BBA judgement by Msia's Justice Wahab Patail

By Habhajan Singh
The High Court recently ruled that the application of the Al-Bai' Bithaman Ajil (BBA), a hugely popular Islamic home loan financing contract in Malaysia for the last two decades but much criticised abroad, is contrary to Malaysia's Islamic Banking Act 1983.
In what is set to be another widely discussed judgement, High Court Judge Datuk Abdul Wahab Patail ruled that the sale element in the BBA is "not a bona fide sale". He also brought into question the profit portion of the facility. The written judgement, dated July 18 but made available to lawyers involved in the case late last month, may force Islamic banks and financial institutions to re-examine their legal documentations.
Carrying the stamp of the Kuala Lumpur High Court commercial court division, the 54-page judgement was a collective judgement for 11 cases involving Bank Islam Malaysia Bhd and Arab-Malaysian Finance Bhd as the plantiffs.
The BBA house financing is a contract of 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.
Profits in this context is justified since it is derived from the buying and selling transaction as opposed to interests accruing from the principal lent out, according Bank Negara Malaysia's (BNM) website.
BNM is the regulator of Malaysia's financial institutions, including Islamic financial institutions operating in the country. However, Abdul Wahab's judgement does not concur with the said notion.
"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 said in his judgement (point No. 69).
In his reasoning earlier, the judge pointed out that "there is no dispute that the concepts" of BBA and several other contracts are "in principle, Islamic in nature since no interest is involved".
"The function of this Court is to examine the application of these Islamic concepts, as to whether as implemented, and in the particular cases before it, the transactions do not involve any element not approved in the Religion of Islam.
"It is a question of looking at the particular facts. That remains the judicial function of the Court which it cannot abdicate," he wrote.
In another point, the judge also made his earlier stand 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.
In his latest judgement, Abdul Wahab wrote: "This Court accepts that where the bank is the owner or had become the owner under a novation agreement, the sale to the customer is a bona fide sale, and the selling price is as interpreted in Affin Bank vs Zulkifli Abdullah.
"Thus, where the bank is the owner of the property, by a direct purchase from the vendor or by a novation from its customer, and then sold the property to the customer, the plaintiffs' (the banks) interpretation of the bank's selling price is rejected and the Court applies the equitable interpretation."
It is understood that the banks are appealing the judgement.