Legal and Practical Issues with Hire Purchase Financing Products Based on Sharikah al-Milk

Undergoing Revision at Arab Law Quarterly

Keywords: Sharikah al-Milk; Hire Purchase Financing; Islamic Finance Instrument; Legal Issues


Since its inception in the 1960s, realization in 1970s, growth in 1980s, and proliferation
in 1990s, the Islamic banking and financial industry has been experimenting with a
range of financial instruments based on contracts, principles, and precedents of
Shari’ah. Bulk of these involve customizing classical Islamic transactions and refitting
them into conventional-esque products. The Islamic equivalent of hire-purchase is one
such innovation. More specifically, this paper focuses on the legalistic, juristic, and
practical issues surrounding hire purchase through Sharikah al-Milk (HPSM), an i-hirepurchase instrument which employs three contracts consecutively: lease, sale, and
partnership. Essentially spawned as a competitor to the hire-purchase conventional
products, HPSM products have been successful in attracting consumer attention
worldwide. Despite being a marketing success, legal issues persist with this product,
such as conjoining multiple contracts into one, legal status of a wa’ad (promise),
conflation of gift as a sale contract, conditional sales’ validity, etc.

Magnet Effect of Price Limits: Evidence from 150 Active Stocks in Bursa Malaysia

Since the late 1980s it has become a common practice worldwide—especially in frontier markets—to impose circuit breakers on stock prices, effectively stunting its intraday growth or decline beyond a certain bracket. Ostensibly, its purport is to prevent investor overreaction, regulatory control of market micro-structure, prevention of crash, and to smoothen excessive volatility. The most ubiquitous form of circuit breaker is price limit, which is used in equity and futures markets. The ranges of existing price limits vary geographically and from exchange to exchange. Academics and regulators have divergent opinions on application of circuit breakers and its resultant positive or negative effects. A lot of academic studies claim circuit breakers have the opposite of intended effects—i.e. they result in attracting prices to the limits by their very existence and thus defeating the volatility tempering objective. Utilizing Historical daily price from 1994 till 2017 in Bursa Malaysia, we employ a probabilistic regression approach to check whether magnet effect exists. Having divided the study period into 3 distinct regimes based on regulatory limit mechanisms, we find evidence of strong magnet effect in Bursa Malaysia throughout the periods, with heightened magnet effect between 2002 and 2013. Also, for all sample regimes, we find magnet effect more pronounced in bullish scenarios compared to bearish ones.

Presently under review at Global Business Review

Circuit Breaker Research

My Doctoral dissertation is a compendium of essays pertaining to  an oft-implemented intervening instrument in financial market microstructure: circuit breakers. Inspired by electrical engineering use of a fuse to prevent damage to a circuit by current overflow, financial regulators and exchanges, since late 1980s, began employing mandated collars to prevent price fluctuation beyond a bracket deemed reasonable. This practice, though widespread in equity and futures markets, is controversial. Proponents claim it endows a propitious time-out when asset (or market) prices are stressed and persuades traders to make rational trading decisions. Opponents demur its potency, castigating it a barrier to laissez-faire price discovery process. Due to conflicting empirical evidences, difficulty in measuring counterfactuals, and a host of statistical methodological constraints, financial economists and industry experts are forked in their views regarding circuit breakers’ efficacy. Nonetheless, the practice is a clear favorite among exchanges and regulators, as substantiated by the staggering pace of adoption since the mid-1990s and nigh-zero evidence of an exchange abandoning it altogether. The last few remaining major bastions of anti-circuit breakers too have recently succumbed to the cry for greater regulation; case in point: Singapore Stock Exchange (SGX) and Australian Stock Exchange (ASX). In academia, meanwhile, the topic shows patterns of seasonality. Empirical works examining performances of regulatory rationales, such as deterring volatility, enhancing price discovery, interferences in trading, and a self-fulfilling gravitational pull (dubbed the magnet effect) seem to mushroom soon after headline-grabbing financial crises or flash crashes (as in May 2010 in the US). In fact, theoretical work in the field stagnated in the late 1990s, as empirical works to test them were difficult to undertake due to lack frameworks, acute paucity of data, and failure to address statistical constraints. The 2000s witnessed a slew of empirical works, mostly from the pacific basin markets, as time-series datasets became more accessible. Though Asian markets such as Korea, Taiwan, Tokyo, Shanghai, and Shenzen dominate the studies with mixed results, the only study undertaken in Malaysian market by Chan et al. (2005) found evidence of deterioration in market quality, using transaction data from 1995. Since then, KLSE has become BM, trading platforms and environments have grown sophisticated, and circuit breaker regime in the bourse has undergone multiple tweaks. Despite the changes, the limit of ±30% is intact since 1989, albeit with some qualifications. 

The Malaysian praxis is rather confounding for following reasons:

  • most exchanges prefer a very tight collar
  • many exchanges experiment with the limit in tranquil times, presumably in quest of an optimal collar
  • advanced exchanges commission studies corroborating the efficacy of the proposed regime and make the results known
  • most exchanges play with the circuit breaker around market crash periods to forestall the crash or reinforce traders’ confidence.

Somehow, Bursa Malaysia did none for nearly 3 decades, inviting us to question:

Does the price limit in Malaysia really work in achieving its professed objectives?

Is ±30% really the sweet spot? If so, why does everyone else prefer a tighter band?

My dissertation attempts to quench these queries. The corresponding pursuits-essaywise-are as follows:

In this essay, I delve into a synthesis of research, global and regional practices of circuit breakers and its many sub-variants, regulatory rationale, and methodological impediments to finding defensible answers to the regulatory incredulity of academic findings. 

In this essay, I use historical daily data from 1994 to test major hypotheses in the field: volatility spillover, trading interference, and price discovery. However, the approach isn’t the run-of-the-mill before-after event study. Instead, the whole sample period is bifurcated according to calm and crisis periods. After all, the purport of circuit breakers is to prevent crashes, and their efficacy is tested the most in turbulence. The results are mixed to varying degrees of statistical robustness with no clear indication of improvement in stopping volatility to spill over the subsequent trading days, delay in emergence of equilibrium price, or interference in trading. 

This essay utilizes proprietary high-frequency intraday data from January 2015 to August 2017 to examine existence of magnet effect and finds lack of evidence supporting the magnet effect hypothesis for majority of limit-triggered stocks. 

Lastly, the overall performance of different circuit breaker regimes in promoting efficient pricing via random walk is examined for affected stocks through a battery of parametric and nonparametric tests. The evidences favor the regulatory practice and indicate a liberal band corresponds with propensity for greater random walk. 

The results, overall, appear to vindicate Bursa Malaysia’s choice of circuit breaker and its nuanced praxis, contrary to earlier findings. The results are thus far preliminary and further tests are on-going to ensure rigor. A fair matrix of conslidated findings will be updated here once results are double-checked. Also, policy implications will be expounded upon both from local, ASEAN, and global perspectives.

Price Discovery

Essay 2
  • Upper limits: mostly no
  • Lower limits: mostly no

Trade Interference

Essay 2
  • Upper limit: mostly no
  • Lower limit: mostly no
  • Crisis-prone

Magnet Effect

Essay 3
  • Upper limit: moderate magnet effect
  • Lower limit: moderate to high magnet effect
  • Vortex zone: 7-10 ticks or 19-23% Δprice

Random Walk

Essay 4
  • Upper limit: mostly no
  • Lower limit: mostly no
  • Subpar performance in bearish markets
  • Limit-triggered stocks outperform the broad market in following a random path

On IMF Debt and Capital Control: Evidence from Malaysia, Thailand, Indonesia, the Philippines and South Korea


The Asian financial crisis was a time of financial catastrophe that grasped quite a bit of East Asia starting in July 1997 and raised reasons for alarm of an overall economic emergency. This study investigates the effects of capital control and external debts during the 1997 financial crisis, and whether a country should impose capital control or opt for external debt to recuperate from the crisis. Utilizing system estimation approach, an econometric model is devised by employing panel data for Malaysia, Thailand, Indonesia, the Philippines and South Korea over the period from 1990 to 2000. Our findings suggest that on average the ASEAN economies choosing external debt perform better in achieving greater economic growth and rebounding compared to economies that imposed capital control.

Implied Volatility in Singaporean Structured Warrants (2014-2015)


Options traders regard implied volatility a vital variable to determine profitability in options trading and use it to estimate the underlying stock’s volatility in the future. While it cannot predict market direction, it has a reputation for forecasting — to a certain extent — potential for large swings by the underlying stock. Once implied volatility is calculated, traders can estimate how high and low the stock can swing by the option’s expiration, and this probable estimation aids in making informed trading decisions. In this paper, we examine the information content of implied volatility of structured warrants in Singapore Stock Exchange (SGX). Using a daily dataset for 252 trading days for a period between August 1, 2014 and July 31, 2015, we test whether implied volatility is an unbiased estimate of realized volatility, if implied volatility contains information on future realized volatility, scrutinize the efficiency of implied volatility and its predictive power compared to historical volatility. Our findings suggest that for although implied volatility does contain some relevant information about future volatility, it is a biased forecast of realized volatility, the efficiency threshold of implied volatility is nugatory, and its predictive power is not superior to historical volatility.


Co-authored with Ismail, Najmi and Mohamad, Azhar

Under review for the 29th Asian Finance Association        Conference, 2017.