Foreign Investment with Islamic Return

By:
Prof. Dr. Mohd. Ma’sum Billah
masum@applied-islamicfinance.com
masum2001@yahoo.com
+6019-3699542

INTRODUCTION

Islamic principle in foreign investment with Islamic return and some information about foreign investment in Malaysia. Besides, it also discuss about how foreign investment can link with Islamic return. Moreover the reason why Islamic return is important in foreign investment also will be discuss about it.

As we know, the definition of foreign investment is employment of foreign capital in a new or existing economic enterprise after obtaining the investment license. Many various types of foreign capital either in cash or kind, imported to the country by foreign investor. There are like cash funds in the form of convertible currency, imported into the country via banking system or other methods,

Besides, the capital can be an equipments and machinery. Some of foreign capitals also like transferable dividends of foreign investor and other permissible items approved by the Council of Minister. What is Islamic return? Islamic return is return which gives benefit to the Muslim and Muslim country and not makes any deception to others.

Nowadays, Islamic economy becomes notice by some economist due to its system which tend to concerned about human being necessity and not only to calculate profit. The relationship between Islamic economy system and foreign investment is just to strengthen the link and can support each other to bring benefit to the investor and Muslim country.

The reason of the importance of Islamic return in foreign investment is to achieve the goal of Shariah rules which to help people and gain benefit and profit with parallel to shariah guidelines.

Foreign investment policy and shariah principle

First of all, foreign investment in Islamic perspectives is very hard to understand unless we practice it in our business life. When a foreign investor come to certain country to invest, they should be follow the rules and Act admission of foreign investment. According to foreign investment policy there are 20 articles which explain about these policies.

Article 1: Losses covered Article 11: Assignment

Article 2: Exclusions Article 12: Uninsured percentage

Article 3: Policy cancellation Article 13: Proposal

Article 4: Renewal procedure Article 14: Declaration

Article 5: Changes in premium rates Article 15:Observance of stipulation

Article 6: Loss minimization and notification Article 16: Misrepresentation

Article 7: Claims Article 17: Joint and several obligation

Article 8: Rates of exchange Article 18: Arbitration

Article 9: Other insurance Article 19: Relevance Law

Article 10: Recoveries Article 20: Definition

These articles are about what should investor do and not to do about foreign investment policy. In article 19, it stated that the policy shall be governed by the principles of shariah in all respects. It shows that shariah rulings also included in foreign investment policy to ensure that the Islamic return can be obtained by Muslim investor and Muslim country.

Islamic return in foreign investment is very important because to make sure the necessity of Muslim country and its people were fulfilled.So, it is the obligation of government of Muslim country to concern about this matter. At the same time, foreign investment not brings harmful and bad impact to the particular country when they invest in certain country. Absolutely, Islamic law was a relevance law of the guideline for foreign investor to make sure their goods, equipments, cash fund and etc not contradict with shariah rules, such as no excess interest payment, hoarding, cheating, corrupt and involve with gambling. Allah SWT prohibits this thing in Quran: “they ask you concerning wine and gambling (maisir), say in them is great sin and some profit for men, but the sin is greater than the profit”

(Al-baqarah: 219).

Another verse which concerned about this is in surah al-maidah: 90-91 “O you, who believe, intoxicants and gambling, dedication of stones and divination by arrows are abomination of Satan’s handiwork, eschew such abomination that you may prosper. Satan’s plans are to excite enmity and hatred between you with intoxicants and gambling, and hinder you from the remembrance of Allah and from prayer, will you not then abstain?”

In Muslim country such as Saudi Arabia, they make restriction for foreign investor with creates one authority called (SAGIA) Saudi Arabian General Investment Authority. SAGIA is expected to serve as a one-stop-shop for business licensing as well, replacing the multiple permits from a variety of Saudi government bodies are currently required for new ventures. This authority will make creation of a "negatives list" of foreign investment, widely considered by investors to be an improvement on the current "positives list. SAGIA will likely assume the lead role in licensing. It means that they only accept permissible foreign investment and disallowed prohibited investment which not approved by Saudi government.

In addition, there are privileges and preferences in Saudi Arabia that favors Saudi companies and joint ventures with Saudi participation. For instance, only firms with at least 25 percent Saudi ownership are eligible for interest-free loans from government credit institutions such as the Saudi Industrial Development Fund (SIDF).Meanwhile, the Saudi Arabian legal system is derived from the legal rules of Islam, known as the Shariah. The Ministry of Justice oversees the Shariah-based judicial system, but most ministries have committees to rule on matters under their jurisdiction. Generally, the board of grievances has jurisdiction over disputes with the government and commercial disputes. The Saudi legal system protects and facilitates acquisition and disposition of private property, consistent with strong Islamic teaching respecting private property. In al-sunnah “Render trust to whom has pit his trust to you, do not betray those betrayed you” Non-Saudis are not allowed, however, to purchase real estate in Saudi Arabia, though this will likely change under the new regulations. Other foreign-owned corporate and personal property is protected.

Islamic return is for concerns especially of muslin community because it develops strong relationship with other country and cooperation to promote the kindness of Islam. As we know, Islam is the perfect religion which its teachings cover all aspect of life including economy and trading. From the foreign investment, Muslim country can increase the economic growth and help other Muslim people who need help at poor country.

For this purpose, the way of making the investment is lawful and get blessing from Allah SWT is by follow the Quran and Sunnah and the bounties (nikmah) from Allah must not make Muslim forget the responsibility to the Deen and Allah SWT.Allah stated in surah al-Jum’ah “O you who believe, when the call is proclaimed on Friday for prayer, hasten earnestly to the remembrance of Allah and leave off business and traffic that is best for you if you but knew”.

In the time of Prophet Muhammad SAW, Madinah is the state of Islam and many traders come to Madinah and make business peacefully and the companions of prophet deal with them and not make cheating, gambling and bad action to the traders outside of Madinah.It is because the good akhlaq of Sahabah which they follow the teachings of Quran and Sunnah

The important part is the traders affect with the beautiful of Islam and then embrace Islam because the Islamic teaching is easy and not burden people even in the economic system

Foreign investment in Malaysia

At a glance, the Malaysian government encourages foreign direct investment, particularly in export-oriented manufacturing and high-tech industries, but retains considerable discretionary authority in approving individual investment projects. Outside the export sector, in keeping with long-standing public policies designed to increase bumiputra (ethnic Malay) participation in the economy, the Malaysian government encourages or requires joint ventures between Malaysian and foreign companies, limiting foreign equity and employment. Foreign investment in Malaysia is very wide and broad. Many foreign investor come to Malaysia to invest due to Malaysia’s foreign policy is reliable and the stability of economy in Malaysia. Malaysia's foreign policy is no exception. Various geographical, historical, social and political determinants contribute to shaping the nature of Malaysia's foreign policy and the conduct of the country's international relations.

Moreover, Malaysia has give many opportunities to foreign investor as well as to increase the Malaysia economic growth.According to article from newspaper that Malaysia will ease procedures for foreigners to buy property and major stakes in local companies as part of efforts to boost the country's competitiveness. It means that Malaysia government want aim to be more investor friendly. Besides that, even Malaysia has sufficient domestic liquidity, foreign investment is input to ensuring technology transfer in its quest to become a knowledge-based economy by 2020 and reduce a serious budget deficit.

Besides, Malaysia 's initiatives at various regional and international for a have put the country on the world map. Increased economic prosperity and political stability has in fact enabled Malaysia to carve its own niche in the international scene. Making our presence felt has allowed us to exercise some influence in setting the international agenda.

In the international area, United States is currently Malaysia's largest trading partner and largest foreign investor. Malaysia possesses abundant resources and land, a well-educated work force, adequate infrastructure, and a relatively stable political environment. Meanwhile,

Bilateral relations with other Asian, African, Middle-Eastern, and Latin American countries would continue to be pursued without neglecting our traditional economic partners in Europe and America. Japan, the European Union, the US, and Australia and the Republic of Korea, would remain Malaysia's major trading partners as well as the source of investment and technology, particularly in connection with the establishment of Malaysia's multimedia super corridor.

Then, the years ahead therefore would see Malaysia’s foreign policy specially oriented towards not only ensuring Malaysia's economic recovery internally, but also the government effective role as an influential geopolitical player in this field at the global level.

Foreign Direct Investment Permits by Countries
(Million US $)

Website: http://www.dtmtokyo.org/foreigninvestmentbycountries.htm

Foreign Direct Investment (FDI).

Foreign direct investment is viewed as a major stimulus to economic growth in developing countries. Its ability to deal with two major obstacles, namely, shortages of financial resources and technology and skills, has made it the centre of attention for policy-makers in low-income countries in particular.

From FDI, we can figure out the growth for the country, because this is one of the determinants for calculating GDP (Gross Domestic Product) in each country. As we can see from the figure, Muslim countries were not actively generating income from FDI. This maybe due to the politics, high labor cost, lack of infrastructure and size of the market.

In order to start the business, foreign investors must accept the rules and regulation as what have done or stated by that particular Islamic country. Here we bring an example for further understanding: Islamic Republic of Iran.

Case: Islamic Republic of Iran.

General overview:

*Foreign direct investment in Iran is allowed only through participation of foreign persons in the equity capital of existing and new Iranian companies. Maximum foreign participation in the joint companies is 49% however, this proportion will be determined on merits of each project. The Law for the Attraction and protection of Foreign investments of 1995 (The Law) provides the legal framework for the approval of all foreign investments in Iran.

*In accordance with Article I of the Law, foreign natural or legal persons importing capital, either in cash or in the form of machinery, etc. into Iran with the permission of the Government of Iran for the purpose of development and productive activities in industry, mining, agriculture and transportation shall enjoy the facilities provided in the Law. Such facilities shall be granted to those investors who obtain the required approval. In general, the facilities referred to among other things, are the annual transfer of net profits in the currency of the original investment, repatriation of the original capital and the accrued profits derived there from and proceeds of the sale of capital or shares and the remaining portion of capital in the event of liquidation Government guarantee of fair compensation in the event of expropriation pursuant to law, all at the exchange rate of the Central Bank's selling rate on the day of actual transfer, and the legal facilities accorded to the domestic investors.

Procedure:

The procedure to be followed by prospective foreign investor to get his investment approved involves different stages:

1-Finding a Suitable Iranian partner

The foreign investor may approach in the following manners:

By referring to or direct correspondence with the relevant Ministries. The relevant Ministry, with regard to its sanctioned projects, is in a position to introduce holders of "Agreement in principle" issued by the Ministry/ and or introduce potential Iranian investors interested to establish industrial firms, to the foreign side:

By referring to or direct correspondence with different banks, financial institutions and or Iran Chamber of Commerce, Industries and Mines:

By referring to or direct correspondence with Organization for investment, Economic and Technical Assistance of Iran (O.I.E.T.A.I) Foreign investment Dept. Ministry of Economic Affairs and Finance:

2- Obtaining the "Agreement in Principle"

As the second step in initiating the investment process, the local partner (together with the foreign investor) should apply to the concerned Ministry for sanctioning the industrial project. The application should be supported by the following:

a) The special prescribed questionnaire for Setting up an industry, and

b) Copy of project feasibility study.

Should the concerned Ministry, after necessary investigation and examination, be in agreement in principle with the proposed industry, it will issue and "Agreement in principle." Based on the above agreement the investor(s) is (are) permitted to start practical measures for construction of plant, import of machinery and arrangement for infrastructural utilities.

3- Application for participation

Simultaneous with 2 above or afterwards, the foreign investor may apply to O.I.E.T.A.I for participation in the realization of the sanctioned project.

His application should be submitted along with the following documents:

a) Properly filled in "Application for import of Capital (1)".

b) Copy of project possibility study.

c) Copies of draft Joint Venture Agreement, and Articles of Association of the Joint Company.

d) Copies of other draft Agreements, if any, in case the foreign investor is the supplier of services and know-how etc.

e) Power of Attorney given to person (s) for signing the application and other contractual texts confirmed by the Islamic Republic Consulate in the county of investor.

f) Copies of Articles of Association and financial reports of the foreign investor including balance sheet and profit and loss account of at least last three years.

g) Other information which is deemed to be helpful.

4- Review of Application by Supervisory Board for Attraction and Protection of Foreign Investments (The Board)

Foreign Investment Dept. (formerly CAPFI) , after necessary coordination with the relevant Ministries and examination of the Application and supporting documents, prepares a comprehensive report and submits it to the Board for a decision. Should the Application meet countries overall interests, the Board will present its positive decision through Minister of Economic Affairs and Finance for approval and issue of a Decree.

5- Issuance of Decree of Council of Ministers

The Decree so issued is the permission that officially authorizes the foreign investor to begin operations by importing the required capital into the country. Once officially registered, the imported capital shall be covered by The Law.

6- Formation of the Joint Company

Upon issuance of the Board's positive decision or after issuance of the Decree, the local and foreign investors may form joint company for commencement of operations.

FINANCIAL INSTRUMENTS IN DEALING WITH FOREIGN INVESTMENT

Islamic return depends on a set of rules and laws collectively referred to as Shariah. Shariah governs not only financial aspects of Islamic society but also the social, political and cultural ones. The following basic principles characterize the Islamic financial system:

These underlying principles have thus forced Islamic finance to design special Islamic financial products/instruments:

Mudaraba: a partnership profit-sharing agreement whereby capital is provided by the bank and assets, management or expertise by the client. The terms of profit and risk sharing are predetermined and customized for each investment. Any loss is bear by the bank except if negligence or misconduct can be proven on the part of the client. The maturity period being short to medium term, this instrument is generally suitable for trade activities.

Musharaka: a profit-sharing joint-venture between the bank and the client with both parties providing capital in equal or varying degrees and sharing the profits and losses in proportion to their investment. This form of equity participation is used for financing working capital of medium to long-term duration and fixed assets.

Murabaha: a short-term commercial finance agreement with the bank buying the goods on behalf of the client and then reselling them to the client who becomes owner, on a predetermined date and at a price that includes an agreed markup.

Ijara: is a leasing structure based on risk sharing. High cost assets such as industrial equipment, aircraft, ships, can be leased without bearing the full capital costs. The bank purchases the equipment for the client and retains ownership. Ownership is transferred to the client at the end of lease period according to pre-agreed terms.

Istisna'a: is a supplier credit or preproduction facility. Through this mode of financing, the bank undertakes to supply equipment, industrial products or raw materials to meet the client's orders for goods. Istisna'a is particularly suitable for financing buildings, construction, manufacture or plants. Once completed, the title is passed to the client on a predetermined deferred-payment basis.

Bay'mu'ajjal: is a deferred-payment sale where delivery of the goods is taken on the spot but payment is delayed for an agreed period. Payments can be made in a lump sum or in installments.

Bay'salam: or deferred-delivery sale is similar to a forward contract where delivery of the product is in the future in exchange for payment on the spot market.

Qard Hassan: (interest free loans) and Zakat (alms). Funds advanced under Qard Hassan are for humanitarian and welfare purposes. Repayments are made over a period agreed upon by both parties at no profit to the bank. Most Islamic banks include these charitable activities in their operations.

CONCLUSION

As a conclusion, foreign investment with Islamic return can only be happened if the investors applied or used Islamic financial product, which we had mentioned before. This is because; only these products were allowed to be used in Islam, in order to get the ‘halal’ rate of return (profit or loss).

Nevertheless, Islamic rate of return is governed by shariah, which are fixed and approved by majority of Muslim scholars. It is suitable beyond any place and time. We as Muslim should encourage non-Muslim to use it as a medium of financial instrument and try to convince them that these Islamic rate of return are fair and just.

If this mission succeeds, Islam will look as a comprehensive religion, because it teaches people not only in religious matter but also how to gain profit according to the will of Allah s.w.t. We must, show a good moral to the non-Muslim, in terms of daily financial transaction, so they can believed that its was not just a theory, but a reality which can attract them to change from conventional to Islamic financial product.

Last but not least, in order to applied this concept, we should be united and support the Islamic financial product cause nowadays, people in the world have realized the impact from capitalist (conventional) system, which seem to make rich become more rich and poor remain poor. So the solution for this problem is to change from conventional to Islamic product which free from interest (riba) and fair to all parties.