Musharakah and its compatibility with the Malaysian legal and regulatory framework :an examination on the implementation of risk sharing

Abstract

Undoubtedly, justice forms an integral part of Shariah (Islamic law) and shall be observed in each of its domain including the commercial segment. This position, therefore, sets the idea of risk sharing at the heart of any business dealing with the profit motive since it manifests the notion of justice; the idea that is propagated by Shariah through the discourse of Maqasid AlShariah (the higher objectives of Shariah). In addition, the existence of the element of risk sharing is also essential in determining the validity of such a dealing and to justify the enrichment derived from it. In the Malaysian context, the initiative for strengthening the implementation of the idea of risk sharing has been demonstrated in various ways. One of these initiatives is the introduction of the Musharakah Mutanaqisah home financing as an alternative to the Bai Bi Thaman ‘Ajil (BBA) home financing. As an equity financing, it is expected that the product would be able to demonstrate such idea as opposed to what is entailed by the BBA home financing which rides on the concept of debt-based financing. This study examines the extent to which the existing legal and regulatory framework in Malaysia supports the implementation of risk sharing thus upholding the notion of justice by referring mainly to the Musharakah Mutanaqisah home financing. It argues that the said framework is not consistent with the purpose of the introduction of the Musharakah Mutanaqisah home financing as mentioned above ie to implement risk sharing as it identifies three main issues. The first issue is the characterisation given by the Musharakah Regulatory Policy of the Central Bank of Malaysia (BNM) to the product as Shirkah Al-Milk which inflicts two major problems ie inaccurate definition which leads to different consequences pertaining to the risk sharing requirement and negating the implementation of risk sharing. The second issue is the discrepancies between equity and debt financings as demonstrated by the Islamic Financial Services Act 2013 (IFSA 2013) and the Musharakah Regulatory Policy; debt financing defeats the idea of risk sharing and serves as a major setback to its advocacy. The third issue is the inability of the product to be recognised as a partnership from the legal standpoint (by virtue of the Partnership Act 1960, PA 1960) which infers the product is not an equity financing but a debt financing instead. The study proposes several further steps to be undertaken in the future to address these three issues as the way to move forward in order to ensure that Musharakah is able to demonstrate the idea of risk sharing and eventually upholding the justice as required by the Shariah.