SOME POINTS TO PONDER - WADIAH VERSUS QARD

When I was studying for my Masters Degree a few years back, I took up a course in Islamic Banking and Finance. My lecturer is a prominent academician and an industry expert in Islamic banking (having served in the Islamic Banking Division of a local bank for nearly 2 decades). Being a person with minimal knowledge in Islamic banking and for my further understanding of the concept of Wadiah, I raised a question on the concept of Wadiah on savings accounts – since Wadiah means safekeeping and the Bank acts as a Trustee for the deposits, they should not invest the depositors’ monies as ownership of the deposits still lies with each individual depositors.

My lecturer gave me an explanation that was not very satisfactory and so I did some research on this very concept and for knowledge purposes, I reproduced a comprehensive (but short) write up on wadiah (courtesy of http://wadiah.com) :

Wadiah or safekeeping is an instrument that allows a person to keep the wealth or assets belonging to oneself with another person for safekeeping purposes. In the legal sense, it signifies a thing entrusted to the care of another. The proprietor of the thing is known as mudi’ (depositor), the person entrusted with it is known as wadi’ or mustawda’ (custodian) and the deposited asset is wadiah. The concept of wadiah is not specifically mentioned in the Holy Quran. However, as far as safekeeping which is closely related to trust is concerned, there are some indications on this concept, which can be observed in the following verses:

· “Those who are faithfully true to their trusts (amanah) and to their covenants” 23:8

· “Verily, Allah commands that you should render back the trusts to those, to whom they are due” 4:58

In the Sunnah, Al-Bayhaqi narrated that ‘A’ishah said on the occasion of the Prophet’s (pbuh) migration to Medina (Hijrah), “The Messenger of Allah asked ‘Ali to take his place in Makkah in order to deliver the deposited things to their owners.” Moreover, the Prophet (pbuh) is reported to have said: “Return the trust to those who entrusted you, and do not betray those who betrayed you.” (Abu Dawood and Tirmidhi).

Therefore, premised on the above, all Muslim jurists unanimously agree on the permissibility of Wadiah.

There are 2 types of wadiah :

· Wadiah Wadiah based on custodianship (wadiah yad al-amanah)

The actual nature of wadiah as started earlier is amanah (custodianship) where it is charitable and divinely rewarded. The custodian shall keep the deposit as if he is keeping and taking care of his own property. As an amanah contract, this type of wadiah does not impose any liability on the custodian in normal cases of loss or damage except in the case of negligence or wrongful doings (fault-based).

· Wadiah with Guarantee (wadiah yad al-Dhamanah)

It is a combination of two contracts which are safekeeping (wadiah) and the guarantee (Damman) contract. Dhamanah contract when attached to the wadiah contract, converts the concept of wadiah to guaranteed safe custody. The custodian is entitled to use the deposited item for trading or other purposes, irrespective of the consent of the depositor as he is guaranteeing the return of the deposit and is liable for any damage or loss. The custodian has a right to any income derived from the utilization of the deposited asset. Since the custodian owns the profit, he may dispose it as he wishes and may give some portions of the profit as a gift (hibah) to the depositor.

The same issue cropped up when I attended my Islamic law of contract class this morning – my lecturer raised the issue that if the Bank wants to invest the deposits made by the depositors, they should use a contract of qard (loan) instead of wadiah. After all, in qard, ownership and risk of loss and returns are transferred to the borrower (in this case, the Bank) and at the same time, the lender (the depositors) are ensured of the return of the deposits. The borrower (i.e., the Bank) has a legal duty to repay to the lender the money that they borrow (the actual deposit), and therefore, the interest of the depositors are safeguarded at all times.

This makes me think that if Islam has made it easy for the Bank to use the contract of qard (for money lending) why do we need another concept of Wadiah yad al-Dhamanah for our savings or even current accounts???

My next question is – is Malaysia the only country that opts to use of Wadiah yad al-Dhamanah concept for our savings and current account?

What if a depositor does not wish his savings to be used for investment purposes? Will he not be entertained by the Bank? As it is right now, when a person opens an account with a Bank, we are to sign opening of account agreement(s) that is/are unilateral in nature – is this just? Or is it only beneficial to one party? What happens to mutual consent of terms and conditions in the agreement?

Hhhhmmmm, too many unanswered questions here – I leave you to ponder ……

ISLAMIC FINANCE MART NEEDS MORE HYBRID PRODUCTS

(Extracted from Business Times, February 20, 2009)

The Islamic finance market is in need of more hybrid products to meet the increasingly sophisticated needs of corporate clients, said Zain Ibrahim & Co (ZICO) chairman Datuk Dr Nik Norzrul Thani.

Local players must grab the opportunity to become more product innovative, taking advantage of the strong Islamic finance framework already provided by the authorities.

"Japan and Hong Kong are now keen (to venture) into this market and if we could become more innovative, we could easily export our expertise," Nik Norzrul told Business Times in an interview.

Nik Norzrul, a former dean at the International Islamic University Malaysia, said the presence of foreign Islamic banks in Malaysia has been positive.

"The competition has brought about more product innovation among the local players, although there is still a lot of room for improvement," he said.

Nik Norzrul advises clients on a wide range of legal matters incorporating Islamic finance, banking, offshore finance, debt restructuring, international, corporate and commercial law.

A director of Al Rajhi Banking and Investment Corporation (Malaysia) Bhd, he has also written several articles on corporate and financial issues, particularly on Islamic banking.

ZICO is the country's largest legal firm and is active in Islamic finance locally and regionally. It has presence in Indonesia, Singapore and Thailand.

It is the first law firm in Malaysia to establish a shariah advisory firm called ZI Shariah and will soon open an office in Dubai.

ZI Shariah, which is licensed by the Securities Commission to advise on sukuk, has advised clients from the Middle East who came to Malaysia on syariah framework.

The advisory services include not only for the Islamic banking legal matters, but also on personal Islamic financing and syariah-compliant wealth management.

"We have done this quite successfully with the Middle East clients and we are now contemplating to open an office in the region, maybe in Dubai," Nik Norzrul said.

Realising the growing importance of Islamic finance globally, especially among those from the Middle East who are flushed with cash, ZI Shariah has hired Arab-speaking lawyers as well as Arabic classes are being provided for its lawyers and staff.

Nik Norzrul said apart from language, legal advisers must be well equipped in understanding the syariah field, especially in the area of Islamic financing.

There is still lack of experts in this area, he said, when compared with the huge demand for Islamic financial products.

"In Malaysia, for example, why is that Muslims are still generally hesitant to engage an expert in Islamic financial management? Why is there still this assumption that Muslims cannot have wills?" he asked.

Nik Norzrul said this is an area that posed great potential and shariah lawyers should be well equipped with Islamic financial management skill.

"Muslim lawyers can play the role of family counsellors and advise Muslims to plan their finances properly before their death," he added.

My comment :

This is a good example that Malaysians can go far with their knowledge in Islamic finance, even establish their own firm in the GCC and not restrict their presence in the South East Asia region only. After all, there are nearly I billion Muslims worldwide - one must also remember that Islamic finance is not only restricted to Muslims but can attract a lot of non-Muslims as well.

RISK MANAGEMENT IN ISLAMIC FINANCE

Risk management for Islamic banking financial products and services is one of the greatest challenges that many westernized, as well as Islamic Banks, are facing today.

As a result of this market growth in Islamic financial products there is a high demand to understand how to assess and manage the risks arising from applying these products and services. Credit, operational, market and liquidity risks together with the risk of non-compliance with the Shariah law are becoming very hot issues for financial institutions. This book presents a common framework of how to efficiently manage the risks faced and minimise the overall degree of Islamic financial risks.

Below is the view of Dr Shamshad Akhtar (Governor, State Bank of Pakistan published in The Banker on September 1, 2008)

Islamic finance has grown substantively in the past few years and with it there has been a growing interest and debate on the appreciation of its risk architecture and profile. It is now well recognised that, by and large, Islamic banks are prone to the same risks as conventional banks. Concurrently, however, Islamic banks face additional risks that emanate from the unique characteristics of Islamic finance transactions, along with risks associated with the real or perceived non-compliance of Shariah principles that may erode customer/investor confidence.

To understand the complexities of an appropriate risk and reward-sharing mechanism embedded in Islamic finance transactions, a better understanding of the management and mitigation of the risks associated with certain Islamic products is necessary. This requires a change of mindset for both the Islamic banking industry and the regulators, whose primary focus has been debt-based financial intermediation.

At the same time, it requires the development of a financial, legal and regulatory infrastructure to help manage principal agent-entrepreneur relationships in profit and loss-sharing transactions, where commercial banks are exposed directly to equity exposures of partners in business while catering for investment account holders’ concerns.

Most importantly, Islamic banks are generally exposed to substantial liquidity risk owing to the lack of access to standardised sharia-compliant investment portfolios and liquidity management instruments. This has affected their ability to successfully manage the maturity profile of both assets and liabilities, and has curtailed diversification.

Lack of instruments
Risk management in Islamic finance is further complicated by the lack of adequate risk hedging instruments and techniques. Shariah prohibition of riba and gharar means many techniques based on conventional tools, such as options, futures, and forwards, are not yet available to Islamic banks and this lack has increased banks’ vulnerability to foreign exchange, interest rate, commodity and equity price risks.

In order to address liquidity risks, the Islamic financial industry must develop appropriate liquidity management instruments. Moreover, the compound risks faced by Islamic banks have necessitated the development of a shariah-compliant derivatives market. Besides providing hedging, such derivative instruments are expected to improve transactional efficiency. However, further progress in this area would require substantial research and employment of financial engineering and innovation.
Further, the disclosure regime in Islamic banking needs to improve to ensure proper market discipline, removal of information asymmetries, better risk-return profile, building trust in shariah-compliance and improvement in internal governance. Better disclosure would also contribute towards the development of equity-based financing such as mudaraba and musharaka.

Consistent with the best practices of the corporate governance framework, Islamic banks also need to conform to its well-accepted and time-tested principles, in recognition of the fact that shariah offers a stakeholder-oriented model of corporate governance implicit in Islamic property and contract provisions. Also, the model of governance is affected by the role of investors as depositors, in addition to the oversight of Islamic banks by shariah advisory boards, and is critical for ensuring credibility and sanctity.

Regulatory framework
Work also needs to be accelerated to develop proper understanding of prudential regulations and shariah inspection and supervision of Islamic banks. Guidance on a prudential regulatory framework should incorporate appropriate amendment and refinements to the Basel II framework or other best practices, with the objective of providing effective treatment of risks associated with Islamic products and balance sheets.

There has been considerable movement in recent times in the development and promulgation of international best practices in Islamic risk management principles. In this regard, the work done by international bodies such as the Islamic Financial Services Board guides the industry and regulators. Notwithstanding, as the risk architecture for Islamic finance continues to evolve, a fuller appreciation of its risks will emerge as more empirical evidence comes forth with the growth in the size of the industry.

My comment :

I somehow agree with the above view. There is already a framework in terms of reporting (even though, they are non-conclusive as yet, but efforts are being made towards that direction) for Islamic financial institutions developed by AAOIFI, however, it is sad to note that only a few countries/organizations have made it compulsory to adopt it (e.g., Bahrain, Jordan and Dubai International Financial Centre). What about the other member countries or OIC? With the standardization, comparability can be made and the framework can cover the unique and peculiar characteristics that are only available in Islamic financial institutions.

Islamic finance also lacks financial instrument – what we have now, is just a direct replication of the conventional instruments, with the deletion of the word interest etc. But the substance remains the same. Therefore, efforts must be made, especially by the learned Islamic finance scholars and with the necessary support by the Central Banks and Governments to promote development of innovative and full-fledge shariah-compliant financial instruments that are accepted worldwide – we do not want a product, e.g. Bai Bithaman Ajil that is accepted in Malaysia but rejected everywhere else in the world.

TASK FORCE FOR ISLAMIC FINANCE AND GLOBAL FINANCIAL STABILITY

The Task Force was proposed during the Forum held by the Islamic Development Bank on 25th October 2008, in response to the Global Financial Crisis, and was endorsed by the Council of the Islamic Financial Services Board (IFSB) at its meeting held on 29th October 2008. It is mandated to assess the performance of the Islamic financial system in the current financial crisis and areas in which Islamic finance could contribute to promote financial stability.

The Task Force has set up three working groups to examine the following areas:
• Promote greater understanding and appreciation of the universal values inherent in Islamic finance.
• Lessons learned from the current financial crisis and how Islamic finance needs to be developed to enhance the resilience of the Islamic financial system.
• Further strengthening of the international Islamic financial architecture.

A preliminary report will be discussed at the next meeting of the Task Force on 28th March 2009.

My comment :
I sincerely hope that the findings could be made public and could help to somehow give insights on how to overcome the financial crisis.

MALAYSIA SERVICES EXHIBITION 2009 IN DUBAI UAE

Malaysia Services Exhibition 2009 (MSE 2009) in Dubai, UAE
Event Date: 17 Mar 09 - 19 Mar 09

MIFC will participate in the Malaysia Services Exhibition 2009 (MSE 2009) at Dubai Airport Expo Exhibition Centre, Dubai from 17 to 19 March 2009.

ISLAMIC FINANCE NEWS (IFN) AWARDS 2008

(Extracted from Bernama – 12 Feb 2009)

On a global arena, Kuwait Finance House (KFH) won Best Islamic Bank award for the second consecutive year in a poll organized by Islamic Finance News (IFN), where Islamic and conventional banks, investors, and governmental representatives from all over the world participated.

BNM has won the Islamic Finance News (IFN) Award for being the Best Central Bank in promoting Islamic Finance in 2008. It is also reported that CIMB has won Malaysia’s Best Islamic Bank while its CEO won the Best Individual Islamic Banker award.

Translation – Bahasa Melayu

Pada arena global, KFH memenangi kategori Bank Islam Terbaik Dunia untuk tahun kedua berturut-turut di dalam pola pengundian yang dianjurkan oleh Ialmic Finance News(IFN), di mana bank-bank Islam dan konvensional, para pelabur dan wakil-wakil kerajaan dari seluruh dunia mengambil bahagian.

BNM telah memenangi kategori Bank Negara Terbaik dalam mempromosikan kewangan Islam bagi tahun 2008, yang dianjurkan oleh Islamic Finance News. CIMB pula mengungguli kategori Bank Islam Terbaik Malaysia manakala Ketua Eksekutifnya berjaya menggondol hadiah bagi kategori Individu Terbaik dalam perbankan Islam.

ISLAMIC FINANCE IN THE LIMELIGHT

6-02-2009: Islamic finance in the limelight
(Extracted from The Edge – author : Racheal Lee Mei Nyee)

Ever since the US housing bubble burst in 2007 leading to the collapse of the global financial system last year, investors have been scurrying to seek alternative investment platforms and Islamic finance is deemed to be one of the viable and attractive options.

Aware of the huge potential in Islamic finance, Malaysia had been preparing the groundwork for a couple of decades and is now poised to become a global Islamic finance hub. Regional fund managers and investors are keeping a keen eye to take advantage of the vast opportunities available here.

It has been reported that Islamic banking assets in the Asia-Pacific account for about US$450 billion (RM1.62 trillion), which is 60% of the global Islamic banking market. The numbers are expected to grow.

According to reports, the Malaysian Islamic finance sector has grown at a compound annual growth rate (CAGR) of 28% in the last 15 years.

As at end-November 2008, the country’s Islamic banking assets rose 18.7% year-on-year (2007: 19.2%) to RM186.6 billion (2007: RM157.2 billion) and accounted for 14.3% (2007: 12%) of total assets in the banking sector.

Bank Negara Malaysia (BNM) wants the Islamic banking industry to constitute 20% of the overall banking and insurance market by 2010.

The Edge Financial Daily spoke to the three latest Islamic asset management licensees, which were granted the approval by the Securities Commission (SC) last month to start their operations in Malaysia.

The three foreign fund management companies are Aberdeen Islamic Asset Management Sdn Bhd, Nomura Islamic Asset Management Sdn Bhd and BNP Paribas Islamic Asset Management Malaysia Sdn Bhd.

The three expressed similar views on the efforts being done by the SC, BNM, Bursa Malaysia as well as the Malaysia International Islamic Financial Centre (MIFC) in promoting the country as a major hub for international Islamic finance.

These three companies, which already have presence in the country’s conventional asset management industry, realise the vast potential in the Islamic finance industry and are keen to play their role in taking the industry to greater heights and give other players a run for their money.
Nevertheless, they address the concern of low liquidity and limited instrument choices in Islamic funds in the market and that is limiting investment opportunities.

They believe there is a lot of unfulfilled demand in Islamic finance and the three companies plan to issue more innovative and attractive products, which under their conventional licence they had been unable to do.

With the incentives given, the foreign players are geared up for stiff competition among themselves as well as with the local boys, and the global arena is their stage. It will be up to each individual house not only to seek investment opportunities for local investors, but also to attract global investments into Malaysia.

It is hoped that with the stiff competition, the players will come up with innovative but transparent solutions for investors in Malaysia.

BNP Paribas Islamic Asset Management Malaysia wants to work with takaful companies here to expand their products so investors have a wider range to choose from. It is also working on an exchange-traded fund (ETF) to be listed in Malaysia.

Nomura Islamic Asset Management is set to launch its first product for institutional investors by the second half of the year for the Malaysian market before venturing into the Gulf and other Asian nations.

Aberdeen Islamic Asset Management is keen on markets such as Indonesia, the Middle East, Brunei, Hong Kong, China and the United Kingdom.

Governed under Capital Market Services Act 2007, foreign Islamic fund management businesses in Malaysia are required to register with the SC.

Currently, there are a total of eight Islamic asset management companies in Malaysia. Besides the three latest licensees, the others are Kuwait Finance House (Malaysia), DBS Asset Management, CIMB-Principal Asset Management, Global Investment House and Reliance Asset Management.

According to MIFC’s website, a foreign Islamic fund management company under a special scheme is subject to two conditions — up to 100% foreign equity ownership and complying with the licensing requirements under the securities laws and the licensing handbook prior to commencing its fund management activities.

It also states that a foreign Islamic fund management company under the special scheme is allowed to participate in managing funds sourced from within or outside Malaysia as well as establishing and distributing unit trust funds. A Syariah adviser must be appointed, approved and registered by SC for these asset management companies.

Below are some of the incentives for Islamic fund management companies:
Institutional
* 10-year tax exemption on all fees received by fund management companies for managing approved Islamic funds for both local and foreign investors up to 2016.
Personal
* Income tax exemption to be given to income received by non-resident experts in Islamic finance.
Operational
* Allowed to conduct foreign currency and ringgit fund management for both retail and institutional investors
Incentives for investment activities
* Islamic fund management companies are allowed to invest all their Syariah funds abroad.
Start-up fund incentive
* Employees Provident Fund has set aside a specific allocation of start-up fund for foreign Islamic fund managers

My Comment :

It seems that the financial crisis has been a blessing in disguise as more and more people/corporations are moving towards Islamic finance.

However, one tends to forget about the ultimate risk management pertaining to Islamic finance, i.e., to incur the risk of not obeying the word of Allah and the teachings of Prophet Muhammad, and that this applies to every aspect of life including business.

What has been stated in the Quran and Hadith is the best method of risk management, and must be complied. Failure to do so will result in the worst risk, which will then lead to total destruction in the world and the hereafter. If all transactions, specifically financial and economic transactions, had been carried out under righteous methods and in accordance with the word of Allah and the teachings of the prophet, Lehman Brothers would not have collapsed in the first place.

DILEMMA FACING ISLAMIC FINANCING FACILITIES

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.

HIGH COURT RULING ON BAI BITHAMAN AJIL FINANCING IN MALAYSIA

15-09-2008: Industry players mixed on High Court judgment on BBA
(Extracted from The Edge Financial Daily - author Ellina Badri)

Industry players are mixed on the impact of a recent High Court ruling that the application of Al-Bai’ Bithaman Ajil (BBA) as an Islamic house financing facility is contrary to the Islamic Banking Act 1983.

Last month, High Court Judge Datuk Abdul Wahab Patail, in a collective judgment for 11 cases involving Bank Islam Malaysia Bhd and Arab-Malaysian Finance Bhd as plaintiffs, had ruled the sale element in the BBA was “not a bona fide sale”.

An industry player told The Edge Financial Daily that the judgment would have no impact on the Islamic banking industry, as it did not affect the banks’ ability to claim money owed by customers.

“My guys are doing a detailed analysis of the judgment, but as far as we’re concerned, it will have no impact whatsoever on the industry, as banks can still claim the money owed by their customers,” the industry player said, disagreeing with the court judgment.

He said the Islamic Banking Act 1983 highlighted that transactions should be carried out according to Islamic principles, and hence the application of BBA by banks, which was not contradictory to Islamic principles, was not contrary to the Act.

“We will not have to restructure our BBA product,” he added.

Monash University Malaysia school of business, director of banking and finance, Professor Bala Shanmugam, however, expected banks to restructure their BBA products following the High Court ruling.

He added that the many interpretations of the application of syariah principles required banks to be innovative while faced with the challenge of competing with conventional banking.

Meanwhile, an industry observer said while Abdul Wahab had made a good point, the solution prescribed was questionable.

In his judgment, Abdul Wahab had said: “This court holds 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 Al-Bai’ Bithaman Ajil facility rendered the facility contrary to the Islamic Banking Act 1983 or the Banking And Financial Institutions Act 1989, as the case may be.”

He also said under Section 66 of the Contracts Act 1950, the plaintiffs were entitled to return the original facility amount they had extended.

“Notwithstanding that the properties may, where no title had been issued, have been assigned absolutely to the plaintiffs, by virtue of the fact the assignment was as security, it is equitable that the plaintiffs must 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,” Abdul Wahab said.

My Comment :
All the industry players went berserk after the judgement, however what bothers me is that why Bank Negara Malaysia (the Central Bank) remains mum about the issue. After all, BNM has their own Shariah Supervisory Council that definitely have their own opinion on this matter, especially as this issue pertains to Islam, our national religion.


Translation – Bahasa Melayu

Industri perbankan umumnya memberi reaksi yang berbeza berkenaan penghakiman yang diberikan oleh Mahkamah Tinggi di mana didapati bahawa penggunaan Bai Bithaman Ajil (BBA) sebagai suatu produk pembiayaan pembelian rumah adalah bertentangan dengan Akta Perbankan Islam 1983.

Bulan lalu, Hakim Mahkamah Tinggi Datuk Abdul Wahab Patail, dalam suatu penghakiman kolektif (11 kes) membabitkan Bank Islam Malaysia Bhd dan Arab-Malaysian Finance Bhd sebagai plaintif, telah mendapati bahawa elemen jualan dalam BBA bukanlah dilakukan secara “bona fide”.

Seorang ahli perbankan memberitahu bahawa penghakiman ini tidak akan member sebarang impak kepada industry perbankan Islam, kerana ia tidak mempengaruhi kemampuan bank untuk menuntut hutang dari para pelangan. Beliau juga mengatakan bahawa Akta Perbankan Islam 1983 menyebut bahawa transaksi yang dijalankan haruslah berlandaskan prinsip-prinsip Islam, oleh itu perlaksanaan konsep BBA oleh bank-bank adalah tidak menyalahi prinsip-prinsip berkenaan, yang tidak bertentangan dengan Akta tersebut.

Komen saya:
Para pengamal perbankan Islam khasnya memang terkejut selepas penghakiman dibuat tetapi apa yang memusykilkan saya adalah kenapa Bank Negara Malaysia bersikap berdiam diri – BNM mempunyai Lenbaga Syariah yang semestinya mempunyai pendapat tentang isu ini terutamanya ia melibatkan perihal agama Islam, iaitu agama rasmi negara ini.