Fiqh Issues in Short Selling as Implemented in the Islamic Capital Market in Malaysia

Islamic capital market represents an assertion of Shari`ah principles in the capital market transactions where the market should be free from any elements or activities that are prohibited in Islam. The strict adherence to Shari`ah principles also implies that all financial instruments used by transacting parties in the capital market need to be Islamic. One of the most popular and commonly used financial instruments in conventional capital market is short selling. Many finance literature assert that short-selling provides liquidity, drives down overpriced stocks and generally increases efficiency of the markets. In general, the conventional short sale is selling a stock which investor does not actually own; a transaction which would clearly violate the general Islamic rule of ‘do not sell what you do not own'. Nevertheless, the Shari`ah Advisory Council (SAC) of Malaysian Securities Commission has recently legalized the short selling instrument to be used in Islamic Capital Market in Malaysia. This paper, therefore aims to study fiqh issues surrounding the short selling instrument. Three main issues are specifically highlighted and discussed, namely the issue of bay`ma`dum (selling what the seller does not own), the eligibility of stock as object of a loan contract and benefiting from loan contract