19 Jan 2009: My Say: Dilemma facing Islamic financing facilities
(Extracted from The Edge – author : Philip Koh Tong Ngee, a senior partner at Mah-Kamariyah & Philip Koh, Advocates & Solicitors)
A recent High Court decision that merits the attention of the Islamic banking industry in Malaysia is that of Arab-Malaysian Finance Bhd v Taman Ihsan Jaya Sdn Bhd & Ors (2008) MLJ 0485. This case concerns the validity of documents involved in a Al-Bai' Bithaman Ajil financing facility (BBA facility) — whether the BBA facility contravenes the Islamic Banking Act 1983 (IBA) and the Banking and Financial Institutions Act 1989 (BAFIA).
When confronted with this issue, Justice Datuk Abd Wahab Patail approached the issue as follows:
First, giving an overview of the development of Islamic financing. The learned judge noted that Islamic financing in Malaysia is governed by the IBA and BAFIA. He also observed that "the fundamental requirement under these Acts in respect of Islamic banking and financing, the aims and operations of the bank do not involve any element not approved by the religion of Islam".
Secondly, in a significant passage exemplifying his judicial approach, he observed that "the civil court is not to be a rubber stamp to issue orders for sale; it must maintain curial supervision that the orders for sale are being sought upon the balance sums that are not pursuant to any element not approved by the religion of Islam".
It is on this premise that the High Court embarked upon an exegesis of whether the BBA facility contained elements which are not approved by Islam. This assertion of curial jurisdiction is a fascinating step for the Civil Court, for though the judge eschewed any findings of economic, social, religious and other justifications or rationale of the elements, he nevertheless proceeded to analyse whether the sale formula under the BBA facility contravened usury (riba).
The High Court also argued that the discernment needed in evaluating whether an instrument is that of the "true nature of contracts and transactions is the substance and not the words and structure". In fact, the judge rejected the use of legal devices or trickery (hilah), which he characterised as legal fiction so as to "fall in not the pit of complacency and inadvertently developing a fiqh al-hiyal (or juridicial evasion)". Bearing this in mind, it is not sufficient that the distinction between a sale and a loan is maintained in form, but it must also be maintained in substance. It is reality and not forms and labels that matters.
As part of the High Court's approach, the judge also refused to abdicate what he considered the judicial function to refer the matter for a ruling to the Syariah Advisory Council set up under the Central Bank of Malaysia Act 1958, as such a referral is not binding on the High Court.
The High Court's decision is that "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 is not a bona fide sale, but a financing transaction, and the profit portion of such BBA facility rendered the facility contrary to the IBA and/or BAFIA, as the case may be".
But after making such a ruling, the High Court made an interesting move to permit a restitution of the principal facility amount and invoke an equitable jurisdiction that the bank may seek to obtain a price close to market price on a sale and account for profit to the defendant's "borrowers".
This extraordinary decision, although dealing with a BBA facility, reverberates into the wider issue of validity of Islamic financing transactions. It will certainly excite Islamic and civil commercial law juristic debate and comments. It introduces an element of uncertainty into the financial markets and must surely invite some response from our regulators and lawmakers, if not from our appellate courts. The same judge had in an earlier decision in Affin Bank Bhd v Zulkifli bin Abdullah (2005) indicated his disquiet over the BBA facility instruments when he had already rejected a view that reference be made to the National Syariah Advisory Council.
It is interesting to compare Justice Abd Wahab Patail's approach with that of his fellow judges at the High Court. For example, Justice Suriyadi (as he was then) in Arab Malaysian Merchant Bank Bhd v Silver Concept Sdn Bhd (2005) took the view that once the contractual formalities had been complied with, a purchase at credit per se with a larger sum being agreed to be paid back founded on a buyback concept which may resemble interest is not void.
In the words of Justice Suriyadi: "I am unable to acquiesce to such a suggestion as there is no clear text that prohibits such a transaction entrenched with all those ingredients." The judge further held that it is his considered opinion that any transacted Islamic banking business must be presumed to be in order at the outset unless rebutted later. Justice Suriyadi approached the matter pragmatically that any court faced with application to enforce an Islamic financing or security instrument ought to do so if the cause papers are in order, unless there is cause to the contrary as may be contested by a chargor (the borrower). However, from the manner in which Justice Suriyadi would determine such a challenge, it would scarcely succeed.
In the UK, where a similar conundrum was placed before the English courts, they have also circumvented any challenge of the legality of Islamic instruments on the grounds of its being un-Islamic by approaching it via construing the same on common law contractual principles. In the case of Islamic Investment Company of the Gulf (Bahamas) Ltd v n (2002), the High Court rejected a challenge that a Murabaha agreement is contrary to orthodox syariah. In its essence, the High Court in UK affirmed that, if properly drafted, it may be enforced in an English court if it is governed by English law.
So too in Shamil Bank of Bahrain v Beximco Pharmaceuticals Ltd & Ors (2003). The Queen's Bench held that the syariah defence posed by defaulting borrower(s) and security provider was without merit and a wholly lawyers' construct which the court rejected. This decision was upheld by the Court of Appeal (2004) where the court held that the intention of the parties was for the Murabaha agreement to be binding and a court ought to lean against a construction that might defeat such a commercial purpose.
My Comment :
Interesting insights given by the learned author. As a layman, I wonder whether the judges and/or the lawyers handling the cases that deal with muamalat (commercial transactions) are well versed in shariah. In Malaysia, if we mention Shariah Court, the first thing that comes to our mind is those that deal with family matters only and all other cases are referred to the Civil Courts.
It is high time that some proactive measures are taken by the Government, and/or Central Bank and/or other related parties e.g., Bar Council or any learned persons/bodies that have direct interests, to start educating these people so that the judgements made do not contravene the core concept of Islamic mode of financing etc.
On the other hand, the industry players must also refrain from manipulating the Islamic modes of financing so as to compete with its conventional counterparts – it comes to no surprise why our Islamic products are not faring well and/or not acknowledged by other Islamic countries especially in the GCC.
It is very sad that the concept of murabaha (that becomes BBA in Malaysia) has been manipulated so much that it mirrors the conventional term loan. God says “Those who consume usury cannot stand except as one stands who is being beaten by Shaytan into insanity. That is because they say, ‘Trade is [just] like interest.’ But God has permitted trade and has forbidden interest.
(Extracted from The Edge – author : Philip Koh Tong Ngee, a senior partner at Mah-Kamariyah & Philip Koh, Advocates & Solicitors)
A recent High Court decision that merits the attention of the Islamic banking industry in Malaysia is that of Arab-Malaysian Finance Bhd v Taman Ihsan Jaya Sdn Bhd & Ors (2008) MLJ 0485. This case concerns the validity of documents involved in a Al-Bai' Bithaman Ajil financing facility (BBA facility) — whether the BBA facility contravenes the Islamic Banking Act 1983 (IBA) and the Banking and Financial Institutions Act 1989 (BAFIA).
When confronted with this issue, Justice Datuk Abd Wahab Patail approached the issue as follows:
First, giving an overview of the development of Islamic financing. The learned judge noted that Islamic financing in Malaysia is governed by the IBA and BAFIA. He also observed that "the fundamental requirement under these Acts in respect of Islamic banking and financing, the aims and operations of the bank do not involve any element not approved by the religion of Islam".
Secondly, in a significant passage exemplifying his judicial approach, he observed that "the civil court is not to be a rubber stamp to issue orders for sale; it must maintain curial supervision that the orders for sale are being sought upon the balance sums that are not pursuant to any element not approved by the religion of Islam".
It is on this premise that the High Court embarked upon an exegesis of whether the BBA facility contained elements which are not approved by Islam. This assertion of curial jurisdiction is a fascinating step for the Civil Court, for though the judge eschewed any findings of economic, social, religious and other justifications or rationale of the elements, he nevertheless proceeded to analyse whether the sale formula under the BBA facility contravened usury (riba).
The High Court also argued that the discernment needed in evaluating whether an instrument is that of the "true nature of contracts and transactions is the substance and not the words and structure". In fact, the judge rejected the use of legal devices or trickery (hilah), which he characterised as legal fiction so as to "fall in not the pit of complacency and inadvertently developing a fiqh al-hiyal (or juridicial evasion)". Bearing this in mind, it is not sufficient that the distinction between a sale and a loan is maintained in form, but it must also be maintained in substance. It is reality and not forms and labels that matters.
As part of the High Court's approach, the judge also refused to abdicate what he considered the judicial function to refer the matter for a ruling to the Syariah Advisory Council set up under the Central Bank of Malaysia Act 1958, as such a referral is not binding on the High Court.
The High Court's decision is that "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 is not a bona fide sale, but a financing transaction, and the profit portion of such BBA facility rendered the facility contrary to the IBA and/or BAFIA, as the case may be".
But after making such a ruling, the High Court made an interesting move to permit a restitution of the principal facility amount and invoke an equitable jurisdiction that the bank may seek to obtain a price close to market price on a sale and account for profit to the defendant's "borrowers".
This extraordinary decision, although dealing with a BBA facility, reverberates into the wider issue of validity of Islamic financing transactions. It will certainly excite Islamic and civil commercial law juristic debate and comments. It introduces an element of uncertainty into the financial markets and must surely invite some response from our regulators and lawmakers, if not from our appellate courts. The same judge had in an earlier decision in Affin Bank Bhd v Zulkifli bin Abdullah (2005) indicated his disquiet over the BBA facility instruments when he had already rejected a view that reference be made to the National Syariah Advisory Council.
It is interesting to compare Justice Abd Wahab Patail's approach with that of his fellow judges at the High Court. For example, Justice Suriyadi (as he was then) in Arab Malaysian Merchant Bank Bhd v Silver Concept Sdn Bhd (2005) took the view that once the contractual formalities had been complied with, a purchase at credit per se with a larger sum being agreed to be paid back founded on a buyback concept which may resemble interest is not void.
In the words of Justice Suriyadi: "I am unable to acquiesce to such a suggestion as there is no clear text that prohibits such a transaction entrenched with all those ingredients." The judge further held that it is his considered opinion that any transacted Islamic banking business must be presumed to be in order at the outset unless rebutted later. Justice Suriyadi approached the matter pragmatically that any court faced with application to enforce an Islamic financing or security instrument ought to do so if the cause papers are in order, unless there is cause to the contrary as may be contested by a chargor (the borrower). However, from the manner in which Justice Suriyadi would determine such a challenge, it would scarcely succeed.
In the UK, where a similar conundrum was placed before the English courts, they have also circumvented any challenge of the legality of Islamic instruments on the grounds of its being un-Islamic by approaching it via construing the same on common law contractual principles. In the case of Islamic Investment Company of the Gulf (Bahamas) Ltd v n (2002), the High Court rejected a challenge that a Murabaha agreement is contrary to orthodox syariah. In its essence, the High Court in UK affirmed that, if properly drafted, it may be enforced in an English court if it is governed by English law.
So too in Shamil Bank of Bahrain v Beximco Pharmaceuticals Ltd & Ors (2003). The Queen's Bench held that the syariah defence posed by defaulting borrower(s) and security provider was without merit and a wholly lawyers' construct which the court rejected. This decision was upheld by the Court of Appeal (2004) where the court held that the intention of the parties was for the Murabaha agreement to be binding and a court ought to lean against a construction that might defeat such a commercial purpose.
My Comment :
Interesting insights given by the learned author. As a layman, I wonder whether the judges and/or the lawyers handling the cases that deal with muamalat (commercial transactions) are well versed in shariah. In Malaysia, if we mention Shariah Court, the first thing that comes to our mind is those that deal with family matters only and all other cases are referred to the Civil Courts.
It is high time that some proactive measures are taken by the Government, and/or Central Bank and/or other related parties e.g., Bar Council or any learned persons/bodies that have direct interests, to start educating these people so that the judgements made do not contravene the core concept of Islamic mode of financing etc.
On the other hand, the industry players must also refrain from manipulating the Islamic modes of financing so as to compete with its conventional counterparts – it comes to no surprise why our Islamic products are not faring well and/or not acknowledged by other Islamic countries especially in the GCC.
It is very sad that the concept of murabaha (that becomes BBA in Malaysia) has been manipulated so much that it mirrors the conventional term loan. God says “Those who consume usury cannot stand except as one stands who is being beaten by Shaytan into insanity. That is because they say, ‘Trade is [just] like interest.’ But God has permitted trade and has forbidden interest.
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