The Islamic Stock Exchange
Dr Saad Al-Harran
Dr. Al Harran is an international Business Consultant.
He is the Managing Director of Global Horizon Limited, a New Zealand-based company.
Contact : Fax: +64 3 3831451
Email: salharran@hotmail.com
IN
THE CONTEMPORARY corporate world, the stock
exchange plays an important role as financial intermediary between those who
have surplus funds, and those who need the money. The former are the investors
while the latter are the entrepreneurs. Therefore, the stock exchange is
playing the role of a middleman or intermediary between these two parties. The
Kuala Lumpur Stock Exchange (KLSE) is an organized market, and the two parties
have to pay transaction costs for the services provided.
This
chapter intends to
1. Analyse the current practices at the KLSE as a financial
intermediary and identify the main beneficiaries;
2. Investigate whether Islam can bring an alternative to the
current practices to create a healthy and conducive environment to the stock
exchange; and
3. Propose the establishing of a small Islamic stock exchange
(SISE) to cater for the needs of small-and medium-sized enterprise to enable
them to raise funds for business expansion.
The
KLSE is divided into two boards, namely, the Main Board and the Second Board.
For the former, the requirement for a company to be listed is a minimum of RM20
million while for the later it is between RM5-20 million.
We
must question whether this division of two main boards serve the needs of
small-and medium-sized enterprises (SMEs) with less
than RM5 million, whose main objectives are to raise funds (through KLSE) to
expand their businesses. As far as we can see, the mechanism prevailing at the
stock exchange does not only help the rich get richer but also make corporations
bigger, more powerful, and monopolizing the wealth of the nation. Such
practices, if not rectified by the relevant government authorities will sooner
or latter make the stock exchange more alien to the society rather than part of
it. This fact enhances the argument that we are indeed living in a world of
unfairness and injustice: the world of the giant corporations where the
"bigger fishes swallow the smaller ones."
In
the KLSE, there are also two main players, namely, the genuine investors and the
inside traders. For the former, the main reason for their involvement in the
stock exchange is simply either to raise funds for business expansion or to
make quick profits. Therefore, the investors have to work harder and study the
macro-economic fundamentals as their starting point. They have to analyse the
various factors that will affect their investment decisions at the second
stage. These factors are unemployment rate, inflation, business cycle, rate of
growth, interest rates, etc. Once a thorough assessment has been made (by
themselves or by their investment consultants) on the macro-economic
fundamental, the second stage starts: analysing the micro fundamentals of the
chosen companies among which are, their growth rates and past records,
dividends, sales turnover, profitability and other financial ratios.
For
the latter (the inside traders), they are known to spread rumours in the stock
exchanges. This kind of people ;usually do not work
hard compared with their counterparts (the genuine investors). Their main
objective is to make a fortune over a short period at the expense of others.
They would release false information and cause panic to the whole stock
exchange, and more specifically, to the genuine investors, to make them quickly
sell off their shares. Moreover, we suspect that these rumours are usually
started by some of the big corporations in the stock exchange to manipulate the
market and force the genuine investors to go out of the stock market forever.
Many investors think that the inside traders are a group of people who will be
able to buy the shares at a bargain price at the expense of the investors. This
is why large number of investors refuse to raise funds from the stock exchange
(perhaps also for moral and ethical reasons) for business expansion while
others feel that current stock exchanges are becoming more like casinos or
gambling dens, and according to their beliefs and ethics, such practices are
unlawful and should be avoided. Ironically, such a practise does not only
prevail at KLSE but also in other stock exchanges (like the New York Stock
Exchange) all over the world. It is indeed based on speculations and
manipulations (internal and external factors) rather than economic and
financial fundamentals.
The
question should be asked: should we continue to have such unfair practices in
the stock exchange where few are monopolizing the wealth of the nation at the
expense of the others? Or is it the right time for the
policymakers in the corporate sector to restructure the stock exchange by
bringing changes and introducing new rules and regulations to safeguard the
small investors and entrepreneurs. If such changes were introduced and
enforced (by the relevant authorities) they will undoubtedly create a healthy
environment for the whole financial market to exist. For the small investors,
it will bring new hope and they will again be keen to be active players in the
stock exchange either in buying or selling shares or by raising funds for
business expansion.
An Islamic Alternative
Islam
as a way of life can bring an alternative and create a healthy environment to
the stock exchange. The most fundamental teaching that Islam advocates in any
financial transactions is "you should not do harm to others while others
should not do harm to you."
At
the macro level, this dynamic concept has its own grass-root Islamic
foundation. It is based on ethical and moral values rather than materialism. It
is focused on the role of man in the society as vicegerents (khilafah) of God (the main Creator and the real
owner of wealth and natural resources of the universe) on earth. God has given
man the responsibility to test him; the life we are in is indeed a test by God
to mankind. Everything in life is planned and well monitored by the Creator,
and man will be a accountable for his deeds and
actions he has made in this life. According to Chapra,
God-given resources are indeed a trust and it should achieve the following
objectives:
a. The resources are for the benefit of all, not just a few.
They must be utilized equitably for the well-being of all.
b. Everyone must acquire resources rightfully and in accordance
to the Quran and the Sunnah.
c. No one is authorize to destroy or
waste the resources that God has given. To do so is equated by the Quran to the spreading of fasad
(mischief and corruption) which God abhors.
If
man fully understands the real message of Islam in life, he will live
peacefully and in harmony with others based on the universal brotherhood.
Prophet
Mohammad (May the peace and blessing of God be on him) said: "All human
beings are dependents of God and the most beloved of them before Him are those
who are best to His dependents."
He
should be honest in dealing with others (realizing that God is monitoring him
and there will be accountability afterwards) especially in any financial
transaction. His main mission in life is hard work, responsibility, time
management and sharing and caring for others. This is why Islam has given
importance to the concept of universal brotherhood which implies unity,
co-operation and co-ordination rather than hatred, selfishness and greed which
is prevailing in the conventional corporate world.
Islam
encourages people to compete with each other in every aspect of life-in
business and commerce, education and research and development--to help develop
a solid and healthy society. Competitions raises
efficiency and helps promote human well-being, the overall objective of Islam. A society of trust, moral and ethical values. Undoubtedly,
for investors, an improvement in the quality of production means that they will
have a market for their product not only for the local but also foreign market
to sell their products. Ultimately, the consumers (who are the main target)
will benefit, so does the society as a whole. Therefore, competition will
create a healthy environment and encourage the investors and entrepreneurs to
work harder to have a market for their products.
This
is why Islam is in favour of competition and against monopoly. The latter can
bring harm to mankind and to the society as a whole. The resources will be
wasted and he used unproductively and ultimately it will be monopolized and
controlled by a few hands at the expense of others. Monopoly usually means selfishness,
greediness, and oversized institutions. This is why Islam advocates the
concepts of "small is beautiful." If the small business is well
managed, closely monitored and followed up, it can bring benefit to the
society. Once these entrepreneurs are motivated through partnership financing
they will work harder and improve their standard of living. They have a mission
in life, the first and foremost, being to seek the pleasure of the Creator (who
has given them the opportunities and the responsibilities) and to bring
happiness not only to their families but also to other people and prosperity to
the whole society. These investors (or entrepreneurs) are keen to be bigger and
their main objectives are maximization of social benefit rather than
maximization of the profit.
In
Islam, savers and investors are considered as one body. Once a viable project
is submitted to them (for financing) by an Islamic investment company (IIC),
who will identify and select the projects based on economic and financial
merits, the savers will automatically become the investors of those projects.
This dynamic formula explains why Islam encourages us to go for partnership
financing and venture capital. It is a challenge, and life without it is indeed
meaningless. Muslims should face the challenge to survive in the new economic
order set in a world of injustice, exploitations, and hatred between those that
have and those that have not. Therefore, Islam has advocated planning for
long-term financing for the development of human beings rather than short-term
gains to please only some of the rich.
Such
a long-term mission will require the need to establish an Islamic consultancy
house (ICH) to cater for the needs of the development of human resources. The
strategy of the ICH relates to firstly, identification of the interrelated
functions that should be performed in a certain sequential order for an
effective and efficient promotional role; secondly, a mechanism for making
effective decisions; and thirdly, the institutional machinery required to
perform the various functions identified.
The
ICH identifies the interrelated functions essential for its promotional role as
follows:
a.
Identification and selection of the project;
b.
Preparation of the preliminary feasibility study;
c.
Identification of entrepreneurs to undertake these projects;
d.
Provision of training to potential entrepreneurs;
e.
Preparation of detailed project reports;
f.
Provision of technical and financial assistance for projects ready for
implementation;
g.
Monitoring and following up of projects;
h.
Managerial and technical assistance for operating enterprises with problems;
and
I.
Technical appraisal of projects requiring future financial assistance.
Once
a viable and feasible project has been identified by a competent Islamic
practitioner (or the ICH), based on economic and financial merits, it can be
sold directly to the savers (who will be automatically investors) without any
intermediary. A profitable project with a high rate of return will
automatically find its market in the corporate sector
(through the computer networks and information technology) without any
financial intermediary.
From
the above analysis, one can say that in Islamic economics, the financial
intermediation will have a limited role to play in the society. Through
financial intermediary, transaction costs will ultimately be paid by the
society and the cost of capital will be expensive for many small entrepreneurs
who want to start their venture capital. The current economic and financial crisis in the Western world have undoubtedly demonstrated
that in the age of recession many small entrepreneurs cannot survive and they
have to close down their workshops and factories. Such persistent economic and
financial problems will have an adverse affect on the society as a whole. The
main causes for such a situation are transaction costs and interest rates.
These people in the corporate world cannot grow simply because they cannot
provide the collateral to the financial intermediaries (like the banks and
other financial institutions).
Proposed Establishment of a
Small Islamic Stock Exchange
From
the above analyses, we are of the opinion that the policymakers in the
government as well as corporate sector should study the proposal of
establishing a small Islamic stock exchange (SISE) to cater for the needs of
those small companies with smaller amounts of market capitalization
requirement. Such a proposal is in line with the leadership Vision 2020 to
promote the SMEs and make them more competitive and
efficient. This proposal of establishing a SISE goes in line with Islamic
principle where monopoly is prohibited and competition from all parties are
encouraged. It is also important for the relevant authorities to set up a
Securities Exchange Commission (SEC) to regulate the market so that a healthy
environment will be created so that the "bigger fishes will not swallow
the smaller ones." Therefore, the government should consider the following
steps.
First,
It should impose very strict rules and regulations
concerning speculation generated by rumours. Those who buy shares,
must retain it at least for six months before they can sell them, and if they
do sell those shares before the due time, higher tax or levy would be imposed
on them. This will gradually reduce the role of rumours in the stock exchange.
Recently, it was revealed that a few people were caught for this act in the
Union Paper Holding short-selling scandal. According to Islamic values a person
is not allowed to sell something which he does not possess. It is indeed
unlawful and unethical to do such a thing.
And
second, to reduce the role of the stock exchange as the financial intermediary
between the investors and the entrepreneurs. For an entrepreneur to mobilize
funds, computer networking and information technology can bring the two parties
together without any intermediary. The new formula will be partnership
financing between the investors on the one hand, and the entrepreneurs on the
other. The transaction costs will be removed an the
profit and loss sharing will be introduced as an alternative. We cannot deny
that partnership financing will bring stability not only to the financial
sector but to the whole economy. This new formula of business enterprise known
as partnership will forgo the role of the stock exchange as a financial
intermediary, and can benefit not only the new parties but also the whole
nation.
Conclusion
Islam
is not against speculation if it is made by genuine investors who have worked
hard and analysed the macro-and micro-economic and financial fundamentals, and
therefore have the right to speculate once the environment at the stock
exchange is conducive to do so. On the contrary, what Islam is against is
insider trading and the role of rumours, whose main interests are to manipulate
the market and force their counterparts (the genuine investors) to sell of
their shares at lower prices, Islam categorically
condemns that, because such actions will undoubtedly bring harm to others and
to the society as a whole.
Islam
has clearly emphasized that for any financial transaction between two parties
or more, a person should not do harm to others while others should not do harm
to him. It is for the policymakers to examine the above proposal to promote the
SMEs and make them competitive and efficient to
achieve Vision 2020.
References:
1. The views expressed in this paper are entirely mine and should not be taken to represent any official views or policies of any organization.
2. M.U. Chapra, Islam and the Economic Challenge, The Islamic Foundation and the International Institute of Islamic Thought, London, 1992, p.207.
3. Quran 2: 205
4. Saad Al-Harran, Islamic Foinance: Partnership Financing, Pelanduk Publications, Petaling Jaya, 1992, p.337.