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ISLAMIC FINANCIAL LEGAL FRAMEWORK

Mardhiyyah Sahri

AN ANALYSIS OF THE COURTS’ DECISIONS ON ISLAMIC FINANCE DISPUTES

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CHRONOLOGY OF CASES

1994

• BIMB v. Adnan Omar1996

• Dato’ Hj Nik Mahmud v. BIMB2006

• Affin Bank Bhd v. Zulkifli Abdullah2007

• Malayan Banking v. Ya’kup Oje2008

• Arab Malaysian Finance v. Taman Ihsan Jaya

2009

• BIMB v. Lim Kok Hoe2010

• BIMB v. Azhar Osman

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BIMB v. Azhar Osman (2010)

FACTS: Two sets of appeal went to Court Of Appeal It was decided that BBA contact was valid and

enforceable. The cases were sent back to High Court to decide

on the quantum of claim and amount due. BIMB was unsatisfied with the decision and now

appealed to Court of Appeal. ISSUE:

Whether there is an obligation for the defendant to pay full sale price stated in the Property Sale Agreement irrespective of a premature termination?

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BIMB v. Azhar Osman (2010)

PRINCIPLES: BBA are sale contracts and the court must

give full effect to the same Ibra’ is applicable in early settlement cases

and not in default cases The bank is allowed to claim balance sale

price Court should not interfere with the contract

if there is no vitiating factors to do so DECISION:

Claim to recover full sale price was granted

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BIMB v. Lim Kok Hoe (2009)

FACTS: Appeal judgment for 12 cases concerning islamic

financing. Whereby the learned judge declared that the BBA

contract was contrary to the religion of Islam Questioned the validity and enforceability of the

BBA contract ISSUES:

Whether BBA contract was more onerous/burden than the conventional loan agreement with riba.

Whether BBA contract was prohibited in Islam

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BIMB v. Lim Kok Hoe (2009)

PRINCIPLES: Comparison between conventional & Islamic

(BBA) contract was not appropiate. Judge should not decide on their own. They

should consult to qualified jurists. Intepretation of “Islamic Banking Business”

under section 2 of the Islamic Banking Act 1983 does not mean banking business whose aims and operations are approved by all the four mazhabs.

DECISION Court of Appeal (COA) allowed the appeal.

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Arab Malaysian Finance v. Taman Ihsan Jaya (2008)

FACTS The respective defendants had already purchased the

property from third party and had paid part of the price. Approaching the plaintiff banks for facilities to complete

the purchase , the defendants were required to sell the property they had bought to the respective bank for the balance stipulated in the bank’s PPA.

The bank then sold the property to the defendants via the bank’s PSA.

The defendants defaulted in the payment of the bank selling price and the bank applied for an order for the sale of property.

The defendants argued that the transaction herein comprising the letter of offer , the PPA, the PSA and the charge or assignment became transparently financing in nature.

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Arab Malaysian Finance v. Taman Ihsan Jaya (2008)

ISSUE Whether involved element not approved in Islam. Whether riba a prohibition element in Islamic financing

PRINCIPLES The functions of civil court. Pertaining to the section 66 of the Contract Act; the price

of the property must close to the market price and cannot be more than that.

Section 256 of the National Land Code read with the Order 83 Rule 3.

The element must be recognised by the four mazhabs as it to be approved by the religion of Islam.

Interpretation of the BBA Contract. Interpretation of other elements which not approved in

the religion of Islam; riba and usury.

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Arab Malaysian Finance v. Taman Ihsan Jaya (2008)

DECISION Court ordered sale by public auction of the

charged properties with costs to be taxed.

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Malayan Banking v. Ya’kup Oje (2007)

FACTS Plaintiff had granted the defendants financing

amount RM 80, 094 under BBA . Defendants defaulted after paying the sum of

RM 16, 947.62 Plaintiff sought an order for sale under section

148 (2)(c) of the Sarawak Land Code to recover the sum of RM 167, 797.10

ISSUES Whether the court should allow the order for

sale for the repayment of the sum in the original form or restrict the order for sale.

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Malayan Banking v. Ya’kup Oje (2007)

PRINCIPLE: Based on just and equity. Islamic contract must be decided based on

Quranic injuctions. DECISION:

Bank to resubmit amount with proposed rebate.

If the court is satisfied that the proposed rebate is just and equitable, it shall make an order for sale

Otherwise the court may make some other order as the justice of the case requires

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Affin Bank Bhd v. Zulkifli Abdullah (2006) FACTS

The defendant bought a double storey link house

Secured the loan under the Shariah principle of BBA from the plaintiff, who was his employer at that time, for the sum of RM 346,000.

Then, the defendant resigned from the plaintiff bank and at his request, the loan facility was restructured whereby under the revised facility

The bank selling price of the house was RM992,363.40 payable over a period of 25 years

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Affin Bank Bhd v. Zulkifli Abdullah (2006) ISSUES

What is the amount that a customer has to pay the provider of BBA facility in the event of default

Whether provider of an BBA facility can, in the event of a default before the end of tenure, claim as part of the sale price or bank selling price the profit margin for the unexpired tenure of the facility

When tenure shortened, whether profit margin could be recalculated with equal certainty

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Affin Bank Bhd v. Zulkifli Abdullah (2006)

PRINCIPLES Principle of applicability of civil law as found in the Court of

Appeal’s decision in Bank Kerjasama Rakyat Malaysia Bhd v. Emcee Corporation Sdn Bhd.

Under a conventional loan, the amount due by a borrower over and above the loan amount (i.e. interest and late payment interest), is limited to the period from release of the loan until the loan amount is fully settled, and not for the full original tenure of the loan where no interest is applied on the unexpired tenure. However, in this case, the bank is seeking to claim the profit on the unexpired tenure of 25 years.

The bank's selling price in BBA financing, is not a sale price paid in a single payment, but is a series of equal monthly installments.

The profit margin is calculated with the profit rate applied to the full tenure.

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Affin Bank Bhd v. Zulkifli Abdullah (2006)

PRINCIPLES If the customer is not given the full tenure to pay

the selling price, then the bank is not entitled to claim for the bank's profit margin for the full tenure, as to allow the bank to do so would mean that the bank is able to a earn a profit twice upon the same sum at the same time.

The profit margin charged on the unexpired part of the tenure is unearned profit and not actual profit, and therefore cannot be claimed under BBA.

DECISION Granting the order for sale and reducing the

amount of repayment

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Dato’ Hj Nik Mahmud v. BIMB (1996) FACTS:

The plaintiff with attorney had entered into a PSA and PPA with the defendant in respect of 25 lots of land in BBA concept.

The defendant purchased the properties and resold back to the plaintiff with additional prices and charges.

The plaintiff applied for an order that the charges be declared null and void.

He also applied for the return the titles of the properties, free of all encumbrances.

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Dato’ Hj Nik Mahmud v. BIMB (1996) ISSUES:

Whether sale of land in accordance with IB Concept of BBA contravened the Malay Reservations Enactment 1930 of Kelantan.

Whether purchase and resale of land for profit by bank contravened the Malay Reservations Enactment 1930 of Kelantan

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Dato’ Hj Nik Mahmud v. BIMB (1996)

PRINCIPLES: Section 7(i) of the Enactment prohibits any transfer or transmission or

vesting of any right or interest of a Malay. However, when the property purchase agreement was signed, the right that could be acquired by the defendant under the agreement at that point of time, the agreement being still executor, was only a right to a registrable interest which right was yet to crystallized into a registrable interest.

The contemporaneous execution of the property purchase agreement and the property purchase agreement and the property sale agreement constituted part of the process required by the Islamic banking procedure before the plaintiff could avail himself of the financial facilities provided by the defendant under the BBA concept.

Indefeasibility could only be successfully attacked by evidence which manifested that registration was obtained by ‘means of insufficient or void instrument’. This meant that the plaintiff could only successfully seek the aid of section 340(2)(b) of the NLC if it could be shown that there existed a defect or illegality in the execution of the charge documents

DECISION: Dismissing the appeal with costs.

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BIMB v. Adnan Omar (1994)

FACTS: The defendant sold to the plaintiff a piece of

land for $265,000. On the same date, the plaintiff resold the

same piece of land to the defendant for $583,000 which amount was to be paid by the defendant in 180 monthly instalments and the land was charged to the plaintiff by the defendant as security for the debt of $583,000.

In case of default in payment by the defendant, the plaintiff entitled to sell the charged land as agreed in the BBA contract.

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BIMB v. Adnan Omar (1994)

ISSUES Whether they have a full knowledge when

sign the contract. Whether they have the same

understanding of the term of the agreement.

Whether the civil court will hear matter of Islamic finance.

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BIMB v. Adnan Omar (1994)

PRINCIPLES Shariah courts have jurisdiction only over

persons processing the religion of Islam. Bank Islam is a body corporate entity will

not be subject to the jurisdiction of the shariah courts.

Shariah court has no jurisdiction on debt When they have been an agreement

between the parties, the contract cannot be disputes because the agreement show they have a full of knowledge

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BIMB v. Adnan Omar (1994)

DECISION Failure to pay the installment is a breach

of the agreement and the plaintiff has the right to terminate the facilities and demand for the immediate full repayment of the load.

Order of sale granted.

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