The Chronicle of BBA Continues… (Bank Islam Malaysia Bhd v Azhar Bin Osman and Ors)

High Court says BBA rebates ‘must be granted’
by Habhajan Singh Available at: http://islamicfinanceasia.blogspot.com/

Islamic banks ‘must grant’ a rebate even if the Bai Bithaman Ajil (BBA) contract is silent on the issue when a default occurs, ruled a recent High Court judgment. The judgment, in four BBA cases heard together by High Court Judge Datuk Rohana Yusuf, brings to the fore an issue that has been a bone of contention for consumers making avail of Islamic home financing as Islamic banks deem rebate, or ibrar as it is known in Arabic, as discretionary. Consumers, on the other hand, would want more certainty in that matter.

“In doing so, the bank should not be allowed to enrich itself with an amount which is not due while at the same time taking cognisance of the customer’s right to redeem his property. “Therefore where the BBA contract is silent on issue of rebate or the quantum of rebate, by implied term I hold that the bank must grant a rebate and such rebate shall be the amount of unearned profit as practiced by Islamic banks,” she wrote in a 29-page judgment dated Jan 28 in Bank Islam Malaysia Bhd v Azhar Bin Osman, and three other cases. She also noted that legal documentations used by Islamic banks in financing should specify a formula for rebate, which at the moment is loosely attached to the principle loan agreement and whose implementation is very much left to bank’s discretion.

In the judgment, Rohana touched on the issues of ibrar and the quantum that banks can claim in an event of a default, two areas that have seen some debate and discussion from the Shariah perspective. “If the documents of the banks had in fact specified a formula of rebate or ibrar, it will demystify the intricacies of a BBA transaction. It will be easily understood by the customer who would then not be put in the dark as to what is ibrar and what would be the amount of ibrar he should be receiving,” she said.

The judgment seems to suggest that Rohana has taken a different tack from a recent Court of Appeal decision on a bundle of BBA contract cases which originated from the much publicised April 2008 decision by High Court Judge Datuk Abdul Wahab Patail, while maintaining that she is still within the bounds of what constitutes a binding decision from the higher courts.

“This is quite a departure form some of her earlier judgments,” said lawyer Mohamad Illiayas Seyed Ibrahim who has dealt extensively in Islamic finance cases. Ibrar, one of the two issues at the heart of this judgment, means surrendering one’s right of claim over debt either partially or in full, according to the definition from a published document by Bank Negara Malaysia (BNM) which regulates Islamic finance outfits.

Ibrar had been a bone of contention with consumers as banks generally do not give them a specific guarantee that they are entitled to a rebate should their loan end prematurely, either due to early payment or a default. The path pursued by Rohana, in this judgment, seems to push local Islamic banks to insert the ibrar clause explicitly into their financing documents, thus bringing about certainty to the issue of rebate and also streamlining the practice with what is already approved by BNM’s Shariah Advisory Council (SAC). Rohana ruled that “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.”

The central bank’s SAC — which has the last say on matters pertaining to Shariah in Islamic finance as further reinforced in newly promulgated central bank regulations — had resolved in 2002 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 four cases in this judgement came from two sets of appeal before the Court of Appeal relating to BBA contracts in Islamic banking. The plaintiff in all the four cases was Bank Islam Malaysia Bhd (BIMB) who were represented by Oommen Koshy from Skrine & Co and Aedyla Bokari from Nassir Hafiz Nazri & Rahim.

In the first set involving 12 cases heard together, the Court of Appeal had decided on Aug 26, 2009 [Bank Islam Malaysia Berhad v Lim Kok Hoe & Anor and Other Appeals] that a BBA contract is valid and enforceable, thus reversing an earlier decision of the High Court in Arab-Malaysian Finance Bhd v Taman Ihsan Jaya Sdn Bhd & Ors. The Taman Ihsan Jaya case made headlines when Abdul Wahab had ruled that the widely used BBA contracts were contrary to Malaysia’s Islamic banking regulations. The Malaysian Reserve first broke that story on Sept 8, 2008.

For full judgement, click here:
Page 1-3
Page 4-6
Page 7-9
Page 10-12
Page 13-15
Page 16-18
Page 19-21
Page 22-24
Page 25-27
Page 28-29

Note (s): Thanks to my colleague, Mr. Aedyla Bokari of Messrs Nassir Hafiz Nazri & Rahim for copy of the judgement. For further reading, you may refer to my articles below:-
Shari’ah and Legal Issues in Al-Bay’ Bithaman Ajil in the Case of Arab-Malaysian Finance Bhd V Taman Ihsan Jaya Sdn Bhd & Ors [2008] 5 MLJ
Questions and Answers on the BBA Financing Facilities in Malaysia

Best Regards
ZULKIFLI HASAN
DURHAM, UK

  • With Professor Mausudul Alam Choudhury, Professor Rodney Shakespeare and Professor Nur Alam Siddiqi in Jakarta, Indonesia

    23 thoughts on “The Chronicle of BBA Continues… (Bank Islam Malaysia Bhd v Azhar Bin Osman and Ors)

    1. MOHAMAD HALIM BEN OTHMAN says:

      Salam to All,

      The recent post on Malaysian High Court decision on BBA cases as reported by Habhajan Singh requires some comments.

      However, first and foremost I have to remind Brother Zulkifli that he had made a grave error albeit unintentionally when he quoted as God saying “My son…… ” instead of Luqman said “my son…….” in surah Luqman 31:16 that is on page 9 of his article.He has to be more careful on Quranic quotations lest it becomes blasphemous.A correction (addendum) is a must.

      Coming back to Harbhajan’s report on the BBA cases, I personally think it would do Islamic Banking in Malaysia justice if the reporter
      cared to have noted that those cases were financings in 2004/2005
      i.e before BNMSAC came out with guidelines on Ibra’.In other words what the learned Judge decided and ruled on the “implied” nature
      of ibra’ on BBA as well as others has been ‘cured’ and remedied by SAC’s guidelines circa 2006/2007.It is as usual the problem of implementation of these guidelines by banks.

      And lastly, Harbhajan should also exercise caution in quoting words; he quoted in one instance rebate as ibrar while in another it is ibra’.Don’t we have Arabic and English speaking Islamic Finance reporters?What happened to the UIA grads?

    2. Mohammad Fadel says:

      Is this a lower-court judgement? I am unfamiliar with the organization of Malaysian courts.

      Thanks,

      Mohammad

      • ZULKIFLI HASAN says:

        Salam, This is high court judgement. Courts Hierarchy in Malaysia 1. Lower Court; Magistrate Court and Sessions Court. 2. Upper Court: High Court, Court of Appeal and Federal Court.

        Thanks.

      • ZULKIFLI HASAN says:

        This is high court judgement. It can be overturned in the court of appeal and finally the apex court of Msia, federal court.

    3. Mohammad Fadel says:

      So, this is a decision that could in theory be reversed by either the Court of Appeal or the Federal Court? Is there one court of appeal for all of Malaysia on such matters? Is the federal court the supreme judicial body?

      Thanks,

      Mohammad

    4. Aedyla bin Bokari says:

      Salam,

      Just discovered this blog and kudos to Zul. Bank Islam is appealing against the decision and the appeal is fixed on 13.10.2010.

      • ZULKIFLI HASAN says:

        Salam Aedyla, Happy ramadhan al mubarak. Grateful to hear from you. Keep updating us with the case, bro.

        Regards
        ZULKIFLI HASAN

        • Aedyla Bokari says:

          Salam,

          Decision on appeal against the High Court decision was delivered this morning. Our appeal is basically on the obligation by bank to give rebate when there is a default, and bank’s disagreement of the court’s equation of ibra’ (rebate) and unearned profit. The appeal court unanimously agreed with the appeal, and declares, among others, ibra’ is only for cases when there is early settlement and not for default cases. So bank is allowed to claim for balance of purchase price when there is default. The appeal court also disagreed with the High Court used / comparison with other Islamic banks’ usage of calculation/formula for early settlement especially on the amortization table, because those witnesses were not in the present case, and their way could be different. In summary, the appeal court upheld the sanctity of contract and the court should not rewrite the terms.

          The corum states that the ground shall be issued in due course. So just wait.

          Regards.

    5. Ben Othman says:

      Salam Bro Zulkifli,

      “The appeal court also disagreed with the High Court used / comparison with other Islamic banks’ usage of calculation/formula for early settlement especially on the amortization table, because those witnesses were not in the present case, ”

      Can you show a copy the amortization table used by the appealing Bank.Also a copy of the amortization table used by other Islamic Bank
      as mentioned ? What are the differences?

      Thanking you in advance.

      • ZULKIFLI HASAN says:

        Salam Bro Ben Othman,
        You may contact the solicitor in charged, my colleague, Mr Aedyla via the following email:- aedyla@nhnrlaw.com
        If I got it I will share it with you as well.

        Best Regards
        ZULKIFLI HASAN

    6. Aedyla bin Bokari says:

      Salam,

      The amortization table is at page 9 of the ground of decision, you may click the aforesaid page. As for the appealing bank, we do not supply any to the court and argued that since it is a sale and purchase, which underlying the method of financing granted to the customer, there is no such thing to be given in case of default and bank is claiming for balance of purchase price. But in any event, even in case of early settlement, we are also in the dark as to how the bank formulate the rebate and comes to an amount…. The fact that they could come to such an amount, means they do have some formula…

      • ZULKIFLI HASAN says:

        Salam Aedyla, thanks for the update. Proud of you. It would be grateful if I could have a copy of the judgement or you could tell me anywhere I can download it. Jazzakallah.

        Send my regards to others.

        ZULKIFLI HASAN

      • Ben Othman says:

        Salam Bro Aedyla and Bro Zul.
        Jazakallah for the offer.

        For the benefit of site visitors, I prefer to communicate with Bro Aedyla via this blogspot. In the process , everybody learns.If that is alright with you Bro Zul.

        My questions are;
        1.The argument by some is that Conventional Banks do give rebate for default cases.Is it true?

        2.If that is true and Islamic Bank do not provide rebate notwithstanding that the contract is Sales and Purchase, then Islamic banks are at a disadvantage.

        3.Whatever happened to the recent Bank Negara Malaysia Shariah Council requirement making ibra’ a apart of Agreement? Granted, there is no retrospective effect but at least,Islamic Bank should exercise discretion to give ibra’for previous cases in order to be fair and competitive.

        4.Does the recent BNM SAC rulings require Islamic Banks to provide ibra’ for Default cases?

        4.IMHO, appealing Bank should provide their lawyers with formula on Early Settlement and Default cases.Hiding on contract terms and not being transparent are not hallmarks of Islamic institutions.We should avoid Fitna as far as possible.

        Wasalam.

        • Aedyla bin Bokari says:

          Salam my Brother in Islam Ben,

          (1 and 2)
          In actual fact, even though in cases of default, Islamic banks do provide ibra’ if there is a certainty of settlement. Even there is a judgment recorded against A, say in 1.2.2010 for an amount of RM100,000-00 being the balance of selling price, if A then came to the bank and informed he wants to sell the property in the next 3 months (or suddenly he has some money and wants to settle off) (there is certainty in the time of settlement), then usually banks do provide the redemption statement. The issue in the court (that we appealed) was that banks are compelled to provide ibra’ now (at the time of giving judgment / order). The problem with that order is that once the ibra’ has been given, it is an order and the amount cannot be changed later on because ibra’ has been given. There is no certainty that the property can be auctioned off at that date, or A can pay that amount at that date. Some property take years before finally there is somebody bid for it, after reducing the price after the few times of auction.

          But from our experience handling default cases for Bank Islam, once the property is auctioned, bank does exercise ibra’ and if there is some balance, the balance is returned to the defaulter. This is what some lay people does not understand and blame Islamic banks as being harsh. As Islamic bank cannot charged interest, they would suffer losses if they are forced to give ibra’ now…

          (3 and 4)
          The new ruling is just an emphasize because in actual fact Islamic banks do give rebate when there is a settlement (or in default case, there is certainty of settlement). People shouldn’t be worried notwithstanding bank says ibra’ is their discretion. If there is an early settlement, there would be ibra’ provided to them.

          5. I could not comment on the formula. Some banks already has that written in the agreement, some not.

          Regards.

    7. Aedyla bin Bokari says:

      Salam Zul. The ground of judgment is not ready. Will update once we receive the same.

      Salam.

    8. Ben Othman says:

      Bro Aedyla,
      Jazakallah for the info.

      The key word would be ‘certainty ‘ of payment.For default cases ,IMO it is the onus of the defaulter to convince the Bank that there is certainty of payment within an estimated time period for rebates to be given . However, sad to say that more often than not, defaulters (even for Islamic Banks) do not keep to their promises and drag the matter as long as they can.

      For Riba banks, this will not be a problem because their interest ‘clock’ starts ticking and counting the moment Judgement together with rebates take effect.The longer the matter drags. the more compounded the interest.For Islamic Banks, any changes on the Judgement Sum neccesitates going to the court over and over again.

      As you explained, the above are the main reasons Islamic Banks do not grant rebates (ibra’ ) before auction of property and they are valid reasons.Granted that it is the practice of Islamic Banks to grant rebates in Early Settlement and also in settlement of Default cases and BNM will see to that.However, the problem lies in PUBLIC PERCEPTION that Islamic Banks do not give rebates and claim the selling price.

      This is a PR issue and Bank Islam and other Islamic Banks have not addressed this issue properly and effectively. Unless they do, we will continue to hear negative vibes from skeptics, detractors and from Riba Banks themselves.

      • Aedyla bin Bokari says:

        Dear brother,

        I couldn’t agree more, there could be lack of explanation… Public perception is such that those thing does not exist because there is no guarantee, compounded because some banks keep saying it is at their discretion while some other banks expressly say yes (and is stated in the agreement). For those asking me, I would say (from my experience in handling bank’s cases) bank does provide ibra’….

        Regards and salam.

    9. Sue says:

      As-salam brother,

      Your text on the “Chronicles…” certainly helped a lot. I’ll be attending court very soon on the BBA matters and syukur al-hamdulillah I have some solid referrals to defend myself who is “legal illiterate” against those unscrupulous lawyers of the Islamic bank!!

    10. shafuan says:

      How abount profit in lieu when client requested early settlement of thier financing

    11. ahmad says:

      Wow!!.. fantastic topic here…

      that why when apply for Housing Loan, i prefer Dimishining Mutanaqisah (MM) concept than BBA concept..

    12. Aedyla bin Bokari says:

      Salam Mr Ahmad,

      Most banks are exploring alternatives to BBA, and MM is one of them. Some like RHB and CIMB etc have started using them. So far there is no contentious cases on MM because it is still new, like BBA when it was first introduced in the market.

      Only after few years, some ‘creative lawyers’ will create issues to help their client not to pay. So MM may also not free from problem. Sorry, I cannot help to say that, because it is true, only few, little number of cases have got real issues to challenge bank. Most of other cases, issues are created because unable to pay bank, not bona fide.

      In any event, as I have said previously, whatever the bank is claiming in the court, most of the time the amount is still subject to ibra’, not given at that particular time because the exact time for actual settlement is not known.

      Wallahu ‘alam.

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