Sunday, October 12, 2008

BNM: Beef up legal docs

By Habhajan Singh
Bank Negara Malaysia (BNM) has urged local Islamic banking outfits to beef up their legal documentation, an area that makes or break a contract when taken to the courts.
In a recent circular to Islamic ourfits, the central bank has urged them to appreciate the importance of proper drafting of Islamic financing legal documentation and cause papers in litigation.
It called on Islamic banks to ensure they employ law firms with the right set of expertise to prepare their legal documentation and handle litigation work.
It also required Islamic banking institutions to ensure that proper internal controls are in place to "preserve the quality and consistency of such legal documentation and cause papers".
The reminder to chiefs of local Islamic banks and financial institutions with Islamic banking activities came in view of the issues that cropped up following a number of judgements on Al-Bai' Bithaman Ajil (BBA) by High Court judge Datuk Justice Abdul Wahab Patail.
In the circular, BNM which supervises the Islamic banks and takaful operators operating in Malaysia, had also "strongly advised" Islamic banks to review their heavy reliance on the BBA concept in a huge number of their transactions.
Justic Abdul Wahab's judgement on the appplication of BBA, a concept popular at home but much criticised abroad, is set to be another widely discussed judgement after his earlier ruling in the case of Affin Bank Bhd vs Zulkifli Abdullah.
In that 2006 case, he passed a ruling on the calculation of the amount to be paid in the event of a foreclosure.
It 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.
Similarly, legal and Shariah experts will be looking at the impact of the latest judgement by Justic Abdul Wahab, which will be scrutinised by the Court of Appeal as an appeal is pending.
"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."
In Malaysia, Islamic banking institutions refer to Islamic banks licensed under Section 3(1) of Islamic Banking Act 1983 (IBA) and commercial banks, merchant banks, finance companies and discount houses licensed under Section 6(4) of Banking and Financial Institutions Act 1989 (BAFIA) that participate in the Islamic banking scheme.

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