During spring 2005 and 2006 the credit assessments appear to have deteriorated, at the same time as loans were granted on terms that far from corresponded to the risks. The price of risk was quite simply too low. However, during this period risk premiums on all assets fell. So it was not merely on subprime loans where the price was set too low. The same also applied, for example, to the market for leveraged buyouts. Hedge funds were the first to experience problems The first signs that the spark had reached the powder keg came during the summer, when it was evident that there would be more defaults on subprime loans than had been feared earlier. Two hedge funds tied to the US investment bank Bear Stearns were among the first to be affected. The funds had borrowed money which was then invested in structured credit instruments linked to securitised subprime loans. When the financiers wanted to pull out, the funds were forced to sell their assets. However, they were not successful as suspicions against subprime loans had increased and the funds collapsed with substantial losses. At around the same time the credit rating agencies began downgrading credit instruments containing subprime loans. As the ratings have set the tone for how the instruments are assessed, the downgradings have meant that the financial markets more or less lost confidence in anything that might contain subprime loans. Finally the banks were also affected But it was not only hedge funds that had invested in subprime loans.
The court’s adjudication role in Islamic finance is reinforced by the support from the SAC in its capacity as a consultative body to the Malaysian judiciary system. Under the law, the Central Bank of Malaysia Act 2009 prevails, if a question concerning a Shariah matter arises in any proceedings relating to Islamic financial business, where the court or the arbitrator shall take into consideration any published rulings of the SAC or refer the matter to the SAC for its ruling. The SAC’s rulings are binding on the courts and arbitrators. This referral system preserves and enhances the sanctity of Shariah rulings and the consistency in the interpretation and application of Shariah principles in Islamic financial transactions. To complement the court system, specific arbitration rules for Islamic banking and financial services have also been developed, enabling disputes for both domestic and international cases to be dealt with by the Kuala Lumpur Regional Centre for Arbitration (KLRCA). Such comprehensive legal infrastructure for Islamic finance is unique to Malaysia and essentially reflects the support and dedication by the legal fraternity in keeping abreast with the development of Islamic finance. Adding to the strength of the institutional and legal framework in Malaysia is our continuing emphasis on human capital development. Various measures have been implemented to ensure that our market players, including the judges and lawyers, are well-trained in Islamic finance.