further suggest that the influence of the common-law tradition on Malaysian legal development is limited.
The development of hybrid Islamic capital market regulation underscores the limitations of both strains of the legal origin thesis in explaining the shift towards sharia in the Malaysian legal system which has been dominated by the common-law system for over a century. Nevertheless, the weak form hypothesis acknowledges that other influences, such as economic and political factors, as well as transnational harmonization may at times have a stronger influence on legal development than legal origin. The proposition of co-evolution of law with economic and political influences in its contextFootnote 162 resonates with theories of legal evolution. Evidence suggests that the shift towards a greater role for sharia in the Malaysian legal system is better explained by reference to political, economic, and sociocultural influences. The interaction between law and these contextual influences has been explored in greater depth by reference to theories of legal evolution.
6.2 Legal Evolution: Sociocultural, Political, and Economic Influences
The emergence of a hybrid Islamic capital market regulatory framework reflects a distinct shift towards sharia and away from common-law influences. The strongest explanation for this shift lies in the interaction of law with sociocultural, political, and economic influences in the Malaysian context. The influence of sociocultural factors is seen in the centrality of Islam to the Malay identity. The sharia regulatory framework has developed in response to societal demands for consistency with the Islamic ethos. Sociocultural and religious values are, however, not monolithic in Malaysia’s multicultural society. There are different opinions among Muslims as to how sharia principles should be interpreted and integrated into the Malaysian legal system.Footnote 163 Nevertheless, Islam’s inextricable relation to the majority significantly contributes to the demand for legal institutions consistent with sharia.
Streamlining legal and economic institutions with Islamic principles provides a mandate for the state’s political economy in line with dominant social and religious values. The development of Islamic capital markets and their regulatory framework, in particular, provides a sanction for the capitalist economy which has substantially underpinned the state’s economic development. Having led the ruling coalition since independence, UMNO’s influence over legal processes resonates with claims of the relevance of political economy to the evolution of corporate law. Privatization policies in the decades prior to the development of Islamic capital markets fostered the state–business nexusFootnote 164 seen in its direct ownership and control of corporations through its investment arm, Khazanah Nasional,Footnote 165 and more indirectly through government-linked investment companies.Footnote 166 The relevance of corporate ownership structures to the development of corporate law is arguably reflected in the close links between the state and business.Footnote 167 State influence in shaping corporate law is seen in the development of Islamic capital market regulation as a direct result of the state’s economic planning.
The development of the Islamic capital market regulatory framework following the Capital Market Masterplan is also consistent with the suggestion of economic policy as a catalyst of legal change in East Asian countries.Footnote 168 As noted above, the Capital Market Masterplan cited economic objectives including the need to revitalize Malaysia’s capital markets in the face of increasing global competition. Islamic capital markets were perceived as a niche market which provided Malaysia with the opportunity to become a key player internationally.Footnote 169
Law reformers have sought to establish a globally competitive regulatory framework which reflects sharia principles. These aims are facilitated by the hybridization of the common-law regulatory framework, which embodies international standards, with sharia standards drawn from Islamic jurisprudence. The opinions of Islamic scholars on applicable sharia standards at times differ and, in this regard, the Islamic Financial Services BoardFootnote 170 serves to promote transnational harmonization. Law reformers’ aspirations include a level of efficiency at least comparable to that of secular law and acknowledge the utility of borrowing from secular law. Such borrowing is regarded as permissible as long as secular regulation does not conflict with Islamic principles.Footnote 171 Horowitz posits that the quest for authenticity has been central to Malaysian legal development. In his definition of authenticity, “a people must be able to see itself in its law.”Footnote 172 Hybrid regulation signalsFootnote 173 compliance with authentic Islamic values and progressive standards, facilitating the fulfilment of aspirations that Islamic capital markets should be a viable alternative to their conventional counterparts.
7. CONCLUSION
This article has sought to explain the development of hybrid Islamic capital market regulation, comprising sharia and common-law components, by reference to theories of legal origin and legal evolution. The analysis indicates that the sharia and common-law components have evolved along separate and seemingly inconsistent trajectories. While the common-law component continues to reflect the influence of legal origin, the shift away from the common-law regulatory style and jurisprudence is evident in the growth of sharia regulation. The latter suggests that the influence of the common-law tradition on Malaysian legal development is limited. Nevertheless, the weak form legal origin thesis acknowledges 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 emphasize the co-evolution of law with economic, political, and sociocultural influences in its context provide a stronger explanation for the development of the sharia component. Analysis of the context in which legal change has occurred indicates that the demand for corporate regulation consistent with sharia has been precipitated by sociocultural values and interrelated political and economic influences. The commitment to the Islamic ethos among Malaysia’s Muslim majority and political economy are likely explanations for the increasing significance of sharia in Malaysia’s capital market regulation.
A possible explanation 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, at the same time, be competitive. The hybrid regulatory framework builds on the country’s strengths of sharia proficiency and its common-law corporate regulations. Hybrid common-law and sharia regulations merge authentic Islamic values with international regulatory standards, presenting investors with a competitive alternative to Western institutions.
