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.

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

Stale News Hypothesis in Selected in FTSE/ASEAN 40 Stocks


This paper examines the influence wielded by social media buzz on stock market performances of selected stocks from several ASEAN stock exchanges. The advent of social media has changed the dynamics of information propagation and utilization in stock markets. Though information asymmetry still persists, current literature has only recently caught up with the dominant trend of social media eclipsing traditional media as a source of information. This is an issue of significant complexity and import for stock market actors. Employing a brand-new theoretical model of predicting impact of social media on asset prices—proposed by Jiao, Veiga and Walther—this study gauges the performances of stocks with active social media coverage for a month and finds abnormally high trading volume and volatility in the ensuing month. Though these findings are statistically significant in confirming stale news hypothesis by Tetlock (2011), this study is the first empirical application of Jiao et al.’s model. Therefore, after discussing the implications of these findings, this paper highlights the need for more replication studies to help develop a social-media related theory on asset prices and how this affects regulators’ responsibility of ensuring fair dissemination of information.

Factors Inhibiting Adoption of Green Investment: Evidence from Malaysia


Despite the surge of ethical and ecologically tenable green investing and banking alternatives worldwide, such options are yet to proliferate in frontier markets such as Asia. This green industry—if it can be called one—is still in an embryonic stage. Though prominent financial institutions like merchant banks and mutual funds have pledged to operate and invest in a green environment, the adoption rate is still painfully slow. Like most nascent products, the green investment industry still confronts challenges to generate enough interest to grow and stay competitive to the conventional counterparts. This study attempts to investigate the constraining factors which stifle the growth of the green investment industry from a Malaysian perspective. In addition, this study attempts to find ways on how they can increase their market share locally. To attain this objective primary data was collected through survey method in Selangor region. Upon analysis, we found that product awareness is positive and significantly determined the selection of green banking and investment products while rate of return negatively determined the customers’ selection. Hence, customers need to be made more aware of the existence and the philosophy behind such investment products before they choose to opt for it. In addition, rate of return appears to have a weak connection to customers’ preference towards green investment products. It is expected that this study would furnish ideas to the proponents of green philosophy and campaigners of sustainable practices on how to generate more interest in investing in sustainable and earth-friendly economic practitioners.

Raising a Bias-Proof Generation: Advocating Reform in Malaysian Business School Curriculum in Light of Advances in Behavioral-Neuro Economics and Finance


Unbeknownst to us, we(humans) possess biases and idiosyncratic interpretations that shape our judgments and ideals. Ergo, humans take for granted that other social participants will appreciate their judgments. When this preconceived notion is betrayed by reality, people’s certitude of objectivity forces them to perceive others as biased or unfair. Such cognitive biases can prove costly in hands of individuals at a micro-level and decision-makers at a macro-level. Recent global financial crises indicate that even regulators and policy-makers aren’t immune from self-serving biases that downplay own dispositional biases. If and when left unchecked, cognitive biases threaten a huge waste of efforts and economic resources. At this juncture of 21st century, overwhelming empirical and theoretical literature underscore the deviation of financial markets and human decision making process from the basic assumptions underlying traditional economics finance paradigm that has pervaded since the mid-1900s. Ranging from applying bounded rationality to economic models to Kahneman’s application of prospect theory to economics and financial markets, designers of business school curricula have now access to a smörgåsbord of literature addressing the inescapable issue of cognitive biases. Specifically, for economics and finance professors, this distinction of cognitive (in)coherences and their recognition should be inculcated subliminally in introductory 1st year level courses, and later on progressively through purposive behavioral-neuro economics/finance courses. In this paper, we argue that such bias-proofing redesign promises aiding students in superior decision making, assessing risk, and minimizing biases. After surveying the curricular praxis in Malaysian business schools, we draw attention to the attractive adaptive market hypothesis (AMH), which promises an exciting infusion of the legacy of EMH model, bounded rationality, evolutionary biology, neuroscience and psychology. This article is a plea for reform in light of nascent advances in behavioral/neuro economics and finance.