The global growth and development of Shari’ah compliant financial products has been more pronounced in the last three decades, when several countries already had established laws and regulations governing finance and securities.
The materialization of variety of capital market products, compounded by progression of market activity, not confined to the traditional jurisdictions in Asia and the Middle East and the development and advancement of technology has led to global trade in Shari’ah compliant products not limited by the geographical boundaries, whereas New Zealand has laws governing investment and finance, what are the implications of Islamic finance for securities law in New Zealand? Furthermore how has the development of Shari’ah compliant financial products occurred in New Zealand and what is the regulatory treatment of these products?
Introduction Islamic capital securities and Shari’ah compliant products, which were previously predominantly viewed as a preserve of Middle East and East Asia, has received geographical expansion beyond the traditional spheres of activity. The global impacts of Shari’ah compliant products resulted to the recognition of such products, hence International Organization of Securities Commissions hence creating Islamic Capital Market Task Force to access the compatibility of IOSCO? s core principles with the products and practices of Islamic finance.
The securities of several countries were created and implemented before the global recognition of Islamic laws concerning finance and securities. In New Zealand, several laws which govern securities were implemented long before IOSCO’s creation and recognition of Islamic Capital Market Task Force, these laws include The Securities Act 1978, Securities Regulations 1983, The Securities Markets Act 1988, Securities Act (Contributory Mortgage) Regulations 1988, Financial Reporting Act 1993, Securities (Fees) Regulations 1998 and the Securities Markets (Fees) Regulations 2003.
The growth of compliant financial services as experienced global growth and several measurement metrics have been recognised, such as FTSE Global Islamic Index Series, Global Dow Jones Islamic Market Index , FTSE Shari’ahh Global Equity Index , Bursa Malaysia Hijrah Shari’ahh and EMAS Shari’ahh indices, FTSE SET Shari’ahh Index, FTSE SGX Shari’ahh Index Series and the FTSE SGX Shari’ah Index Series which on critical analysis reveals that the global performance of Shari’ah compliant financial services has been on the positive trend, however New Zealand does not have Islamic compliant Series and as such, whereas the laws have been amended and changed several times, the global influence of Shari’ah compliant products is bound to have adverse impacts on the securities law in New Zealand.
Literature Review The Islamic finance sectors in terms of Shari’ah compliance incorporate diverse spectrum of financial services such as securities, banking, insurance, non-bank monetary arbitration and capital markets where these products are influenced by the common Shari’ah legal maxim where any action is permitted unless expressible prohibited by law
According to El-Hawary, Grais & Iqbal the growth of Islamic finance in the 1980’s and 1990’s involved mainly the augmentation of banking and trade-related financing activities. The Islamic finance sector is a product of Shari’ah laws, which are founded on Qur’an, Ahadith , Ijma, Qiyas, and Ijtihad, the laws however traverse the Islamic way of life in entirety, where associated influence of rules, laws and interpretations of Shari’ah is demonstrated in the religious, cultural, social, political and communal aspects of Muslims. According to Muhammad Ashraf , the convergence of the country’s regulatory laws, and the Shari’ah compliancy should be based on the principle of concordare leges legibus est optims interpretandi modus which dictates that the best mode of interpreting laws is to make laws agree with laws.
New Zealand being a member of International Organization of Securities Commissions (IOSCO) which mandated the formation of an Islamic Capital Market Task Force (ICMTF) is envisioned to embrace fully and conform with international defined standards of Shari’ah compliancy, however the Securities Act 1978, which regulates primary markets in New Zealand forms a basis of regulation, Securities Markets Act 1988 regulates secondary markets, furthermore there exists legislations that impact on securities such as Unit Trusts Act 1960, Financial Reporting Act 1993, KiwiSaver Act 2006, and Companies Act 1993, these acts come in force before the prominence of Shari’ah compliant financial products.
Mansoor H Khan , and argues that the implications of Islamic finance on laws are a challenge based on divergence of Islamic banking courts and conventional court systems, where disputed cases of the Islamic banks are subjected conventional legal system while in essence the nature of the legal system of Islam differs, he further argues existing laws, are repugnant to injunctions of Islam, yet they are expected to promulgate Shari’ah compliant legal cases and products.
This supports the argument by Yong-Jae Chang , and Jun-Hee Choi , where existent laws are identified as inhibitors to development of Shari’ah compliant products, and advocates amendment of existing laws since Islamic banking resembles universal banking, consequently, laws and regulations need to be amended accordingly to provision for the universal approach, this complies with Securities Act 1978, which grants the Securities Commission leeway to co-operate with similar bodies overseas. The connotation of Islamic finance are disposed by the Shari’ah laws governing finance and investment, which are bound to have influence is the principle of materiality where financial transactions should bear material in terms of actual monetary transaction.
In this case Shari’ah compliancy in terms of financial reward achievement is based on musharaka, in terms of joint ventures, where risks and financial results are shared by the contributing partners and mudaraba centred on trust financing where the outcome of business venture is shared by capital contributor and the managing partner. Shari’ah laws also prohibits predetermined interest rate, referred as riba or usury set ex ante, in this regard banks are disallowed from charging additional interests, which do not equally benefit the client, consideration of New Zealand laws, Securities Markets Act 1988 , requires brokers and investment advisers offer customers written disclosure statement and forbids market manipulation, hence agreeing with Shari’ah.
With the principle of risk-sharing, the finance provider as well as the loaned party share risks, in exchange of profits and losses, the attractiveness of such arrangement has enhanced the growth of Shari’ah compliant especially to risk averse investors, regulations however have to be modified to suit such an arrangement. The Securities Act 1978 & Securities Regulations 1983 allows clients to cancel allotment of security midterm as a result of misleading information, on the Islamic perspective, Shari’ah dictates murabaha (mark-up financing), which occurs in terms of Basic Murabaha, Commodity Murabaha and Reverse Murabaha in which a financing institution buys products for a client and sells them on on a deferred basis, adding an agreed profit margin , however the agreement can be cancelled midterm, this conforms with existing laws on securities and can foster development of Shari’ah compliant products.
Ijara which governs operating Lease and Ijara wa Iqtina which governs finance Lease are also products which demand less amendment of existing laws, since they are modelled on conventional sale agreements where the financial institutions acquire assets and leases them to a customer who may purchase the said assets at a later date, this is also exhibited in Diminishing Musharaka. On contrast however, qard hassana which prohibits charging interest on loans and bai’salam or bai’salaf is based on delivery or the purchased commodity, are different from the conventionally accepted principles of financial institutions which are geared towards achieving profits by charging interests.
According to IOSCO report, Shari’ah law prohibits gharar or improbability or speculation, in actual sense however, financial markets are laden with vibrant and fickle behavior, whereas Shari’ah principle states that complete disclosure of information is a requisite and disallows indiscretion of information in a contract, while allowing improbability with controllable on the society, in New Zealand, the Financial Reporting Act 1993 , agrees with the Shari’ah laws and further defines the terms of compliance by defining the punitive measures against truant financial institutions.
Conclusion The global pace of market development hint on interest to offer Shari’ahh compliant financial products by financial institutions globally, the fact that regulatory bodies such as International Organization Of Securities Commissions distinguishes these products means that global recognition and regulation of Islamic finance is eminent, with collaboration, information exchange and thematic work by financial institutions globally, New Zealand financial institutions will be compelled to offer Shari’ah compliant products, in essence this shall contribute to altering of the country’s laws to accommodate the new product.