THE year 1997 was a tragic year for Malaysia and its citizens. Dubbed as one of the promising “tiger economies”, the country was suddenly dragged into the contagious effects of currency speculation activities.
The devaluation of the ringgit was painful to many, especially those in the corporate world. Overnight, the amount of external debts burgeoned and forced many firms to scale down and, to a certain extent, cease operations; not to forget those categorised as PN4 companies by the Kuala Lumpur Stock Exchange.
A number of so-called Malay flagships fell into debt traps and were unable to service their debts. Five years down the road, they are still struggling to recover.
I think it is not too late to ask why many companies succumbed to the crisis. Directing the blame solely on the currency speculation, which inflated the amount of debts, is rather too simplistic an answer. There must be a better explanation to the problem.
Recently, the Institute of Islamic Understanding of Malaysia (Ikim) and the Security Industry Development Centre jointly organised a workshop – “Managing Success: The Management of Assets and Liabilities from the Islamic Perspective.”Practitioners and academics in relevant fields were invited to participate.Basically, when one talks about management of assets and liabilities, one talks about managing business. Therefore, one particular glaring issue raised in the workshop was the integrity of the office bearers.
Normally, when one talks about integrity, one cannot avoid discussing accountability. A manager is accountable to very decision made with regard to the company’s affairs.
Office bearers are responsible to, among others, the stakeholders and relevant authorities. However, in many cases, people are legally right (even though morally wrong) and escape from any form of punishment in this world.
This is where religion can play a role. One must understand and believe that one is not only accountable in this world but also in the hereafter.
With regard to accountability, Allah says in the Holy al-Quran: “We shall set up scales of justice for the Day of Judgment, so that not a soul will be dealt with unjustly in the least, and if there be (no more than) the weight of a mustard seed, We will bring it (to account): and enough are We to take account.” (Chapter al-Anbiyaa’: Verse 47)
Basically, when one discusses integrity and accountability, one also talks about ethics and corporate governance – the rights and the wrongs.
However, the more pressing issue is the differentiation between awareness and practice. Every normal individual could easily differentiate between right and wrong but will not necessarily practise the right thing.
IKIM chairman Tan Sri Dr Ahmad Sarji Abdul Hamid rightly says: “In actual fact, values must be internalised. A person can go on preaching endlessly about good values, but there is a real gap between practice and knowledge.
“A person may read all the books on ethics and values, but when it comes to practice he or she may just abandon all these because of worldly temptation.” (Corporate Governance From The Islamic Perspective, Kuala Lumpur: Institute of Islamic Understanding Malaysia by Nik Mustapha Hj Nik Hassan and S.M. Saifuddeen S.M. Salleh)
How does integrity relate to excessive level of debts? And how could managers or members of the boards be held accountable for their financing decisions?I strongly believe they are accountable in two ways – the greed for expansion and the use of excessive level of debts as a method of financing.Expansion plans must be guided by the ability of the company to generate the required funds internally. Developing expansion plans based on debt financing will expose a company to higher default risk.
Is debt financing allowed in Islam? The answer is “yes”. Islam allows debt financing as long as no usury (riba’) is involved. Therefore, Islam allows the combination of debt and equity financing provided that the debt content is low and not vice-versa.
If this is the case, how much debt financing is allowed in Islam? This is an issue that requires ijtihad from Islamic scholars. The Syariah Advisory Council of the Dow Jones Islamic Market Indexes clearly indicates that the ratio of total debts to the average of 12 months’ market capitalisation must not exceed 33% (www.djindexes.com).So, what is the solution to the issue of excessive debt finance?
It is my opinion that we need to review the education system. One should understand that many of the corporate leaders graduated under Western education systems.Even local universities recommend the use of Western textbooks on the subject of financial management, written by authors such as Brigham and Keown. Some of these books were even translated into Bahasa Malaysia.
Western authors on financial management always suggest that debt financing is cheaper than equity financing (e.g. through own capital, partnership or issuance of new shares). Interests paid to creditors are cheaper than the dividends paid to shareholders. Furthermore, the issuance of new shares is less palatable to companies since it will reduce the ownership of the founders. If a founder initially owned the whole company, issuance of new shares could dilute his ownership to, maybe, just over 50%.
However, one has to bear in mind that interest payment is obligatory regardless of economic and business conditions. Nevertheless, dividends are very much dependent upon the performance of the company and also subject to the decision of the board of directors.
Thus, there is a lesson learnt from the last financial crisis. Debt financing could expose a company to the risk of bankruptcy. Therefore, future managers must be taught to better appreciate equity financing instead.
As for Muslims, there is a need to have a good grasp on Islamic principles of financing. The scope of knowledge is rather wide, ranging from prohibition of usury to methods of financing. As caliphs of Allah in this world, Muslim managers have the obligation to adopt Islamic principles of managing businesses. God willing, all of us will prosper in this world as well as in the hereafter.