The Evolution of Islamic Banking Cases in Malaysia

Assalamualaikum,

Dear all,

With reference to the recent case of Arab Malaysian Finance Berhad v Taman Ihsan Jaya Sdn Bhd & Ors (Suit No: D4-22A-067-2003) in the High Court of Malaya, Muamalat Bench, I believe that the judgment made by Y.A. Dato Wahab Patail in this case may change and affect the Islamic banking approach in Malaysia particularly on the extreme utilisation of debt-based financing instruments. I have identified several reported cases pertaining to Islamic banking from 1987-2008 for references.

1. Tinta Press Sdn Bhd v BIMB (1987) 1 CLJ 474
2. Bank Islam Malaysia Berhad v. Adnan Omar [1994] 3 CLJ 735; [1994]3 AMR 44
3. Dato’ Nik Mahmud Bin Daud v. Bank Islam Malaysia Berhad [1996]4 MLJ 295
4. Bank Kerjasama Rakyat Malaysia Bhd v. Emcee Corporation Sdn. Bhd. (2003) 1 CLJ 625
5. Bank Islam Malaysia Bhd v. Pasaraya Peladang Sdn Bhd. [2004] 1 LNS 280
6. Arab Malaysian Merchant Bank Bhd. v. Silver Concept Sdn Bhd [2005] 5 MLJ 210
7. Malayan Banking Bhd v. Marilyn Ho Siok Lin [2006] 3 clj 796
8. Affin Bank Berhad vs Zulkifli Abdullah (2006) 1 CLJ 447
9. Malayan Banking Bhd v Yakup bin Oje & Anor [2007] 6 MLJ 398
10. The recent case of Arab Malaysian Finance Berhad v Taman Ihsan Jaya Sdn Bhd & Ors (Suit No: D4-22A-067-2003)

Enjoy reading!

BEST REGARD
ZULKIFLI HASAN
UNIVERSITY OF DURHAM

Cape of Good Hope, Cape Town, South Africa (The Most South-Western Point of the African Continent)

A New Dawn for Islamic banking in Malaysia

Quoted from Islamic Finance Asia

BBA: Banking sector braces for impact from ruling

The Islamic banking fraternity is bracing to face a fallout from the recent High Court rulling that the application of the Al-Bai’ Bithaman Ajil (BBA), a widely used Islamic home financing contract, is contrary to the Islamic Banking Act 1983. At the heart of the written judgement by Datuk Justice Abdul Wahab Patail is that since some BBA contracts were structurally faulty, defaulters need not pay more than the original financing amount that they received, depriving banks of the profit that they would have otherwise booked from the transaction. Bankers also fear the judgement could mean that current BBA financing clients would only need to pay the facility amount and would escape from paying the profit portion. The home financing facilty extended under the BBA concept runs into billions of ringgit. “It will impact (the industry) in a big way. Bankers and financiers are used to the idea that when a default takes place, they are entitled to recover the full balance of the sales price. This and the previous judgement by Justice Wahab has altered that,” said a local lawyer who ranks among the pioneers in the field of Islamic finance.

Wahab’s latest judgement, dated July 18, encompassed 11 separate cases involving Bank Islam Malaysia Bhd and Arab-Malaysian Finance Bhd as the plantiffs.It is understood that the banks are appealing to the Court of Appeal to over turn the judgement which was received by lawyers involved in the case only last month.Industry experts estimate that close to 70% of Islamic financing has been granted under the BBA concept which essentially is a deferred payment sale (the sale of goods on a deferred payment basis) at an agreed selling price, which includes a profit margin agreed on by the customer and the bank.

The BBA concept is widely used in various Islamic financing instruments, including for bridging finance, cash line facilities, contract financing, project financing and letters of credit. Among the big local players on this front are CIMB Bank Bhd, Malayan Banking Bhd, Bank Islam Malaysia Bhd and Public Bank Bhd, all of whom have home financing facilities based on the BBA concept. Local banks like CIMB and Maybank now have full-fledged Islamic subsidiaries that handle such financing. “Banks are worried this judgement will set off alarm bells with regard to confidence with BBA locally. As for foreign investors, they fear its potential ramification on Malaysia’s efforts in becoming a global hub for Islamic finance.
“Our whole industry has been BBA-driven. Banks are fervently trying to find a solution,” said an industry executive.

It is understood that the legal departments of some these banks are now trying to get their hands on Abdul Wahab’s latest judgement which has yet to be published by any of the local regular sources for the legal fraternity. On Monday, The Malaysian Reserve ran a report on Abdul Wahab’s ruling followed by excerpts from the 54-page judgement the next day. The judgement on the appplication of BBA, popular at home but much criticised abroad, is set to be another widely discussed judgement after Abdul Wahab’s earlier ruling in the case of Affin Bank Bhd vs Zulkifli Abdullah, in which he passed a ruling on the calculation of the amount to be paid in the event of a foreclosure. The 2006 case attracted much attention, and is still the subject of seminars today, as it turned on its head the way bank practitioners calculated the outstanding amount to be repaid by borrowers who had defaulted on their BBA contracts. Some banks had calculated the amount up to the full period of the facility, even though the borrowers may have defaulted only a few years into the financing. to be fair, though, banks usually have a defaulter rebate, which is at their sole discretion.

“The effect of this judgement is that customers are obliged to pay only the principle that had been extended to them. “Since the court holds this contract null and void, Section 66 of the Contract Act will apply,” said a lawyer. Section 66 of the act states that “when an agreement is discovered to be void, or when a contract becomes void, any person who has received any advantage under the agreement or contract is bound to restore it, or to make compensation for it, to the person from whom he received it.” (The Malaysian Reserve, Sept 11, 2008)

Best Regard
ZULKIFLI HASAN
UNIVERSITY OF DURHAM

The Statue of Liberty, New York.

Germany, UK and Spain face recession

Quoted from the Financial Times By Ralph Atkins in Frankfurt

Germany, the UK and Spain all face recessions this year, the European Commission forecast on Wednesday, dashing finally any remaining hopes that Europe would avoid a sharp economic downturn. France and Italy would fare little better, it said.The steep downward revisions in growth forecasts by the European Union’s executive arm showed it had accepted that tumbling business and consumer confidence was hitting economic activity – even though the European economy had been “generally sound” prior to the credit crisis . Joaquin Almunia, economics and monetary affairs commissioner, described the environment as “difficult and uncertain”. As well as financial turmoil and a near doubling of oil prices over the past year, significant housing market corrections in some countries were taking their toll, he said.

The Commission expected the 27-country European Union economy to expand by 1.4 per cent this year, and the 15-country eurozone by 1.3 per cent, below the 2 per cent and 1.7 per cent it expected in its last forecasts, released in April. Germany’s economy is projected to contract by 0.2 per cent in the three months to September, taking it into technical recession – two quarters of contraction – after a fall of 0.5 per cent in the second quarter. The UK and Spain were expected to contract in both the third and fourth quarters.But France and Italy, which both contracted in the second quarter, were expected to see flat growth in the current quarter.

Jean-Claude Trichet, European Central Bank president, struck a more upbeat tone, telling the European Parliament that the “current episode of weak economic growth is expected to be followed by a gradual recovery”.But he reinforced expectations that ECB interest rates would remain firmly on hold by warning of a pick-up in eurozone unit labour costs that “has to be countered”. The ECB, which increased its main rate to 4.25 per cent in July, is particularly worried about wage indexation, which it fears increases the risk of current high inflation rates becoming entrenched. The Commission forecast eurozone inflation would average 3.6 per cent this year – above the ECB target of an annual rate “below but close” to 2 per cent.

Mr Trichet also complained about the “cartel” among oil producers. “Stabilisation of prices might be a good thing but stabilisation at a very abnormally high level is not a good thing.”The ECB president warned financial markets would not return to conditions that had previously been considered normal, with three-month interest rates likely to stay elevated. The economic outlook would also depend increasingly on the financial system’s fate. “The financial market correction could be gradually changing its nature and scope and evolve into a more traditional credit-cycle downturn.”

In similar comments – echoing the fears of US policymakers – the Commission said that, “a deceleration in real economic activity could amplify problems in the financial sector by decreasing the capacity of companies and households to service their debt-repayment obligations.” That could trigger a further tightening in bank lending standards.

ZULKIFLI HASAN
UNIVERSITY OF DURHAM

As a panelist together with Associate Professor Dr. Asyraf Hashim for the Capetonian Radio Station’s Talkshow, Cape Town, South Africa.

My Story: Ramadhan in Durham

It is truly hard to believe almost 8 days of this blessed month have already passed us. I take this opportunity to write something about my experience celebrating Ramadhan for the first time in the UK . The holy month of Ramadhan in the UK started on 1st September 2008 just like Malaysia and unlike Pakistan and some other countries, they began on September 2nd. The time for suhoor or “sahur” is around 4.00 am and Maghrib at 8.00 pm i.e. about 16 hours of fasting. Next year, we will celebrate Ramadhan during summer and we may have to fast for more than 18 hours as the time for Maghrib is between 10-10.30 pm.

As one of the committees of the Durham Mosque, I volunteer to assist the preparation for daily Iftar Jamai sponsored by the Durham University Islamic Society. All the foods for Iftar are taken from one restaurant in Newcastle, about 16 miles from Durham University. As for Taraweeh, we are very delighted to have a hafiz to be our Imam, Mr. Atif from Libya. Interestingly, he recites al-Quran in different qiraat. (At the first time I heard he recites surah al-Baqarah, I found different kalimah has been used in certain ayaah). Between the Taraweeh prayer, there is a short and concise tazkirah that will be delivered by the appointed speakers. It reminds me a lot on the duty towards seeking forgiveness from Allah and not to miss the opportunity to fulfill Ramadhan kareem with continous amal.

Beside, I also joint programme of Tadarus al-Quran in the Mosque with a few of my colleagues. It takes an hour to finish the whole one juzu’ of al-Quran. The Malaysian society in Durham organises Kuliah Hadith and Tafsir every Friday and Usrah on Saturday. Usrah activity in Durham reminds me the first Usrah I attended in 1990 when I entered Madrasah Idrisiah, Kuala Kangsar, Perak. I still remember my fellow usrah members and Naqib such as Cikgu Mustafa, Cikgu Hamdan and Ustaz Anuar Jusoh. I admit that Usrah changes me a lot. It really opens my mind and exposes me with the Islamic movement, dakwah, jihad, faith, amal and many issues related with the religion of Islam.

That’s all for today. Happy Ramadhan al-Mubarak.

ZULKIFLI HASAN
UNIVERSITY OF DURHAM

With Professor Dr. Hussein Pirashteh in Dubai, United Arab Emirates.