Sunday, June 9, 2013

Islamic Finance in Southeast Asia and Anti-Money Laundering Law

by Asst. Prof. Dr. Mohd Yazid Bin Zul Kepli


Analysis: Case law on Islamic finance (Malaysia)


A blind support for products labeled as Shariah-compliant by the judiciary, without adequate consideration to public interest and without critical analysis on the true nature of the products is harmful. The problem is not with the principles. The actual problem is the wrongful or mistaken application of the principles. An active judiciary is required.    

Hasan and Asutay’s analysis on the courts’ decision on Islamic finance disputes in Malaysia leads them to classification based on three phases: 1. First Phase: 1979-2002, 2. Second Phase: 2003-2007 and 3. Third Phase: 2008-2010 (onwards).[1]

i.          First Phase: 1979-2002: During this phase, the Malaysian court applied the classic common law interpretational approach by looking at the express terms and conditions laid down in the contract.[2] The issue of actual Shariah-compliant etc was not tackled and the approach was basically to admit the legality of the contracts, together with their express terms, regardless of how arbitrary some might be.

ii.         Second Phase: 2003- 2007: In this stage, the Malaysian courts gradually shifted from their earlier approach by giving more critical examination on Islamic finance cases. In some cases, the courts held that unearned profit could not be claimed by Islamic banks due to its similarity in calculation to interest.[3] The aim is to ensure justice to the customers.
iii.        Third Phase: 2008-2010: The Malaysian courts adopted a pro-active attitude while recognizing that the court should not rewrite the terms of the contract between parties. The Malaysian government finally stepped in by passing the Central Bank of Malaysia Act that covered important matters on Islamic finance which significantly improve the legal and regulatory framework on Islamic finance.[4] The aim is to ensure justice to customers while maintaining legal and regulatory certainty.

Below is the analysis on some of the Islamic finance cases in Malaysia and United Kingdom. The cases are mostly from Malaysia, unless stated otherwise.

  • Tinta Press Sdn Bhd v Bank Islam Malaysia Bhd [1987] 2 MLJ 192
  • Glencore International AG v Metro Trading International Inc [2001] 1 Lloyd’s Rep 284 [English case]
  • Islamic Investment Company of the Gulf (Bahamas) Ltd v Symphony Gems and others [2002] WL 346969
  • Bank Kerjasama Rakyat Malaysia Bhd v Emcee Corporation Sdn Bhd [2003] 2 MLJ 408
  • Shamil Bank of Bahrain EC v Beximco Pharmaceuticals Ltd and Others [2004] 4 All ER 1072 [English case]
  • Tahan Steel Corp Sdn Bhd v Bank Islam Malaysia Bhd [2004] 6 MLJ 1
  • Malayan Banking Bhd v Marilyn Ho Siok Lin [2006] 7 MLJ 249
  • Affin Bank Bhd v Zulkifli bin Abdullah [2006] 3 MLJ 67
  • Malayan Banking Bhd v Ya’kup bin Oje & Anor [2007] 6 MLJ 389
  • Arab-Malaysian Finance Bhd v Taman Ihsan Jaya Sdn Bhd & Ors (Koperasi Seri Kota Bukit Cheraka Bhd, third party) [2008] 5 MLJ 631
  • Tan Sri Abdul Khalid bin Ibrahim v Bank Islam Malaysia Bhd and another suit [2009] 6 MLJ 416
  • Sea Oil Mill (1979) Sdn Bhd & Anor v Bank Kerjasama Rakyat Malaysia Bhd [2009] 3 MLJ 237 [English case]
  • The Investment Dar Company KSCC and BLOM Developments Bank Sal [2009] EWHC 3545 (Ch) [English case]
  • Bank Islam Malaysia Bhd v Lim Kok Hoe & Anor and other appeals (2009) 6 CLJ 22
  • Bank Kerjasama Rakyat Malaysia Bhd v Sea Oil Mill (1979) Sdn Bhd & Anor [2010] 2 MLJ 740
  • Arab-Malaysian Merchant Bank Bhd v Silver Concept Sdn Bhd [2010] 3 MLJ 702
  • Bank Islam Malaysia Bhd v Azhar bin Osman and other cases [2010] 9 MLJ 192
  • Mohd Alias bin Ibrahim v RHB Bank Bhd & Anor [2011] 3 MLJ 26
  • Al Rajhi Banking & Investment Corp (M) Bhd v Hapsah Food Industries Sdn Bhd & Ors and another action [2012] 1 MLJ 115


Case Analysis:

CASE 1:          Tinta Press Sdn Bhd v Bank Islam Malaysia Bhd [1987] 2 MLJ 192

In this important case, the court accepted Islamic financial product on its face value, without attempting to go beyond it. This case highlighted the earlier trend of the Malaysian court to be accommodative to Islamic finance.[5]

Despite the phenomenal growth of Islamic finance in Malaysia in the 1980s, there were only two reported cases on Islamic finance in Malaysia.[6] The respondents in this case had leased certain printing equipment to the appellants using Islamic financing facility known as Ijarah. The appellants then defaulted in their obligations to make the monthly rentals payment. The respondent then brought a legal action to recover the rent, to recover possession of the equipment. An ex parte application for a mandatory injunction to enable possession of the equipment was also made and accepted. Attempt by the appellants to set aside the mandatory injunction was rejected and the appellants appealed. The judges in this case, Salleh Abbas LP, Syed Agil Barakbah J and Wan Hamzah SCJJ held that:

  • the learned judge rightly concluded from the documents and the affidavit evidence that the agreement in this case was a lease agreement and not a loan agreement;
  • there was a clear breach of the lease agreement in this case by the appellant and the respondent therefore became entitled to immediate possession of the equipment. The learned Judge was confident that the court would grant a mandatory injunction at the trial of the suit and rightly held that if the injunction had not been granted earlier the respondent would suffer irreparable damage and greater hardship. The balance of convenience was very much in favour of the respondent and the application was one of urgency.
The legal impact of this case is strong. Since the court recognized that the nature of the contract is a lease contract, also known as Ijarah, the lessor owned the equipment and the appellants do not have right to the equipment until full payment is made. This case highlighted that Islamic finance do have technical differences with conventional finance due to the nature of the contract. It is noted that the judges in this case mostly deal with the issue of mandatory injunction, without elaborating much on Islamic finance issues. This case is observed not just in the area of Islamic finance, but also in other legal area as well. For example, the plaintiff’s counsel in B-Trak Sdn Bhd v Bingkul Timber Agencies Sdn Bhd & Anor [1989] 1 MLJ 124 relied on the case of Bank Islam Malaysia Bhd v Tinta Press Sdn Bhd & Ors [1986] 1 MLJ 256 for the definition of a lease.

One researcher, Illiayas highlighted a peculiar fact that, despite the extraordinary growth in the operations of Bank Islam despite the severe recession that hit Malaysia in the mid-1980s, there have been only two-reported court cases in which Bank Islam featured as a party.  He proposed that the small number of litigation involving this Islamic bank at this stage is perhaps attributable to its adherence to the Quran, particularly Chapter 2: 280 which read as follows: ‘If the debtor is in a difficulty, Grant him time Till it is easy For him to repay.’[7]

The application of Islamic principles that focus on kindness in reclaiming payment is partly evidenced in this case. In this case, Syed Agil Barakbah SCJ (delivering the judgment of the court) stated as follow:

The learned Judge came to the conclusion that the respondent had been “helpful and extremely polite” to the appellant. They had attempted to recover the money due to them step by step by acting diligently and prudently. It was only after they had failed to get rentals due from the appellant that they decided to take possession of the equipment according to the terms of the lease agreement. When that failed, they sought legal remedy by filing a writ applying for an injunction. We agree with respect with the learned Judge that there was no unreasonable delay on the part of the respondent in filing the writ and the ex parte application for injunction.[8]

In this important case, the court upheld the validity of the Islamic financial product called ‘ijarah’ and clarified that this is a leasing contract and not loan. However, no reference was made to the Islamic law relating to ijara or leasing.

Similar accommodative attitude from the court can be seen in subsequent cases like Bank Islam Malaysia Berhad v Adnan Bin Omar [1994] 3 CLJ 735/ [1994] MLJU 221 where the court upheld the BBA contract and stated that the defendant is estopped from denying that the plaintiff is entitled to the total sale price since the defendant voluntarily enters to the contract. In that case, there was no attempt to deal with the matter from the Islamic view point that stress on fairness and justice. Such simplistic approach failed to critically consider the interest of the customers of Islamic bank. Rebate or discount was not implied into these cases. The customers were burdened with heavy amount of repayment ‘because the purchase price has been agreed’ although the transactions were basically financing in nature (and not true sale and purchase) and the real risks were mostly allocated to the customers. This trend continues in Dato’ Hj Nik Mahmud Daud v Bank Islam Malaysia Bhd [1998] 3 CLJ 605, and Bank Islam Malaysia Bhd v Shamsudin Bin Haji Ahmad [1999] MLJU 450.

Due to the serious consequences of these cases, the legal and regulatory framework were changed afterwards. Judges refused to entertain claim for full ‘purchase price amount’ and implied rebate etc. Later on, the Shariah Advisors also elaborated on the permissibility of rebate and discount and the matter was put to rest when the Central Bank ordered rebate and discount in all similar cases.














CASE 2:          Islamic Investment Company of the Gulf (Bahamas) Ltd v Symphony Gems and others [2002] WL 346969

This case was the first Islamic finance case heard and decided by the English court. It is one of the earliest Islamic finance cases decided by a secular court in non-Muslim country. The claimant in this case is the Islamic Investment Company of the Gulf while the first defendant was Symphony Gems. The two other defendants were guarantors to the first defendant. The parties in this case have entered into an Islamic financing agreement on January 2000 by way of an Islamic financial product known as Murabahah. The purpose of the contract is to get Shariah-compliance financing. The claimant in this case will purchase some commodities, precious gems and stones from the supplier at the price of USD15 million and sell it to the first defendant, Symphony Gems at the price of USD15.8 million. There are numerous legal issues in these case including governing law clause and governing jurisdiction clause. The court held that the parties would be governed by the principle of murabahah but the court will be English court. The judge in this case refuses to take into consideration the expert opinion of two Islamic finance experts. The judge held that the court will only construe it according to its term and based on English law contract. In this case, Mr. Justice Tomlinson stated as follow:

The Morabaha contract is intended in Islamic law to be a contract which complies strictly with the requirements of the Shariah. However, it is important to note -- indeed, in my judgment, it is absolutely critical to note -- that the contract with which I am concerned is governed not by Shariah law but by English law. Indeed, it is equally critical to note that Dr. Samaan, after examining the nature and terms of the contract with which I am concerned, comes to this conclusion: "I have therefore come to the conclusion that the Agreement in issue does not have the essential characteristics of a Morabaha contract." He then goes on, insofar as he has not already done so, to explain why that is so.[9]

Experts have commented a lot on this case. For example, an Islamic finance expert Professor Dr Norhashimah Mohd Yasin, questioned the logic and reasoning for calling Islamic financial experts to express their professional opinions if the court held that their professional opinion have no effect what so ever to the case.[10]  Another Islamic finance expert, Professor Dr Engku Rabiah Adawiyah Bt Engku Ali, highlighted that this case is a clear example where contract that is not compliant to Shariah and is expressly contrary to the wishes of the parties were validated by the court by simply stating that the term is valid according to English law.[11]

However, it is also noted that in this case, the contracting parties have expressly chosen English law as governing law while it could be foreseen that the English court will have difficulty venturing into the Islamic or Shariah aspect of the contract. This case should be distinguished from Shamil Bank of Bahrain E.C. v Beximco Pharmaceuticals Ltd and others [2004] 4 All ER 1072. In the subsequent case, the governing law clause expressly stated that English law shall apply subject to the principles of Shariah. 

Prof. Engku Rabiah Adawiah explains that the refusal by the courts in both cases to use Islamic principles is understandable since English courts apply Common Law and in the absence of substantive codified code on Islamic banking, incorporation of Islamic princ

















CASE 3:          Bank Kerjasama Rakyat Malays`ia Bhd v Emcee Corporation Sdn Bhd [2003] 2 MLJ 408

The ratio of this case is that the law applicable to Islamic banking facility can generally be the same with the law applicable under conventional banking. The appellant in this case granted an Islamic facility known as BBA to the respondents. As security for the repayment of the sale price under the second agreement, the respondents charged to the appellant 15 pieces of land. When the respondent defaulted, the appellant issued the form 16D notice (a procedure under the National Land Code) and then for an order for sale. The High Court dismissed the application of the appellant and the appellant appealed to the court of appeal. The Court of Appeal allowed the appeal and stressed that the same legal framework will be applicable.

The court in this case held as follow:

‘Although the facility was an Islamic banking facility, that did not mean that the law applicable in this application was different from the law that was applicable if the facility was given under conventional banking. The charge was a charge under the National Land Code. The remedy available and sought was a remedy provided by the Code. The procedure was provided by the National Land Code and the Rules of the High Court 1980. The court adjudicating it was the High Court. So, it was the same law that was applicable, the same order that would be, if made, and the same principles that should be applied in deciding the application (see p 411G -I).’

In Malayan Banking Bhd v Marilyn Ho Siok Lin [2006] 7 MLJ 249, David Wong J referred to the above passage and stated as follow:

Not only do I agree with the sentiments stated in the above case, I am bound by them under the principle of stare decisis.

This case has been cited with approval in various cases including Bank Islam Malaysia Bhd v Pasaraya Peladang Sdn Bhd [2004] 7 MLJ 355, Affin Bank Bhd v Zulkifli bin Abdullah [2006] 3 MLJ 67, Malayan Banking Bhd v Marilyn Ho Siok Lin [2006] 7 MLJ 249, Tan Sri Abdul Khalid bin Ibrahim v Bank Islam Malaysia Bhd and another suit [2009] 6 MLJ 416, Bank Islam Malaysia Bhd v Lim Kok Hoe & Anor and other appeals [2009] 6 MLJ 839, and Bank Islam Malaysia Bhd v Azhar bin Osman and other cases [2010] 9 MLJ 192.

However, the warning given by Rohana Yusuf J in the case of Bank Islam Malaysia Bhd v Azhar bin Osman and other cases [2010] 9 MLJ 192 must be noted:

In Bank Kerjasama Rakyat Malaysia Bhd v Emcee Corporation Sdn Bhd [2003] 2 MLJ 408; [2003] 1 CLJ 625, the Court of Appeal enforces a BBA contract. Abdul Hamid Mohammad JCA (as he then was) in that case states that ‘though the facility given by the appellant to the respondent was an Islamic banking facility. But that did not mean that the law applicable in this application was different from the law applicable if the facility was given under conventional banking’. This remark cannot be taken literally. It cannot be taken to mean that the law of contract which recognises the sanctity of a contract and the right to enforce the contract to its letter, as a ratio decidendi that the sale price is enforceable. Reading it contextually, the observation is made by His Lordship in that case to show that the Islamic banking contract is subject to the same law and legal system as any banking contract. It is true that the Court of Appeal in Lim Kok Hoe acknowledges these cases which ultimately resulted in granting and enforcing payment of the full sale price under the PSA, however none of the cases had in the judgment treated it to be the ratio decidendi of the decision.




















CASE 4:          Shamil Bank of Bahrain EC v Beximco Pharmaceuticals Ltd and Others [2004] 4 All ER 1072

This English case involved an Islamic financial product known as murabahah. One of the parties, Beximco Pharmaceuticals Ltd defaulted in its obligations and then raised the issue of governing law clause as defense. In this case, the parties to the agreement agreed that the contract shall be governed by English law subject to its consistency with Shariah law. Beximco Pharmaceuticals Ltd argued that the agreement is contrary to Shariah principal and should be declared null and not enforceable.

The agreement in this case contained the following wording regarding the choice of law – “Subject to the principles of Glorious Shariah, this agreement shall be governed by and constructed in accordance with the laws of England.” Potter LJ rejected this argument and held that the contract was only govern by the English law and not the Shariah law. The judge also held that a contract could only be governed by one legal system or law at the same time. The only way for the parties to incorporate the provision of a foreign law into their contract is by expressly including a clear black letter provision of the foreign law but not the whole foreign law per say.

The reception of the legal community on this case differs, with some approving and many criticizing. DeLorenzo and McMillen highlighted four aspects of reasoning in the case of Shamil Bank v Beximco case.[12] Firstly, in accordance with conceptions of national sovereignty and the concepts of nations, the near universal principle is that the law governing a contract is the law of a nation as precisely defined in that nation. Second, the laws of many nations allow the parties to a contract to choose the law that will be applicable to the enforcement of that contract. Third, as a general matter, the laws of many nations allow the parties to a contract to incorporate foreign laws, codes, and rules into a contract governed by the laws of such nation, although they also require some degree of specificity to effect that incorporation. However, the court in Shamil Bank v Beximco do implied that it would have no objection to the incorporation of the French Civil Code, the Hague Rules, or the Harter Act, if there were adequate specificity of the terms to be incorporated.’[13]

In the subsequent appeal of this case, Shamil Bank of Bahrain EC v Beximco Pharmaceuticals Ltd and others [2004] EWCA Civ 19, Potter, Laws and Arden LJJ of the Court of Appeal affirmed the previous decision of Morison J in this case. The judges held as follow:

The financing agreements were governed by English law alone. The intention of the parties at the outset had been for the agreements to be binding, and the court should lean against a construction which would or might defeat that commercial purpose. The reference to the principles of Sharia'a was simply intended to reflect the Islamic banking principles according to which the bank held itself out as doing business, rather than incorporating a system of law intended to 'trump' the application of English law as the law to be applied in ascertaining the liability of the parties under the terms of the agreement. Having chosen English law as the governing law, it would have been unusual and improbable for the parties to have intended the English court to proceed to determine and apply the principles of Sharia'a in relation to the legality and enforceability of the obligations clearly set out in the agreement, and the appeal would therefore be dismissed (see [47], [54], [62], [63], below).[14]

This kind of legal issue can actually be avoided if the legal and regulatory framework similar to the one recently adopted by Malaysia is used. The suggestion by the judge in this case that reference to Islamic principles does not have any legal significant since it is ‘unusual and improbable for the parties to have intended the English court to proceed to determine and apply the principles of Shariah’ merits serious consideration. One of the scholars commented as follows:

It is important for parties intending to deal on Islamic principles to incorporate the law of an Islamic country which most closely gives effect to those principles of Sharia that they are concerned with. It is neither enough to choose Sharia law per se, nor English law as guided by an Islamic board (in the present case, it was the bank’s own Religious Supervisory Board). It is clearly open to the parties to ensure that the decisions and recommendations made by the Board to be taken seriously by contractually providing for appropriate sanctions; where Sharia principles are considered to be fundamental, the parties may provide for a more active involvement of such a Board. In the present case, the system of supervision was of little help because it was not the specific agreements which were subject to religious supervision, only the general activities of the bank.[15]

The universe of Islamic finance is big, with numerous different views by various scholars and experts. In the absent of a clear codified law on Islamic finance, and without express clauses elaborating on the principles agreed, it would not be practical to expect judges from English court to determine and decide on Islamic principles.
























CASE 5:          Tahan Steel Corp Sdn Bhd v Bank Islam Malaysia Bhd [2004] 6 MLJ 1

The plaintiff in this case had undertaken the development and construction of Steckel Hot Strip Mill Plant. The plaintiff had secured RM97 million worth of financing facility from the defendant bank using an Islamic financial product known as al-Istisna’. The defendant then refused to release the balance of the facility amounting to RM38.7 million. The plaintiff took a legal action against the defendant. The defendant contended that the plaintiff had failed to meet condition precedents of the al-Istisna’ facility, namely to secure facilities totaling approximately US80 million from EXIM banks as agreed. The defendant also alleged that the plaintiff had defaulted in its obligation to make repayment. The court dismisses the application and held that the defendant was right in its action. The plaintiff has failed to observe its obligations, and has unilaterally tried to vary the terms of the contract. Abdul Malik Ishak J held as follow:

The conditions precedent imposed on the plaintiff of obtaining the EXIM loan was neither whimsical nor belligerent, they were based on sound commercial basis. The plaintiff adopted a rather lackadaisical attitude  towards the express term and essential condition, namely, securing the EXIM loan. The plaintiff was not entitled to depart from the requirement of the EXIM loan condition without the written and signed consent of the defendant. The defendant was within its rights to refuse to allow the disbursal of the third tranche of the facility to the plaintiff since the plaintiff has by their own admission failed to secure the EXIM loan (see paras 45, 53, 70, 77).

One of the important issues from the legal and regulatory aspect is the court statement on the loss that will be suffered by the Islamic financial institution if injunction was granted wrongly, due to the rejection of interest. In other words, the court cannot compensate the Islamic financial institution by awarding any sort of interest as commonly awarded to conventional banks.  The court in this case answered the question on whether the bank will suffer irrecoverable damage as follow:

I would answer this question in the positive. It must be recalled that the defendant is a licensed Islamic Bank governed by the Islamic Banking Act 1983 and is regulated by Bank Negara Malaysia -- the Central Bank of Malaysia. It is not allowed to participate nor to conduct any business that contravenes the Syariah unlike a conventional bank. The defendant does not charge penalty interest by whatever name one wishes to call it for late payment. Every single installment that is paid late to the defendant is a loss of use of money owed to the defendant for the period of delay. The defendant has been losing and continues to lose the use of its installments since 31 January 2002. Whilst this may not appear to be a significant loss it is still a loss for which the defendant cannot be compensated. Viewed in this context, the grant of an injunction to the plaintiff would cause irreparable damage to the defendant. Moreover, the strict Islamic banking system as alluded to in the beginning of this judgment mirrors the unenviable position of the defendant bank. This is the crucial factor that differentiates this case from the rest. It is not the run of the mill type of cases.[16]

In this case, Abdul Malik Ishak J also quoted the statement of Tan Sri Nor Mohamed Yakcop, the Second Minister of Finance of Malaysia (as he then was) in his paper entitled “Reflections on the Islamic Financial System” to show the real nature of Islamic finance:

If we are to look at the Islamic financial system, it is natural that we look at the core of Islam itself. Unlike many other religious systems, we see Islam as a deen, or as a complete way of life. Beyond basic religious beliefs and practices, Islam shows us how to best conduct ourselves in everyday matters. This code of best conduct is called the Shariah, and it is the basis of the Islamic financial system. But the Shariah has been put there not as a set of rituals to make life difficult. It serves several important purposes. Firstly, the Shariah is a means for us to approach and seek the pleasure of the Creator. Secondly, a positive side effect of complying with Shariah is that it brings about human success and harmony -- allowing man to attain excellence. It is through the strong adherence of the Shariah that the Muslims of earlier generations achieved their magnificence and global success. Thus, the Islamic financial system, being a part of this Shariah system, ought to be treated in the same light. Just as the Shariah is a means to an end, so too is the Islamic financial system. The implementation of an Islamic financial system is not the end goal. It is, in fact, a means and a tool of competitive advantage for the Ummah's success, including economic success.[17]

This case was cited with approval in Amazing Place Sdn Bhd v Couture Homes Sdn Bhd & Anor [2011] 7 MLJ 52 (on the issue of damages) and in Affin Bank Bhd v MMJ Exchange Sdn Bhd & Anor [2011] 9 MLJ 787 (on the issue of judicial notice).





































CASE 6:          Affin Bank Bhd v Zulkifli bin Abdullah
 [2006] 3 MLJ 67

The defendant in this case bought a double storey link house using an Islamic financial product known as BBA from the plaintiff. The financing was to be repaid over 18-year tenure by 216 monthly installments and a charge was registered against the title. After making several payments, the defendant defaulted and the plaintiff took legal action. The issue faced by the court is the exact amount that the defendant has to pay. The court grants the order for the sale of the property and held that the remaining balance has to be repaid by the defendant. However, the court also held that the amount of repayment must be reduced as the termination was made earlier. The judge, Abdul Wahab Patail J held as follow:

(1) If the customer is required to pay the profit for the full tenure, he is entitled to have the benefit of the full tenure. It follows that it would be inconsistent with his right to the full tenure if he could be denied the tenure and yet be required to pay the bank's profit margin for the full tenure. To allow the bank to also be able to earn for the unexpired tenure of the facility, means the bank is able to earn a profit twice upon the same sum at the same time (see para 29).

(2) The profit margin that continued to be charged on the unexpired part of the tenure cannot be actual profit. It was clearly unearned profit. It contradicted the principle of Al-Bai Bithaman Ajil as to the profit margin that the provider was entitled to. Obviously, if the profit had not been earned it was not profit, and should not be claimed under the Al-Bai Bithaman Ajil facility (see para 29).

(3) The profit margin could be calculated and derived with certainty. Even if the tenure was shortened, the profit margin could be recalculated with equal certainty (see para 34)…

(4) Once it was established that there had been a default, then unless there was cause to the contrary, the order for sale must be given since a charge is an ad rem right to dispose of the security to recover a secured debt (see para 45).[18]

One of the biggest significant of this case is it had restricted the plaintiff, typically Islamic bank, suing under BBA facility from recovering the full amount of profit that they can claim under the full tenure of the agreement.

In this case, the court also stated as follow:

Since the question before the court is the interpretation and application of the terms of the contractual documents between the parties and of the decisions of the courts, reference of this case to another forum for a decision would be an indefensible abdication by this court of its function and duty to apply established principles to the question before it. It is not a question of Syariah law. It is the conclusion of this court, therefore, that there is no necessity to refer the question to another forum.[19]

This case highlighted the common problem from the legal and regulatory aspect when the issue of discount or rebate is not properly addressed in the legal framework. Since Islamic finance prohibits interest and usury, many of the transactions are shifted from interest-based loan into financing methods that involve sale and purchase. The problem is that when default occurs, the risks and harms exposed to the customer under certain Islamic financial products will be very high (if proper legal framework is not put in place). This is because during default, under conventional finance, the customer will usually have the repay the principal, plus some amount of interest to the bank, measured based on the time of repayment. In any event, the customer will not have to repay the full amount of interest that the customer has to pay originally.

This makes sense as the customer have to pay the amount earlier than originally stipulated in the agreement. For illustration, the customer borrows $10 million to purchase a building and use conventional finance to facilitate the purchase. The agreement is that the customer has to pay the bank $20 million in monthly installments for 20 years. Suddenly, the development of the building is halted due to the bankruptcy of the developer and 80% of the loan has already been released by the conventional bank to the developer. The customer will still have the repay the conventional bank the capital disbursed by the bank, plus some profit. However, the total amount that has to be repaid will never be the original $20 million, due to rebate and discount due to early termination. However, under certain Islamic financial product like some of the BBA offered in Malaysia, the customer will have to pay the full amount in the event of default, as the transaction is disguised as a sale and purchase transaction. However, in reality, it is not a real sale and purchase as the risks are always shifted to the customer using the sale and buy-back concept.

This important case is a departure from earlier rulings in which the courts merely follow the express terms of the contract, into a more equitable approach. While the equitable approach of the court is understandable, some suggest that the court obiter on the role of Shariah Advisory Council is disturbing since feedback from the Shariah Advisory Council should be of great assistance.[20]

The courageous approach adopted the court in this case has been summarized by one author:

If a contract between the contracting parties becomes an instrument of injustice, a judge cannot ignore the unfairness and insist on strict adherence to the letter of contract. Hence, a judge is empowered to set aside a contract when the fact discloses gross unfairness on one of the parties as Islamic system is a just and equitable system that promotes close relationship between the banks and the customers based on cooperation and equitable sharing of risks and rewards.[21]

This case has been cited with approval in subsequent cases including Malayan Banking Bhd v Marilyn Ho Siok Lin [2006] 7 MLJ 249, Arab-Malaysian Merchant Bank Bhd v Silver Concept Sdn Bhd [2008] 6 MLJ 295, Bank Islam Malaysia Bhd v Lim Kok Hoe & Anor and other appeals [2009] 6 MLJ 839 and Bank Islam Malaysia Bhd v Azhar bin Osman and other cases [2010] 9 MLJ 192.






CASE 7:          Malayan Banking Bhd v Marilyn Ho Siok Lin
[2006] 7 MLJ 249

In this case, the court held that, similar to the case of Affin Bank v Zulkifli, the bank concerned was only allowed to claim its sale price minus the ‘unearned profit’, that is, profit for the unexpired tenure of the Islamic finance facility. This is because it would be very inequitable for any financial institution, Islamic or otherwise, to claim for the complete agreed profit that is based for the entire tenure of the financing facility, when the customer in fact never had the benefit of the full tenure. In this case, David Wong J held as follow;

The court must have good reasons to ignore or put in another way rewrite the terms in the BBA documents. This involves the process of taking into consideration of ‘all the circumstances of the case’. That would include the public interests, the peculiarities of the contract, and the compliances by the parties of the agreed terms contained therein. Of course at the end of the day, the primary aim must be to make an order as in the circumstance seems just (see para 35).[22]

The finding of the court was a departure from the earlier decision of the court involving BBA in Bank Islam Malaysia Bhd lwn Pasaraya Peladang Sdn Bhd [2004] 7 MLJ 355 (High Court in Alor Setar), Bank Islam Malaysia Bhd v Adnan bin Omar [1994] 3 CLJ 735, Dato’ Hj Nik Mahmud bin Daud v Bank Islam Malaysia Bhd [1996] 4 MLJ 295 (High Court in Kota Bharu), Dato’ Hj Nik Mahmud bin Daud v Bank Islam Malaysia Bhd [1998] 3 MLJ 393 (Court of Appeal at Kuala Lumpur) and Bank Kerjasama Rakyat Malaysia Berhad v Emcee Corporation Sdn Bhd [2003] 1 CLJ 625 (Court of Appeal). In the earlier cases, the court upheld the bank’s application to recover the sale price, regardless of the actual tenure.

The judge in this case, David Wong J also elaborated that this approach is also in the public interest:

Further it is in the public interests that the Islamic Banking industry continues to flourish in this country and abroad. Adopting the interpretation given by the learned judge in the Affin case would enhance that process. It is common knowledge that people have a preference to a BBA facility for the simple reason that they are better off than that of a conventional bank loan in terms of ringgits and cents as the amount of repayments in the nature of profits are slightly lower to the normal interests charged in conventional loans and fixed. In conventional loans, the interests for the loans move up and down according to market forces. That is how it is being marketed by the banking industry and the reason for its popularity. As such, people who take up a BBA loan should not be put in a worse position than had they taken a conventional bank loan. If the plaintiff in this case succeeds, there is no doubt that the defendant would be put in a worse position than had she taken a conventional one. In a conventional bank loan, the borrower will only be required to pay an amount outstanding as at the date of the recovery of the loan, which is the date of the sale of the charged property. This is of course one of the grounds which the learned judge in Affin's case relied on in coming to his conclusion.

The decision of the judge in this case is very useful, considerate and pragmatic but the choice of word should be improved. For example, BBA is not a loan contract and the term ‘BBA loan’ is inaccurate. If BBA is a loan contract, this will be clearly contrary to all school of Islamic thoughts that prohibited the element of usury in transaction.




















CASE 8:          Malayan Banking Bhd v Ya’kup bin Oje & Anor
[2007] 6 MLJ 389

In this essential Malaysia High Court decision, the bank concerned was only permitted to claim its sale price minus the ‘unearned profit’ (profit for the unexpired /remaining tenure of the Islamic finance facility) since it would be very inequitable for any financial institution, Islamic or otherwise, to claim for the complete agreed profit that is based for the entire tenure of the financing facility, when the customer in fact never had the benefit of the full tenure. At the request of the defendant, the plaintiff in this case had granted the defendants a financing facility amounting to RM80,000 under the BBA to finance a purchase of property. The defendant then defaulted. In this case, the court must also consider the Sarawak Land Code and National Land Code that stressed that equity must be exercised. The major question in this case was whether the plaintiff was entitled as of right to the full profits in the event that the BBA was terminated earlier.

In this case, the court held that plaintiff cannot get the full original amount, as the principle is now established from the case of Affin Bank Bhd v Zulkifli bin Abdullah [2006] 3 MLJ 67 and Malayan Banking Bhd v Marilyn Ho Siok Lin [2006] 7 MLJ 249. In this case, the court noted that the reason why Islamic banks do not specified the amount of rebate or discount for earlier termination of the contract is allegedly due to the Shariah requirement for certainty, in which the amount involved in a transaction should be clear, and the rejection of multiple contracts when it cause ambiguity. However, the court wisely suggested that the Islamic bank can still openly state their policy and rates of rebate without including it in the agreement, to promote transparency. The court in this case held as the following:

(1) Islamic contract relating to commercial transaction is not only subject to the terms of the contract but must be decided subject to the Quranic injunctions and/or Islamic worldview as the case may be. For this very purpose, the court can on their own motion decide the issue or alternatively call experts to give their views.

(2) Section 148(2)(c) of the Sarawak Land Code  makes it mandatory to exercise equity and the court may not grant the order if it is going to be perverse to the defendants. When it comes to justice and equity, similar powers is also preserved under the National Land Code 1965

(3) As matter of practice, most of the Islamic banks do exercise their discretion and give a rebate, thereby keeping with the true spirit and intent of justice and equity under the Syariah law. Further, Islamic law of commercial transaction will not permit the bank to state the rebate for default under the BBA as Islamic law of contract, though it may appear to be similar to the secular law, is not the same. The Syariah law does not generally permit conditional contract, contract upon a contract, etc. However, this does not mean that Islamic bank cannot openly state their policy and rates of rebate without encapsulating in BBA agreements. This will promote transparency and equity. The fact that ' ibrar' is unilateral does not stop Islamic banks from voluntarily relinquishing part of their claim or the court upon default by the customer to demand that proper concessions be granted to the customer on equitable grounds when exercising its jurisdiction and powers for order for sale under SLC or NLC.

(4) Equity in this case applied both to the plaintiff as well as to the defendants. To obtain a just result and without dismissing this originating summons, the court would give an opportunity to the plaintiff to demonstrate equitable conduct by filing an affidavit stating: (i) that upon recovery of the proceeds of sale they will give a rebate; and (ii) specify the rebate. The amount specified must not be a nominal rebate but a substantial one taking into account the prevailing market force by banks generally, and the meaningful decision in the cases of Affin Bank Bhd and Malayan Banking Bhd. If the court is satisfied that the proposed rebate is just and equitable, it shall make an order in terms of the plaintiff's application, subject to the terms set out in the proposed affidavit. Otherwise, the court may not make the order as prayed or may make some other order as the justice of the case requires.[23]

In this case, the court made a few important observations. Concerning the validity of BBA, Hamid Sultan JC in this case said as follow:

‘Whether BBA is valid or invalid depends on the nature of the instruments. However, the concept of BBA is now being widely accepted, provided it does not infringe on the rule against riba. The Pakistan Supreme Court, in the historic judgment on interest stated above, has held that murabahah and/or BBA transactions (sale by deferred payment), when used as a mode of trade financing, is a borderline transaction with interest-bearing loan. The court stated that unless the basic requirements for its legal validity under the Syariah are strictly complied with, it might amount to interest-bearing loan. Further, the Supreme Court took the view that the murabahah and/or BBA concept is susceptible to misuse and is not an ideal financing system and should only be used where musharaka and murabahah, a concept of financing (partnership or equity financing), are not applicable. Our courts here have not ventured into the validity of such instruments in detail, as was done in Pakistan.’

This case follows the precedent established by earlier cases.




























CASE 9:          Arab-Malaysian Finance Bhd v Taman Ihsan Jaya Sdn Bhd & Ors (Koperasi Seri Kota Bukit Cheraka Bhd, third party)
[2008] 5 MLJ 631

In this case (and another 11 other cases), Kuala Lumpur High Court Justice Datuk Abdul Wahab Patail declared that the Islamic financial products known as Bai Bithaman Ajil (BBA) in Malaysia is contrary to the Islamic Banking Act 1983 (IBA) and the Banking and Financial Institutions Act 1989 (BAFIA). Previously, in the case of Tahan Steel Corporation Sdn Bhd v Bank Islam Malaysia Berhad, that was decided in the same day, he firmly rules that Istisna contracts are void ab initio (from inception).

The same judge, Justice Datuk Abdul Wahab Patail of the Kuala Lumpur High Court, earlier on in the the case Affin Bank v Zulkifli Abdullah (2006) 3 MLJ 67 also shocked the Islamic finance industry in Malaysia when he ruled that in the event that recovery proceedings are commenced prior to the expire of the agreed financing tenure, the bank is only entitled to profit up to the date of recovery only, and not the entire balance of the agreed sale price. While the earlier decision is highly appreciated, the decision in this case seems to be very problematic. The decision of this court was later overturned by the appellate court (although the written judgment seems to be not available).

In the case of Taman Ihsan Jaya, the defendant had approached the plaintiff for financing, to complete their purchase of a property from a third party. The plaintiff had already paid of the purchase price to the third party. The plaintiff agreed to give the defendant an Islamic finance facility known as BBA. Under the agreement, the defendant will sell the property to the plaintiff (at the balance price, to be paid immediately) and simultaneously purchase it back from the plaintiff (at higher price, to be paid in installment). The defendant defaulted and the plaintiff took legal action. The High Court judge in this case surprisingly said that BBA is not a bona fide sale but a mere financing facility that is contrary to Islamic Banking Act 1984 and BAFIA. The court ordered the parties to be return to their original position.

Below is the court decision on this case:

(1) When dealing with cases involving Islamic financing facilities, the civil court functions strictly as a civil court and does not become a Syariah Court. The civil court’s function, in this regard, is to render a judicially considered decision before it according to law and not apply Islamic law as if it were a Syariah Court. Its function is to examine the application of the Islamic concepts and to ensure that the transactions in the cases before it do not involve any element not approved in Islam (see paras F 8 & 31).

(2) In Islamic financing there is nothing that prohibits the giving of a loan. It is only the riba element in the loan that is prohibited. Hence, loans without riba ie benevolent loans or qard al-Hasan are allowed (see para 18).

(3) The term Al-Bai’ Bithaman Ajil is no more than a sale and deferred payment of the price as agreed to between the parties. As such, the selling price is ordinarily paid upon delivery. However if the payment is to be made later, the seller is in effect extending a credit or a loan of that selling price. At the same time it must be remembered that the deferred payment of the selling price is a credit or a loan permissible only because no riba is charged. Furthermore, the key to the argument that the Al-Bai’ Bithaman Ajil scheme does not involve any element not approved by Islam is to read the PSA independently. Therefore it is essential to maintain a bona fide sale in order that the profit or selling price should not be an element disapproved by Islam. Even so, an interpretation of the selling price must not be such as to impose a heavier burden than on a loan with interest (see paras 52–56).

(4) The court has the authority to look beyond the words of the agreement to the actual facts of the case in order to determine the substance of the transaction between the plaintiffs and the defendants before it draw any conclusions on the nature of the Al-Bai’ Bithaman Ajil transactions. It is necessary to look beyond the labels used and look at the substance particularly in the light of the fact that the interpretation advanced by the plaintiffs resulted in the defendants being burdened with a debt far in excess of that if they had taken interest based on a conventional loan (see para 62).

(5) Thus when the bank became the owner of the property by a direct purchase from the vendor or by a novation from its customer, as in the present cases, and then sold the property to the customer, the plaintiffs’ interpretation of the selling price ought to be rejected and the equitable interpretation applied. Where the bank purchased directly from its customer and sold back to the customer with deferred payment at a higher price in total, the sale was not a bona fide sale but a financing transaction and the profit portion of such an Al-Bai Bithaman Ajil transaction rendered the facility contrary to the Islamic Banking Act 1983 or the Banking and Financial Institutions Act 1989, as the case may be (see paras 68–69).
(6) Since the plaintiffs’ actions resulted most likely from a misapprehension rather than intent afterthought, the plaintiffs were entitled under s 66 of the Contracts Act 1950 to a return of the original facility amount they had extended. It was equitable that the plaintiffs seek to obtain a price as close to, if not more than, the market price as possible, and account for the proceeds to the respective defendants (see paras 70–71).’

There are conflicting reaction to this case, with some supporting and many objecting. For example, according to Mohamed:

The BBA facility offered to Muslims must not be contrary to the 'religion of Islam' and the issue whether the BBA scheme is consistent with the 'religion of Islam' is determined not merely by reading the property sale agreement independently but by going beyond the words of the agreement to determine the actual facts of the case and the substance of the transaction between the parties. Further, its determination is made with reference to the primary sources of Islamic law namely, the al-Quran and hadith and not merely with reference to the views of a particular mazhab alone. In Arab-Malaysian Finance Bhd v Taman Ihsan Jaya Sdn Bhd & Ors and Other cases, the court held that where the bank purchased the property directly from its customer and then sold back the same property to the customer with deferred payment at a higher price in total, such a sale is not a bona fide sale but a financing transaction. Therefore, where there appears gross unfairness, as in the above case, the courts are entitled to invoke equitable principles so as to eliminate the injustices.[24]

However, another author, Azahari observed that four important issues were not highlighted to the court attention in this case.[25] Firstly, contrary to court’s perception, there are actually adequate legislations that may be applied in Islamic banking and trade transaction, other than IBA and BAFIA. Secondly, Azahari highlighted that in Malaysia, several state law enactments clearly provided for the statutory interpretation of the term sharak which accepts any of the recognised mazhabs as part of sharak (Shariah). Thirdly, the issue on riba’ is a complicated matter and there are many different views on the matter. Fourthly, there is already an equitable way to calculate the amount involved (the sale price including ibra’) in which the parties will not be left in unfair position. Azahari concluded that the court finding in this case, that current BBA structure is faulty, is too harsh.

The decision in this case posed a very serious challenge to Islamic finance industry, not merely from the legal and regulatory aspect, but also to its very existence. Most of the Islamic financial products in Malaysia are based on the BBA contract.

The court basically held that the BBA contract as currently used in Malaysia cannot be used. The case suggests that a bank providing Islamic finance using the BBA cannot operate as mere financier but must instead step into the shoes of its customer by actually purchasing the property from the developer or vendor, and not from the customer. The implication of this case is very serious and it is fortunate that it was overturned during the appeal.

In this case, the judge also ruled that in order for a Shariah principle to be in accordance with Islam, it must be approved by all four madhahib (Islamic schools of thought). This gross mistake was corrected and the decision of this case on that matter was overruled by the Court of Appeal in the case of bank Islam Malaysia Bhd v Lim Kok Hoe & Anor and Other Appeals [2009] 6 MLJ 839 (CA).













CASE 10:        The Investment Dar Company KSCC and BLOM Developments Bank Sal [2009] EWHC 3545 (Ch)

The appellant/defendant in this case was The Investment Dar Company, an investment company that is incorporated in Kuwait. According to Article 5 of the memorandum, the company was established as a Shariah-compliant company.

The contract involves in this case is a wakalah contract, a type of agency contract. The contract in this case is to be governed by English law subject to compliant with Shariah. In this case the court initially granted a summary judgment in favor of the claimant bank, Blom amounting to USD10.7 Million. The defendant appeals against the summary judgment.

The main issues in this case involved trust and the issue of Shariah-compliant, although the focus on this research will be on the latter. To summarize, when the defendant defaulted in payment of the principal amount and the agreed profit, the defendant raised the issue of non-compliant to the Shariah. The judge in this case, Purle QC detailed as follow:

It is said on behalf of TID that that contract amounted to a noncompliant Sharia transaction because, in reality and substance, what TID was doing was taking deposits at interest. Blom says that claim is a nonsense. It points to the undoubted fact that the Sharia committee of (I shall assume) respected scholars had authorised and approved of this form of contract which is a strong indication that the contract was indeed Sharia compliant. There was put in before the master for TID at the very last moment some rather exiguous evidence of Sharia law, which was answered overnight and then supplemented by further evidence on the part of TID. Master Bragge was not especially impressed by TID's evidence but nonetheless considered that there was an arguable case that the transactions entered into pursuant to the master wakala contract were ultra vires TID. As moreover questions of capacity of a corporate entity are governed by the law of the place of incorporation, the fact that the master wakala contract was governed by English law was neither here nor there. I agree with Master Bragge that a triable issue has been shown on that score. Blom answered the evidence with the expert opinion of a Dr Hoyle, which the master thought was much more impressive than that of TID. I do not wish to say anything at this stage as to whose expert evidence appears to me to be the better. It seems to me that that is a trial point.  Mr. Reed for Blom pointed out, as was not disputed, that this defence is a lawyer's construct and the court should approach it with appropriate scepticism for that reason, especially as the Sharia committee apparently approved of this transaction. I agree that the court should approach the matter with some circumspection, but that does not take anything away from what is essentially a simple point, albeit difficult to apply, namely, that where one finds, as one does in this master wakala contract, a device to enable what would at least to some eyes appear to be the payment of interest under another guise, that is at least an indirect practice of a nonSharia compliant activity. I do not think it appropriate for me to go through the expert evidence in detail because I am satisfied that I cannot resolve which expert is correct on this application.[26]

In summary, the defendant alleged, among others, that the wakalah facility was not Shariah-compliant. The judge in this case observes that the Islamic facility has already been approved by the shariah committee and wakalah agreement was held to be valid and enforceable. This case has been critically scrutinized by Aldohni:

… [T]he argument of the contract validity under Islamic law was brought to the court after the defendants defaulte without a valid ground, which means that the use of Islamic law was purely strategic. This can, to certain extent, explain the dismissive approach that the court adopted in deciding Shamil Bank of Bahrain v Beximco Pharmaceuticals Ltd & ors case, which can be argued is not directed to Islamic law, but rather to its tactical use. Nevertheless, the point that the judge made in realtino to the court’s inability to deal with Islamic law is still a source of major concern in this context.[27]







CASE 11:        Tan Sri Abdul Khalid bin Ibrahim v Bank Islam Malaysia Bhd and another suit [2009] 6 MLJ 416

The defendant, Bank Islam Malaysia Bhd provided two murabahah financingfacilities to the plaintiff, to enable the plaintiff to redeem and acquire more shares in a company called ‘Kumpulan Guthrie Berhad’. Due to some breaches by the plaintiff, the defendant offered to restructure the financing facility into BBA. The plaintiff defaulted in the first installment and then challenges the validity of the BBA facility agreement, alleging, among –others, non-compliance to principles of Shariah. The court decided in favor of the bank on matter regarding shariah-compliant, after consulting the Shariah Advisory Council (SAC). The secretariat to the SAC clarified that SAC has confirmed that BBA is Shariah-compliant. The learned judge, Rohana J had this to say concerning the role of the SAC:

‘Taking cognisance that there will always be differences in views and opinions on the Shariah, particularly in the area of muamalat, there will inevitably be varied opinions on the same subject. This is mainly due to the permissive nature of the religion of Islam in the area of muamalat. Such permissive nature is evidenced in the definition of Islamic banking business in s 2 of the Islamic Banking Act 1983 itself. Islamic banking business is defined to mean, banking business whose aims and operations do not involve any element which is not prohibited by the religion of Islam. It is amply clear that this definition is premised on the doctrine of 'what is not prohibited will be allowed'. It must be in contemplation of the differences in these views and opinions in the area of muamalat that the Legislature deems it fit and necessary to designate the SAC to ascertain the acceptable Shariah position. In fact, it is well accepted that a legitimate and responsible government under the doctrine of siasah-as-Shariah is allowed to choose, which amongst the conflicting views is to be adopted as a policy, so long as they do not depart from the Quran and Islamic injunction, for the benefits of the public or the ummah. The designation of the SAC is indeed in line with that principle in Islam.

At this stage, the court still has discretion whether to refer to the SAC or not. The situation later change with the introduction of the new Central Bank of Malaysia Act 2009, in which section 56 requires all proceedings relating to Islamic financial business to take into consideration the published rulings of the Shariah Advisory Council. This is a departure from the old position in which the reference to SAC is purely discretionary.
CASE 12:        BANK ISLAM MALAYSIA BHD v. LIM KOK HOE & ANOR AND OTHER APPEALS [2009] 6 CLJ 22 

This case addressed some of the fundamental issues in the legal and regulatory aspect of Islamic finance. In this case, Per Raus Sharif JCA held as follow:

The comparison between a BBA contract and a conventional loan agreement was not appropriate. The two instruments of financing are not alike and have different characteristics. BBA contract is a sale agreement whereas a conventional loan agreement is a money lending transaction. The profit in BBA contract is different from interest arising in a conventional loan transaction. The two transactions were diversely different and indeed diametrically opposed. Thus, the learned judge was wrong when he equated the profit earned by BIMB as being similar to ‘riba’ or interest. Further, the comparison between a BBA contract and a conventional loan agreement was of no relevance. It served no purpose as the law applicable in BBA contract was no different from the law applicable in a conventional loan agreement. The law is the law of contract and the same principle should be applied in deciding the cases herein. Thus, if the contract was not vitiated by any vitiating factor recognised in law such as fraud, coercion, undue influence, etc, the court had a duty to defend, protect and uphold the sanctity of the contract entered into between the parties. (paras 24, 25, 26 & 27)

The Court of Appeal also stated as the following:

In this respect, it is our view that judges in civil court should not take upon themselves to declare whether a matter is in accordance to the religion of Islam or otherwise. As rightly pointed out by Suriyadi J (as he then was) in Arab-Malaysian Merchant Bank Bhd v Silver Concept Sdn Bhd [2005] 5 MLJ 210 that in the civil court 'not every presiding judge is a Muslim, and even if so, may not be sufficiently equipped to deal with matters, which ulama' take years to comprehend'. Thus, whether the bank business is in [*854] accordance with the religion of Islam, it needs consideration by eminent jurists who are properly qualified in the field of Islamic jurisprudence.

In this case, the court also commented on the role of the SAC:

‘Thus, we already have the legal infrastructure to ensure that the Islamic banking undertaken by the banks in this country does not involve any element which is not approved by the religion of Islam. The court, will have to assume that the Shariah advisory body of the individual bank and now the Shariah Advisory Council under the aegis of Bank Negara Malaysia, would have discharge their statutory duty to ensure that the operation of the Islamic banks are within the ambit of the religion of Islam.’

This case highlighted some of the problems that will occur if the legal and regulatory framework is not clear. It is necessary to have finality on the issue of shariah-compliant by providing for a proper and authoritative mechanism. Failure to have such mechanism will open a floodgate of cases on Islamic finance, as defaulting parties will be tempted to raise the issue of shariah-compliant as escape liabilities. However, such mechanism must be sensitive and must ensure protection of all parties, particularly the public at large.
























CASE 13:        Bank Kerjasama Rakyat Malaysia Bhd v Sea Oil Mill (1979) Sdn Bhd & Anor [2010] 2 MLJ 740

In this case, the appellant/plaintiff, Bank Kerjasama Rakyat Malaysia sued the defendants/respondents (debtor/guarantor) for a claim of around RM31 million. The plaintiff in this case gave a credit facility using bai al inah principal to the first respondent while the second respondent acted as the guarantor. When the first respondent defaulted, the appellant sued both respondents and obtained a summary judgment.

The appeal of the first respondent was rejected by the court as the first respondent is already in liquidation and proper leave of court has not been obtained. The appeal of second respondent was allowed as there was a triable issue whether the appellant had the legal capacity to carry on Islamic finance. The learned high court judge found that the appellant conduct were in order but the court of appeal rely on the Development Financial Institution Act 2002 that prohibit the appellant from carrying any Islamic banking business before obtaining the return approval of the Central Bank.

The court in this case held that the appellant operation using the Shariah concept was in order as it was in accordance with the resolution of its board of directors. The court also held the questioned whether that the appellant could carry on Islamic banking or not did not arise. The court in this case stated as follow:

The question whether the appellant could carry on Islamic banking or not does not arise. The simple fact is that the first respondent received a large sum of money from the appellant and then defaulted in its repayment. The second respondent was also sued by the appellant based on his guarantee for the said revolving credit. Both the first and second respondents were well aware of their respective contractual responsibilities and liabilities in the event of default of repayment. From the evidence available, we do not see any triable issue arising from the appellant's claim against the second respondent. We also agree with the learned High Court judge that the appellant was properly authorised to carry on its Islamic banking according to the minutes of the meeting of its board of directors dated 29 April 1993 (see the appeal record 344 exh ABO37 and also the minutes of the meeting of the Majlis Pengawasan Syariah Bil 2/94 dated 29 November 1994 which clearly stated their approval to the overdraft facility according to Shariah concept of Bai-al-Inah which was named as al-Tarkhis (Istimewa) facility.

This case indirectly shows the support of the legal system in Malaysia of the Islamic finance industry in which a flexible and permissive approach is taken.



































CASE 14:        Arab-Malaysian Merchant Bank Bhd v Silver Concept Sdn Bhd [2010] 3 MLJ 702

In this case, the defendant, Silver Concept Sdn Bhd entered into a sale and purchase agreement with a vendor to acquire a piece of land and assets in Ulu Selangor in order to be developed. The defendants then applied to the plaintiff, Arab-Malaysian Merchant Bank Bhd for a BBA facility amounting to RM125 million in order to purchase the land and a RM60 million alwujuh facility for the working capital for the development project and a RM200 million end-financing facility to provide financing to prospective purchases of units on the land.

At all material times, the plaintiff was the agent who arranged for the facilities by bringing together a consortium of financial institutions to provide the financing to the defendant. The defendant then defaulted in its repayment to the consortium and the plaintiff then sued the defendant. The plaintiff also claimed based on the alwujuh facility. The defendant counterclaim for damages and for losses suffered by it when the plaintiff bank breached its fiduciary duties by not fully disbursing the facility and also claimed that the facility agreement was null and void due to Shariah inconsistencies. The defendant further argues that the facility was tainted by riba’ and thus contravenes Islamic Banking Act 1983. In this case, Rohana Yusuf J stated as follow:

‘The parties here have agreed before executing the agreement, without any undue pressure or persuasion, to the preconditions of the Islamic based contracts. Parties also agreed to be bound by the terms to conclude the agreement. The defendant also agreed that the whole purpose of the sale transaction is to provide the banking facility it required, for the capital of the purposed project. For that reason, a sale agreement was concluded between the plaintiff. This is to ensure that the defendant becomes the beneficial owner of the land for the purpose of the revolving al-Wujuh facility. The facility was structured in such a way to accommodate the defendant's request for such capital. Al-Wujuh revolving financing facility is made on the basis of a fluctuating facility on a short to medium terms (in this case it was seven years) method of financing via the principle of Bai Bithaman Ajil or deferred payment sale. In this case, the purchase price was at RM60,000,000 while the sale price is predetermined at RM96,225,000. Nothing in the agreement stipulates the interest rate as alleged by the defendant. It is wrong for the defendant to say it is interest when they both agreed them to be profit. The issue of validity of Bai Bithaman Ajil was earlier brought to court in the Arab Malaysian Finance Bhd v Taman Ihsan Jaya Sdn Bhd & Ors [*710] (Koperasi Seri Kota Bukit Cheraka Bhd, third party) [2008] 5 MLJ 631; [2009] 1 CLJ 419 where the learned judge in that case ruled that the Bai Bithaman Ajil agreement is not a sale transaction but a lending agreement. The Appeal Court had however in Bank Islam Malaysia Bhd v Lim Kok Hoe & Anor and other appeals [2009] 6 MLJ 839; [2009] 6 CLJ 22 (CA) overruled the decision and held that the Bai Bithaman Ajil agreement is valid and an enforceable contract. I am bound by that decision to hold that the al-Wujuh revolving financing based on BBA is valid and enforceable.’

The court in this case held that the facility is not tainted by riba. The BBA agreement was valid and enforceable contract and other agreement involved in this case are also valid and enforceable. Markom et al highlighted that this case is part of a series of inconsistent decision made by Malaysian court:

This confusion and uncertainty can be seen in the conflicting judicial pronouncements. In the case of Affin Bank Bhd v. Zulkifli Abdullah, it is observed that the banks cannot claimed the full sale price of the property in the the event of default by the borrower. On the contrary, in the case of Arab Malaysian Merchant Bank Bhd v. Silver Concept Sdn Bhd the court permits the bank to claim from the borrower the profit of the full tenure.[28]












CASE 15:        Bank Islam Malaysia Bhd v Azhar bin Osman and other cases [2010] 9 MLJ 192

In this vital case, the court decided that Islamic bank must grant discount or rebate for BBA contract in the event of default by customer although the contract between the parties was silent on the issue. This is a departure from some of the traditional approaches, in which the court will not include a new term into a contract, unless it can be implied. The issue whether ibra’ or discount was purely discretionary on the part of the bank, was answered is negative by the court. Datuk Rohana Yusuf J decided that due to the practices of Islamic bank of granting rebate on premature termination, it has now ‘creates an implied term and legitimate expectation on the part of the customer.[29]

The concept of rebate, discount or ibra’ has been considered by the Shariah Advisory Council in Malaysia for some time and has been recognized. Under conventional finance, the exact rebate or discount that the customer will get when the contract is terminated earlier by earlier payment by the customer (either voluntary or due to default) is fixed and clear. However, under current Islamic financial products, the schedule or amount was not included in the contract agreement due to some Shariah uncertainty over the issue.

In this case, the legal counsel for the bank proposed that the bank was entitled to the full sale price as the transaction was not a loan transaction, as under conventional finance but a sale and purchase transaction. The legal counsel also cited the case of Bank Islam Malaysia Bhd v Lim Kok Hoe and Anor and others where the Court of Appeal acknowledged the obligation of the purchasers to make full payment of the sale price. The court in this case held, among others, as follow:

…Whilst it is true that the Court of Appeal in Lim Kok Hoe held that a BBA contract in a way differs from conventional banking because it is a sale transaction, it cannot however be regarded as a sale transaction simpliciter. The BBA contract is secured by a charge and concession as ibrar is given as a matter of practice to all premature termination. Despite the written term of the agreement, the bank in reality does not enforce payment of the full sale price upon a premature termination. It always grants rebate or ibrar based on 'unearned profit' (see paras 13-14).
…The court does not enforce payment of the full sale price but intervenes on equitable grounds, albeit based on different approaches. Therefore, when an Islamic bank practices granting of rebate on a premature termination, it creates an implied term and legitimate expectation on the part of the customer. Accordingly it is only proper that such expectation and practice be read into the contract. Hence, where the BBA contract is silent on issue of rebate or the quantum of rebate, the bank must, by implied term, grant a rebate and such rebate shall be the amount of unearned profit as practiced by Islamic banks (see paras 18, 20 & 22).[30]

The judge in this case, Rohana Yusuf J held that the bank should not be permitted to enrich itself with undue profit. The court also held that BBA was not a simple sale transaction. Although the contract was silent on rebate, Islamic financial institutions and banks were known to adopt a practice of granting rebate on premature termination and this created implied term and legitimate expectation that must be observed.  The court also held that the court in only bound by the Lim Kok Hoe case on the issue of validity and enforceability of a BBA contract.

The legal and regulatory framework in Malaysia is further strengthened by this case as the uncertainty and doubts concerning rebate and discount are clarified. Previously, in 2002, the Shariah Advisory Council has already resolved that ‘Islamic banking institution may incorporate the clause on undertaking to provide ibra’ to customers who make early settlement in the Islamic financing agreement on the basis of public interest (maslahah)’. The court in this case has also highlighted its curiosity on how the inclusion of a clear schedule for rebate or discount is contrary to Shariah:

The practice of the banks in deducting the unearned profit as ibrar is not ignoble. In the same breath, it is inconceivable how stipulating the terms of the rebate will be repugnant to Shariah. The latter however creates unnecessary anxiety in customers. For that and other reason stated herein, I have, for the purpose of determining the quantum of claim, taken an approach to enforce an implied term of Islamic banking practice in the case before me. In this respect, I am guided by the Federal Court case of Sababumi (Sandakan) Sdn Bhd v Datuk Yap Pak Leong [1998] 3 MLJ 151. In Sababumi Zakaria Yatim FCJ (as he then was) stated in that case that the court may infer an implied term from evidence that the parties to a contract must have intended to include it in the contract, though it has not been expressly set out in the contract. Therefore when an Islamic bank practices granting of rebate on a premature termination, it creates an implied term and legitimate expectation on the part of the customer. Accordingly it is only

































CASE 16:        Mohd Alias bin Ibrahim v RHB Bank Bhd & Anor [2011] 3 MLJ 26

This is the first case in Malaysia that deals with the issue of constitutional validity of the new sections of the Central Bank of Malaysia Act 2009, particularly section 56 and section 57. The ratio of the case is reference to Shariah Advisory Council under section 56(1)(b) is permissible and constitutional as the Shariah Advisory Council is merely required to make an ascertainment, and not final determination, of Islamic laws related to the questions posed.

Section 56 to Section 57 of the Central Bank of Malaysia Act 2009 stated as follow:

Section 56: Reference to Shariah Advisory Council for ruling from court
or arbitrator

(1) Where in any proceedings relating to Islamic financial business before any court or arbitrator any question arises concerning a Shariah matter, the court or the arbitrator, as the case may be, shall—

(a) take into consideration any published rulings of the Shariah Advisory Council; or
(b) refer such question to the Shariah Advisory Council for its ruling.

(2) Any request for advice or a ruling of the Shariah Advisory Council under this Act or any other law shall be submitted to the secretariat.


Section 57: Effect of Shariah rulings
Any ruling made by the Shariah Advisory Council pursuant to a reference made under this Part shall be binding on the Islamic financial institutions under section 55 and the court or arbitrator making a reference under section 56.

Section 58: Shariah Advisory Council ruling prevails
Where the ruling given by a Shariah body or committee constituted in Malaysia by an Islamic financial institution is different from the ruling given by the Shariah Advisory Council, the ruling of the Shariah Advisory Council shall prevail.

The plaintiff in this case entered into a sale and purchase agreement to purchase some properties situated within the Kota Warisan project and a building agreement to construct and complete a house on the land. On January 2004, the first defendant granted the plaintiff financing via an Islamic financial product known as Bai Bithman Ajil (BBA) and cash line facility to finance the said construction project. On March 2005, the assets, rights, and liabilities of the first defendant in respect of Islamic finance were vested in the second defendant.

The plaintiff in this case proceed with a legal action against the defendants claiming that the financing facilities dated January 2004 were void and of no effect, in addition to the plaintiff claim for damages for breaches of the facilities agreements with interest and cause.

On May 2010, the first defendant’s application to strike out the plaintiff claim was dismissed but during the process it was noted that there were some issues that require reference to the Syariah Advisory Council pursuant to Central Bank of Malaysia Act 2009 under section 56-58.

Similar to the case of Al Rajhi Banking & Investment Corp (M) Bhd v Hapsah Food Industries Sdn Bhd & Ors and another action [2012] 1 MLJ 115, the plaintiff in this case also seeks court’s determination as to whether the said sections were inconsistence with article 121 [1] of the Federal Constitution. The Plaintiff’s main submission was mainly premised on the view that the Parliament could not make law to delegate the judicial power of the court to any other body without an enabling clause or express provision in the Federal Constitution to such effect.[31]

The plaintiff raised three issues:

  1. whether the said sections were worded to the effect that they usurped the judicial power of the court to decide the issue to another body [in this case SAC]
  2. whether by imposing a duty on the court to refer any Syariah Banking matter to the SAC and making the decision of the SAC binding on the court, the litigants were deprived of any chance to be heard
  3. whether the said sections could not have retrospective effects on the transactions since they were entered into before the Central Bank of Malaysia Act 2009 come into force.

This case is very essential as it touches a few fundamentals aspect of the legal and regulatory system governing Islamic finance in Malaysia, particularly the finality of the decision of the SAC. Due to the importance of the matter, the court with the consent of the parties invited the attorney general’s chambers and the Central Bank of Malaysia as amicus curie to forward their views on the matter.

In response it was submitted that the said sections were enacted pursuant to the federal lists of the Ninth Schedule to the Constitution, and it is constitutional. In other words, there is no issue of unconstitutionality. Furthermore, the Central Bank of Malaysia and the attorney general chambers denied the proposition that the plaintiff right to be heard was or will be denied under the current system since according to section 51 (2) of the Act, the SAC was given full liberty to set its own process and procedure when a Syariah matter was referred to it. Therefore, the proposal that the plaintiff will not be able to be heard is only speculative.

There are many important decisions held by the court in this case. The judge in this case, Mohd Zawawi Salleh J elaborated that the role of the SAC was merely to make ascertainment, and not a final and binding legal decision:

In Malaysia, Islamic laws fall under the jurisdiction of the Shariah Court, which derives its power under a state law enacted pursuant to art 74(2) of the Federal Constitution, but in cases involving banking transactions based on Islamic principles it was the civil courts that had the jurisdiction to hear these matters. However, with the development of Islamic financial instruments it became important to establish one supervisory authority to regulate the uniformed interpretation of Islamic law within the sphere of Islamic finance and banking, and in Malaysia, that supervisory authority is the SAC. Based on s 52 of the Act, which sets out the functions of the SAC, it was clear that the SAC was established as an authority for the ascertainment of Islamic law for the purposes of Islamic banking business, takaful business and Islamic financial business. Thus, if the court referred any question under s 56(1)(b) of the Act to the SAC, the latter was required to merely make an ascertainment and not a determination of the Islamic laws related to the question. The sole purpose of establishing the SAC was to create a specialised committee in the field of Islamic banking to ascertain speedily the Islamic law on a financial matter. As such there was no reason for the court to reject the function of the SAC in ascertaining which Islamic law was to be applied by the civil courts in deciding a matter (see paras 62-63, 78 -80, 84-85, 105 & 122).[32]

Secondly, the judge also clarified that the final decision was still with the court:

… in a matter where there were differences of opinion regarding the validity of a certain Islamic finance facility, the SAC could be referred to so as to ascertain which opinion of the jurist was most applicable. This ascertainment of Islamic law would then be binding upon the courts as per the impugned provisions and it will then be up to the courts to apply the ascertained law to the facts of the case. As such, the final decision in the matter remained with the court in that it had to still decide the ultimate issues which had been pleaded by the parties. The process of ascertainment by the SAC had no attributes of a judicial decision and the ruling issued by the SAC was an expert opinion in respect of Islamic finance matters and it derived its binding legal effect from the impugned provisions enacted pursuant to the jurisdiction provided under the Constitution (see paras 87-88, 90, 93- 94, 96 & 109).[33]

The court in this case dismissed the plaintiff application with no order to cost. The court held that the said sections were valid federal laws enacted by the parliament. Concerning the issue of jurisdiction the court held that although the jurisdiction on Islamic law generally fall under the jurisdiction of Syariah court, cases involving Islamic finance fall under the jurisdiction of the civil court, as civil court have jurisdiction over financial disputes. Furthermore, due to the development of Islamic finance, it has become important to establish one supervisory authority to regulate the uniformed interpretation of Islamic law and in Malaysia the supervisory authority is the SAC.

From the legal and regulatory aspect, a few things can be learnt from this case. Firstly, it is important to have one supervisory authority vested with the final say on Islamic finance to ensure consistency and uniformity. If the details of Islamic finance, particularly the interpretation of Islamic rulings were left to the court, there would be numerous unnecessary difficulties as the judges mostly lack specialization in Islamic finance and there would be a series of conflicting decision that will eventually halt the development of Islamic finance. Secondly, the authority vested with the final say on Islamic finance must ensure that the party’s right to be heard is expressly stipulated in its procedure.

One of the lessons that can be seen from this case from the legal framework is the court, particularly in commonwealth countries should be given the final say to decide on legal dispute, but clear effect of reference to supervisory authority and their views must be clarified. In this case, the court referred to following statement by Ajaib Singh J in the case of Public Prosecutor v Oh Keng Seng [1976] 2 MLJ 125; [1976] 1 LNS 107:

Article 4(1) of the Federal Constitution declares that the Constitution is the supreme law of the Federation and that any law passed after Merdeka Day which is inconsistent with the Constitution shall to the extent of the inconsistency be void. Under the fundamental liberties provisions of the Constitution it is provided in art… that all person are equal before the law and entitled to the equal protection of the law. It need hardly be stressed that it is the duty of the court to jealously guard the Constitution and to see that nothing is enacted by the Legislature which may offend the provisions of the Constitution particularly those which relate to the fundamental liberties of the subject. If any particular piece of legislation gives so much as a hint that it violates the Constitution the court must unhesitatingly declare it null and void and of no effect. On the other hand if the impugned legislation is not inconsistent with or does not in any way violate the Constitution it is equally the duty of the court to uphold its validity and give effect to it.[34]

Concerning the issue of Shariah-compliant, the judge in this case noted that there were numerous different views:

The freedom to interpret Islamic laws by qualified jurists and scholars has lead to a myriad diversity of opinions (al-ra'yu) among them. These differences of opinion are mainly due to juristic issues of the Islamic law. It could differ for various reasons such as the use of different methodologies of Islamic jurisprudence, different approach towards an issue, different understanding of the Quran and Sunnah etc. Furthermore, legal opinion, to a certain extent, is influenced by characteristics of races, societies and epochs, depending upon their customs, traditions, predilections, peculiarities and business culture of a particular society.

The judge proceeded with the following statement concerning the need for finality so that the diversity of views will not hinder the development of Islamic finance:

Diversity of rulings and differences of opinion are the reasons why Islamic law continues to develop according to time. Just like common law, if there are no differences of opinion and development of the law, it will remain like a dead coral reef, a structure of fossil that remains still at the bottom of the ocean. In the light of the above, to ensure that the development of Islamic financial instruments progresses smoothly and orderly, the establishment of one supervisory authority in a country is very important. This supervisory authority should have the power to regulate a uniformed interpretation of Islamic law within the sphere of Islamic finance and banking in that country and may choose the best opinion in its decision making process after taking into consideration all of the authorities, custom of the locality etc. In Malaysia, that supervisory authority is the SAC. The SAC was established on 1 May 1997 as the highest Shariah authority in Islamic finance in Malaysia.[35]

The judge in this case also held that this is the first time the court is dealing with the new ss. 56 and 57 of the Central Bank of Malaysia Act 2009 and accordingly, there would be no order as to costs. This indicates that in the future, parties that unsuccessfully challenge the new sections might be given order as to costs for wasting court’s time. The obiter given by the court in this case is very relevant and useful:

To ignore the functions of the SAC is to open a floodgate for lawyers and cause a tsunami of applications to call any expert at their own interest and benefit, not only from Malaysia but also from other countries who might not be familiar with our legal system, administration of Islamic law and local conditions, just to challenge the Islamic banking transactions in this country.[36]


































CASE 17:        Al Rajhi Banking & Investment Corp (M) Bhd v Hapsah Food Industries Sdn Bhd & Ors and another action [2012] 1 MLJ 115

This case is actually a consolidated action of two civil suits. The dispute is due to the failure of the Defendant, Hapsah Food Industries Sdn Bhd to pay for the “sale price” of two Islamic financial products (known as Trade Commodity Financing-i) disbursement and the failure to pay the outstanding amount in respect of another Islamic financial product known as Structured Commodity Financing-i.

The purpose of these transactions was to provide financing to enable Defendant to import rubber products from Indonesian suppliers to be sold to Mardec Processing Sdn Bhd. Mardec Processing Sdn Bhd will then pay for the products supplied to it under the purchase orders issued by it to the Defendant and letters of credit [LC] were issued. The Defendant was under the legal obligation to ensure full payment of the LC and the Plaintiff/bank’s profit. To ensure payment, the Plaintiff required an assignment of the proceeds of the contract payable by Mardec, to be emplaced in a sinking fund. According to the evidence tendered in this case the Defendant was supplying to third party unauthorized customers although they did not exist any assignment of contract’s proceeds. This is done because the Defendant wanted to avoid selling to Mardec at lost. The Defendant then requested an additional financing facility to finance its new contract with the unauthorized customers. The Defendant attempted to build a case on a promissory estoppel and doctrine of forbearance. The judge dismissed the Defendant’s claim with cost:

I am allowing the claim by the Plaintiff Bank in D-22NCC-345-2010 as prayed in its Writ of Summons and Statement of Claim, prayers (i) and (ii) for the adjusted sum of RM4,888,701.43 for the TCF-i facility and RM84,839.17 for the SCF-i facility with costs of RM15,000.00 to be paid by the Defendants to the Plaintiff within one month from the date of this Order, with judgment to be entered accordingly. As for Civil Suit No. D-22NCC-471-2010, I am dismissing the Plaintiff’s (Hapsah Food’s) claim with costs of RM50,000.00 to be paid by the Defendant to the Plaintiff within one month from the date of this Order.[37]

The court decided that the Defendant had disregarded its obligations not to supply to unauthorized customers or third parties. There seems to be at least three important relevance of this case. Firstly, the issue of complexity is touched. The court noted in this case that certain Islamic financial products were sometimes complicated and proper understanding is necessary:

Built into the mechanics of payment are several security arrangements. These facilities are structured facilities in this sense. True enough, the structure is a complicated one because it involves Islamic financing which requires the interposition of a supply and exchange of commodities nominally done, but failure to comprehend the exact nature of the facilities cannot be a reason not to comply with essential obligations on the part of the 1st Defendant.[38]

It is necessary for parties involving in Islamic finance to understand its modus operandi and nature before proceeding. Secondly, the issue of equitable principles is briefly touched. This case is interesting partly due to the obiter dicta said by the judge in this case. Mohamad Ariff J stated as follow:

It is customary in common law cases to appeal to equitable principles to achieve a legal conclusion that can be regarded as just and proper between the parties. I have to observe in this connection that these equitable principles should be accorded an even more heightened presence since these are Islamic facilities, where considerations of aqad and piety in commercial relations should be regarded as primary considerations.[39]
     
According to the judge, Mohamad Ariff Bin Md Yusof J, equitable principle should be given even more consideration in this case since the financial products used are Islamic facilities. This approach, while noble, might cause some difficulties as it will be difficult to measure or limit the scope of the equitable principles that should be used in relation to Islamic facilities, particularly in the absence of a clear case precedent or statutory guideline.

From the legal and regulatory aspect, a few issues can be considered from this case. The first issue is the proper scope for the application of the equitable principle in Islamic finance cases. Islamic financial product is often portrayed as an ethical financial product that also focuses on ethics and morality, often associated with fairness and equity. However, in various cases this label might be slightly misleading as the current Islamic financial products offered in certain country including Malaysia are often nothing more than cosmetic changes (in relation to risk allocation) to the conventional financial products in order to ensure minimal compliance with Shariah requirement.

More often than not, the risks associated with Islamic financial products are more or less the same, sometimes more, than conventional products. For example, a customer using an Islamic financial product manages to get a financing for the purchase of a commercial building. The cost of the building is 10 millions. Under the so called Islamic financial product, the customer will purchase the building from the developer by paying the deposit, and then the customer [who is now vested with the beneficial interest and ownership] will “sell” the building to the Islamic financial institution for immediate cash and immediately at the same time repurchase the building at a higher price eg 20 millions, paid by monthly installments for few years.

If the customer purchases the building using conventional financing, the amount that the customer have to pay to the conventional bank in the form of usury or interest is usually more or less the same eg 20 millions in monthly installment. The reason why the Islamic financial institution adopts such a complicated process is to circumvent the Islamic prohibition of usury without actually taking any extra or real risk.

Under the current approach, in the event of default from the part of the customer the customer will be exposed to more harm using the so-called Islamic financial product compared to the conventional financial product under a few scenarios. For example, let say the building was only completed 80%, and the customer defaulted, under the conventional financing would have to pay the amount of money paid by the conventional bank in addition to a certain amount of interest. Furthermore, the customer would be entitled to get some rebate due to the early termination of the contract. In other words, the customer will not have to pay the full amount that the customer is supposed to pay under the normal period of the transaction. On the other hand, under the previous illustrated Islamic financial product, the customer would have to pay the full amount eg 20 millions because the contract is supposed to be a sale and purchase contract. However, it is not a true sale and purchase contract as that customer is the one who have to bear all the risks under this scheme.[40]

Under an ideal Islamic facility, the Islamic financial institution/bank will purchase the building at the price of 10 million and sell the building to the customer at a price of 20 millions to be paid in monthly installment. The Islamic bank will first have to investigate the developer to ensure the credibility of the project to avoid or reduce the possibility of default. In the unfortunate event where the project is defaulted and the building was not completed, the risk will not be suffered by the customer alone.

The customer will have a set off against the Islamic financier for selling a defective product i.e. an incomplete building while the Islamic financier can sue the developer for its failure to complete the project. It is clear that under the ideal Islamic facility the allocation of risk is better in the sense that the customer is afforded more protection. Under the ideal Islamic facility, the financier will have to take real risks but such risks can be reduced and mitigated with proper management and supervisory system. However, under the current system some of the Islamic financial products can expose the customer to more harm. In order to avoid this, it is of utmost important to have a clear legal and regulatory framework concerning issues like rebate, discount, etc. In order to reduce or avoid ambiguity concerning these issues, guidelines from supervisory body like SAC will be very beneficial.

Thirdly, the issue of claims without merit was answered firmly by the court with its strong rejection:

As for costs, counsel for Al-Rajhi pressed for higher costs to be awarded against Hapsah in D- 22NCC-471-2010 in view of the unmeritorious claim instituted for the alleged loss of RM55,000,264.00. Counsel urged upon this Court that a strong signal must be sent that an unmeritorious claim such as this cannot be tolerated. Given the conduct of the Defendants, I have no hesitation to agree with the Plaintiff Bank’s counsel. I am therefore awarding costs of RM50,000.00 in Suit No. D-22NCC-471- 2010.[41]





[1] Zulkifli Hasan and Mehmet Asutay, ‘An Analysis of the courts’ decisions on Islamic finance disputes’ (2011) ISRA International Journal of Islamic finance, Vol.3, Issue 2, 41
[2] Zulkifli Hasan and Mehmet Asutay, ‘An Analysis of the courts’ decisions on Islamic finance disputes’ (2011) ISRA International Journal of Islamic finance, Vol.3, Issue 2, 41
[3] Zulkifli Hasan and Mehmet Asutay, ‘An Analysis of the courts’ decisions on Islamic finance disputes’ (2011) ISRA International Journal of Islamic finance, Vol.3, Issue 2, 41

[4] Zulkifli Hasan and Mehmet Asutay, ‘An Analysis of the courts’ decisions on Islamic finance disputes’ (2011) ISRA International Journal of Islamic finance, Vol.3, Issue 2, 41

[5] This is one of the leading cases in Malaysia during the early years of the introduction of Islamic finance. This Supreme Court case is quite unique. Most of the cases during the early day involved BBA contract which was basically a financing facility based on the concept of sale with deferred payment. The bank would purchase a commodity or subject-matter and simultaneously sell it to the customer at a higher price (to be paid in installment), in order to avoid the prohibition  of riba’ or usury.  However, this case involved the Ijarah or leasing facility.
[6] Samsar Kamar Bin Hj Ab Latif, ‘Legal Aspect of Interest-free banking in Malaysia’ (1997) 2 MLJ xcii; [1997] 2 MLJA 92

[7] Mohd Illiayas, ‘Islamic/Interest-free Banking in Malaysia: Some Legal Considerations’ (1995) 3 MLJ cxlix; [1995] 3 MLJA 149

[8] Tinta Press Sdn Bhd v Bank Islam Malaysia Bhd [1987] 2 MLJ 192
[9]Islamic Investment Company of the Gulf (Bahamas) Ltd v Symphony Gems and others [2002] WL 346969, 4

[10] Norhashimah Mohd Yassin, ‘Islamic Commercial Contract Cases Heard in Civil Courts under Common Law: A Case Study of Malaysia and England’ (2007) Journal of Islamic Law Review, Vol. 3, 104.
[11] Engku Rabiah Adawiyah bt Engku Ali, ‘Constraints and Opportunities in Harmonization of Civil Law and Shari’ah in the Islamic Financial Services Industry’ (2008) Malayan Law Journal, 4 MLJ i.
[12] Yusuf Talal DeLorenzo and Michael J.T. McMillen, ‘Law and Islamic Finance: An Interactive Analysis’ in Simon Archer and Rifaat Ahmed Abdel Karim, Islamic Finance: The Regulatory Challenge  (Wiley 2007) 167-168
[13] Yusuf Talal DeLorenzo and Michael J.T. McMillen, ‘Law and Islamic Finance: An Interactive Analysis’ in Simon Archer and Rifaat Ahmed Abdel Karim, Islamic Finance: The Regulatory Challenge (Wiley 2007) 167-168
[14] Shamil Bank of Bahrain EC v Beximco Pharmaceuticals Ltd and others [2004] EWCA Civ 19

[15] Jason Chuah, ‘Private International Law – Choice of Law: Islamic law’ (2004) Journal of International Maritime Law, 10(2), 125-127
[16]Tahan Steel Corp Sdn Bhd v Bank Islam Malaysia Bhd [2004] 6 MLJ 1
[17]Tahan Steel Corp Sdn Bhd v Bank Islam Malaysia Bhd [2004] 6 MLJ 1
[18]Affin Bank Bhd v Zulkifli bin Abdullah [2006] 3 MLJ 67
[19]Affin Bank Bhd v Zulkifli bin Abdullah [2006] 3 MLJ 67
[20] Surianom Miskam, ‘Reference to the Shariah Advisory Council in Islamic Banking and Finance Cases: The Effect of the Central Bank of Malaysia Act 2009’ <http://www.internationalconference.com.my/proceeding/icber2010_proceeding/PAPER_106_ShariahAdvisory.pdf> accessed 6 January 2012
[21] Habib Rahman bin Seni Mohideen, ‘Affin Bank Bhd v Zulkifli Abdullah — Shariah Perspective’ [2006] 3 MLJ i

[22]Malayan Banking Bhd v Marilyn Ho Siok Lin [2006] 7 MLJ 249
[23]•         Malayan Banking Bhd v Ya’kup bin Oje & Anor [2007] 6 MLJ 389
[24] Ashgar Ali Ali Mohamed, ‘Al-Bai' Bithaman Ajil - Its consistency with the Religion of Islam: With special reference to Arab-Malaysian Finance Bhd v Taman Ihsan Jaya Sdn Bhd & Ors and Other cases’ [2008] 6 MLJ xiv; [2008] 6 MLJA 14
[25] Fakihah Azahari, ‘Islamic Banking: Perspective on recent case development’ (2009) 1 Malayan Law Journal xci

[26]The Investment Dar Company KSCC and BLOM Developments Bank Sal [2009] EWHC 3545 (Ch)
[27] Abdul Karim Aldohni, The Legal and Regulatory Aspects of Islamic Banking: A Comparative Look at the United Kingdom and Malaysia (Routledge 2011) 121

[28] Ruzian Markom, Sharina Ali Pitchay, Zinatul Ashiqin Zainol, Anita Abdul Rahim, Rooshida Merican Abdul Rahim Merican, ‘Adjudication of Islamic banking and finance cases in the civil courts of Malaysia’ (2011) European Journal of Law and Economics
<http://www.springerlink.com/content/qn431774608k617h/fulltext.pdf> accessed 10 January 2012
[29]Bank Islam Malaysia Bhd v Azhar bin Osman and other cases [2010] 9 MLJ 192

[30]Bank Islam Malaysia Bhd v Azhar bin Osman and other cases [2010] 9 MLJ 192
[31]Mohd Alias bin Ibrahim v RHB Bank Bhd & Anor [2011] 3 MLJ 26
[32]Mohd Alias bin Ibrahim v RHB Bank Bhd & Anor [2011] 3 MLJ 26
[33]Mohd Alias bin Ibrahim v RHB Bank Bhd & Anor [2011] 3 MLJ 26
[34]Public Prosecutor v Oh Keng Seng [1976] 2 MLJ 125; [1976] 1 LNS 107
[35]Mohd Alias bin Ibrahim v RHB Bank Bhd & Anor [2011] 3 MLJ 26
[36]Mohd Alias Ibrahim v RHB Bank Bhd & Anor [2011] CLJ JT(2) <http://www.cljlaw.com/public/cotw-110603.htm> accessed 10 February 2012
[37]<http://kl.kehakiman.gov.my/sites/kl.kehakiman.gov.my/attachments/D-22NCC-345-2010.pdf> accessed 10 February 2012
[38]<http://kl.kehakiman.gov.my/sites/kl.kehakiman.gov.my/attachments/D-22NCC-345-2010.pdf> accessed 10 February 2012
[39] Al Rajhi Banking & Investment Corp (M) Bhd v Hapsah Food Industries Sdn Bhd & Ors and another action [2012] 1 MLJ 115

[40] Recent court trend in Malaysia has shifted from this approach to a more equitable approach.
[41]<http://kl.kehakiman.gov.my/sites/kl.kehakiman.gov.my/attachments/D-22NCC-345-2010.pdf> accessed 10 February 2012