INVESTMENT POLICIES IN ASEAN ISLAMIC COUNTRIES :

LEARNING FROM INDONESIA MALAYSIA AND BRUNEI

INTERNATIONAL SEMINAR “INVESTMENT POLICIES IN ASEAN ISLAMIC COUNTRIES” ,

UNIVERSITY THAI CHAMBER OF COMMERCE , BANGKOK THAILAND APRIL 24 2014

Dr Mukti Fajar ND SH., M.Hum Associate Professor, School of Law

University of Muhammadiyah Yogyakarta, Director of The Center for Law and Social Welfare Studies

University of Muhammadiyah Yogyakarta

Introduction Facing the upcoming 2015, ASEAN countries have been preparing

their self to face the ASEAN Economic Community Each country is doing their best preparing their both internal and

external aspects Internal aspect including the preparation of their superior national

products and services, as well as preparing for the supported policies and economic-related administration procedures.

The external aspect is covering the inter-country survey process to study other’s countries economic situation, such as ; government policies, political situation, as well as socio-cultural factors , including religion and faith

This paper will be more focused on a review in the relationship between religious aspect and government policies as well as its effects on consumption and transaction pattern in ASEAN countries which’s their Moslem population is quite big such as Indonesia, Brunei and Malaysia

Issues

This paper will also discuss about investment topic which seen from Islamic perspective in Indonesia with some comparison with Malaysia and Brunei, specifically about some of these issues below: Principals of Islamic Law as a guidance for

Moslem people in their actions Indonesia’s investment regulation (as well in

Malaysia and Brunei) in Islamic perspective What kind type of investment in Indonesia (as

well in Malaysia and Brunei) that suitable with Islamic perspective?

First Discussion : 5 Principles of Islamic Law (Sharia) As a Moslem, it is an obligatory to live based on the

guidance from the (1) Holy Quran and (2) al Hadist , (The prophet Muhammad , The Messenger of Allah ) as well as from (3) Ijtihad ; as a process of legal reasoning and hermeneutics through which the jurist-mujtahid (Ulama) derives or rationalizes law on the basis of the Qu'ran and al Hadist.

Ijtihad plays a role as supplementary yet important law for anything which is still unclear (Subhat). Technically, Ijtihad usually served as a Fatwa

In Indonesia there are many Ulama (or Ulama council) from many Islamic organization such as Muhammadiyah or Nahdathul Ulama. Apart of that, there is also Majelis Ulama Indonesia (Indonesia Ulama Council), well known as MUI

Five principals of Islamic Law (Sharia):

Wajib (Obligatory), is an obligatory duty, the omission of which is punishable

Sunnah (Desirable), is an action which is rewarded, but the omission of which is not punishable

Mubah (Indifferent), is an action which is permitted and to which the law is indifferent

Makruh ( Undesirable), is an action which is disapproved of, but which is not a punishable offence, thought the omission is rewarded

Haram (Forbidden), is an action which is absolutely forbidden and punishable, and the omission is rewarded. 

Those five principles are embedded in every aspect of Moslem’s live without any segregation (non-secularism).

Every Moslem tends to do any kind of action which are Halal, Sunnah, and Mubah, while leaving out any action which is Makruh or Haram.

This condition must be well understood as this is also becoming a main consideration for a Moslem while doing any business activity.

Second Discussion : Islamic Investment Regulations in Indonesia Indonesia has the largest Muslim population in the

world, amounting to about 210 million, or more than 80% of the population of Indonesia.

Invesment Law in Indonesia based on Law Number 25 Year 2007 concerning Invesment Law and Regulation of the President Of The Republic Of Indonesia Number 36 , Year 2010 concerning Lists Of Business Fields That Are Closed To Investments And Business Fields That Are Conditionally Open For Investments

In general, the law and policy of investment in Indonesia is not explicitly say that the investment must be in accordance with Islamic law, although substantially there are considerations of sharia. In principle, all business should be invested in Indonesia except declared as prohibited.

Example

Investments there are just 6 barred sectors namely as follow: Agriculture ( cannabis cultivation) Forestry (prohibited species and marine material

making) Industrial sector (alcoholic beverages) Transportation (ground terminal) Communication (Satellite providers) Tourism ( museums, gambling kasino)

Cannabis cultivation., gambling and alcoholic beverages are banned since it is categorized as haram in Islamic sharia.

Moreover in some provinces or districts with powerful Islamic movement, regional regulations are laden with Islamic values

Between the years 2004 -2009, there are fifty two (52) Local Regulation have been published in various regions.

The regulated issues are: gambling and prostitution prohibition, dress code for employee in public, prohibition of hotel guests who are not married, prohibition to open a restaurant in the daytime during month of Ramadan, a ban on selling alcoholic beverages and open places of entertainment and others

In genereal. Malaysia and Brunei are having similar policy. For things that are prohibited by Islamic law there will be restrictions, although not banned altogether.

However, there is an interesting phenomena about gambling business in Genting Higland Malaysia

Since it is generally known, gambling is something that is forbidden by Islam. It is turned out that gambling in Malaysia are conducted by the Chinese.

Another thing that needs to be understood is about the investment and Moslems are the employment relationship. The Labor Law No. 13 of 2003 included some of the basic principles of Islamic Sharia into the working relationship between the company and employees. In Article 80, it is mentioned that "Employers are obliged to provide sufficient opportunities to workers / laborers to carry out worship required by his religion”

a Moslem need to pray 5 times a day (Fajr, Dhuhr, Asr, Maghrib and Isha), there is a need for them to have a break to do the praying at Dhuhr and Asr time which is still within the work hours.

A Moslems must perform once in a lifetime pilgrimage to Mecca for the duration of 20-40 days. Meanwhile, according to Article 93 paragraph (2) letter (e) it is mentioned that during the worship, the company should not be cutting salary. In Article 153 a quo paragraph 1 letter (c) it is mentioned that for employees who leave the work to do their worship cannot be dismissed.

In Indonesia there are also many religious-related national holiday, as many as 12 days per year which is obviously considered as inefficient for business.

Third Discussion : Investment Sectors that Suitable with Islamic Principles Islamic Banking Indonesia : In the period between 2007-2013,

Islamic banking business experienced a tremendous increase from 782 bank branches into 2872 branches organized by 195 Banks, which consists of Sharia Bank (Islamic Commercial Bank), Sharia Unit (Islamic Business Unit) from commercial banks and rural Sharia Banks (Islamic Rural Bank).

By absorbing up to 40,928 employees, this business produced the net profit of IDR 2. 514 Billion for Islamic Commercial Banks and IDR 65.313 Million for the Rural Islamic Bank

Figure 1. Graph of Depository and financing assets

Figures 2. Graph of non-performing loan

The Indonesia government has issued some Islamic banking related laws as folow: Law Number 21 Year 2008 Concerning

the Banking Sharia; Law Number 19 Year 2008 Concerning

Sharia Securities Law Number 3 Year 2006 Concerning

Religious Courts to Dispute Islamic Economics;

Malaysia

Malaysia is the forerunner in Islamic banking. The world is looking to this country and trying to learn from its experience in developing modern and sophisticated instruments which are said to be Shariah compliant. This is the first country in the world to introduce and promote an Islamic inter-bank money market to link all the market players and promote short-term liquidity.

At present, Malaysia is one of the most developed Islamic banking markets in the world. It is growing at an annual rate of 18-20% and its assets reached USD 65.6 billion. This is supported by comprehensive financial infrastructure, continual product innovation, adoption of global best practices, and strong emphasis on human capital development.

Due to the progress of the banking business in Malaysia, the government passed the Law of Malysia Act 759 Islamic Financial Services Act of 2013, which not only regulates the Islamic Bank, but also Islamic Insurance and Islamic Money Market And Islamic Foreign Exchange Market.

In Malaysia, As far as Islamic banking transactions and legal documentation is concerned, it is submitted that the following laws are relevant and applicable: (i) Valid according to Islamic law; (ii) Compliance with Civil/Federal laws as well as

procedural laws; (iii) State law; and (iv) English Common law.

His Majesty The Sultan of Brunei initiated the formation of Islamic bank in Brunei. In his royal speech to the Islamic Religious Council Meeting held in September 1990, he stressed that the establishment of an Islamic bank is important because it is a ‘fard kifayah’, obligation for each Muslim country and Negara Brunei Darussalam.

Brunei’s first significant commitment to developing a complete Islamic system began in September 1991 with the official opening of Tabung Amanah Islam Brunei (TAIB). Two years after establishing the trust fund, Brunei officially opened its first fully-fledged Islamic commercial bank called ‘The Islamic Bank of Brunei Berhad’ (IBB).

Domestic Islamic and conventional banking activities in Brunei darussalam are governed by the Islamic banking Act 1999 and the Banking Order 2006 under supervision of the ministry of Finance, Financial Institution Division.

The market share of Islamic banking in Brunei is expected to increase to 60 percent from current levels of 40 percent. The growth of the Muslim population in the Middle East, North Africa and Asia became the main driver of the increase in demand for Islamic financial services.

Riba (usury)

The blooming of Islamic business in Indonesia, Malaysia and Brunei is due to the awareness of the Muslims to use the financial services and transactions which Sharia compliance as the system of conventional commercial banks is considered as usury (Riba).

Riba is any efforts to augment the amount of principal or capital assets unlawful, such as giving loan interest or additional payments for the suspension. In principle, Islam prohibits Riba because it adds to the property subject without any real business transactions

Some examples of Sharia contract are: Mudharaba Contract: A contract between a capital

provider and an entrepreneur or a fund manager, whereby the entrepreneur or fund manager can mobilize the funds of the former for its business activity within the Sharia guidelines. Profits made are shared between the parties according to a mutually agreed ratio.

Musharaka Contract: A contract between two parties whereby both parties provide capital and both may be active in managing the venture. Losses are shared on the basis of how much capital has been contributed. Profits are shared in any way the partners decide.

Murabaha Contract: The sale of goods at a price, which includes a profit margin agreed to by both parties. The purchase and selling price, other costs, and the profit margin must be clearly stated by the seller at the time of the sale agreement.

Halal label

Another issue related to investments in Muslim countries is the halal labeled products.

Consuming the halal labeled product, both goods and services are is obviously more convenient for Moslems.

Halal here is defined as lawful products, both the materials as well as the production process.

Some of unlawful materials are: Whole part of pig and its products Dogs; meats and saliva Canines such as tigers, snakes, rats Amphibians such as frogs and crocodiles Blood and carrions Slaughtered animals which is offered for other than

Allah Khamr (alcoholic beverages)

To further convince the consumer that the goods or services it halal, Indonesia manufacturers can apply to Research Institute for Food, Drug and Cosmetic of of Indonesian Ulama Council (MUI LPPOM) for the halal certificate.

In Brunei the halal certifate can be obtained by applying to the Religious Council of Brunei Darussalam.

Certification of halal in Malaysia can be submitted to the Department of Islamic Development Malaysia (JAKIM) by following the scheme of Malaysian Standards MS 1500: 2004.

Halal Case : Ajinomoto case.

PT Ajinomoto Indonesia is a producer Ajinomoto brand food seasoning. PT Ajinomoto headquarters is located in Japan which is one of the 36 largest food and beverages company in the world which produces seasonings, cooking oils, foods and pharmaceuticals.

The Ajinomoto cases blew up in 2001, and had shook Muslim community due to the MUI fatwa which forbids this brand because it is considered containing lard. This situation obviously led Indonesian Moslems’ anger.

PT. Ajinomoto actually already had a halal certificate from MUI, but it was expired in June 2000. Unfortunately, PT Ajinomoto did not reapply for a new certificate to the MUI, they even changed the raw material, using extracts bactosoytune which is suspected containing lard.

To overcome the tranquility and anxiety that were already widespread in the community, PT Ajinomoto simultaneously recalled all Ajinomoto seasoning products with total amount of 10 thousand tons.

As a result, PT. Ajinomoto had to bear the losses by giving compensation to the traders of IDR 55 billion. PT. Ajinomoto also apologized to all Indonesian people and declared that the entire new stocks of Ajinomoto seasoning products may only be marketed after obtaining a new halal certificate from MUI .

Conclusion

Muslims have strong guidelines in his life, namely the Qur'an, Al-Hadith and Ijtihad. These guidelines strongly influence their behavior in life activities including their consumption and trading behavior.

Regulation of investment in Indonesia has been clearly defined in the Investment Law No. 25 of 2007 and Government Regulation No. 36 Year 2010 on the list of open and closed investment for foreign investment. The regulations do not strictly prohibit the investment due to strategic and security reasons. But, in fact, some restrictions substantially due to the Islamic principles, which is same as what happen in Malaysia and Brunei.

The strengthening of the Moslems belief affect businesses based on Islamic law (sharia), such as Islamic banking and halal-labeled products. Moslems tend to choose a business which shall be in accordance with sharia and away from things that are forbidden in Islam.