SAC: BNM to review SAC’s role

By Halim Wahab & Habhajan Singh
PLANS are underway to compel the High Court to refer to the Shariah Advisory Council (SAC) of Bank Negara Malaysia (BNM) when presiding over Islamic banking and finance-related cases, unlike presently, where High Court judges are neither required to consult the Shariah experts or heed their advise.
It is learnt that the central bank is reviewing the necessary laws to make this possible. This follows the recent controversy over Islamic financing under the Al-Bai' Bithaman Ajil (BBA) concept and the confusion over the role of the SAC in determining the compliance status of Islamic finance products.
To date, BNM has not responded to queries from this newspaper on the implications of the judgment to the Islamic banking industry or if plans for changes to the SAC's role and powers are underway.
On July 18, High Court judge Justice Datuk Abdul Wahab Patail ruled that the application of the BBA contracts in 13 cases he presided over were contrary to the Islamic Banking Act 1983 (IBA), as the sale element in the BBA was deemed "not a bona fide sale". The judgment, which came to light following The Malaysian Reserve report on Sept 8, brings into question the profit portion of the facilities, as it suggests that defaulters need not pay more than the original financing amount obtained, thereby depriving banks of the profit they would otherwise have booked.
Consequently, confusion abounds over how such "profits" would now have to be treated in the accounts and why the BBA contracts are deemed not Islamic when the SAC had considered the concept as Shariah compliant in the first place. Questions also arise as to whether it is appropriate for non-Shariah specialists to decide on the Shariah compliance status of Islamic banking concepts and products, thus bypassing the SAC over such matters.
According to BNM, the SAC is an independent advisory body established under section 16B of the Central Bank of Malaysia Act 1958 and shall be the authoritative body for the ascertainment of Shariah law in Islamic banking, finance and takaful business. It stated that the Act provides that the SAC can be referred to by the court in its proceedings relating to Shariah matters in Islamic banking and financial business disputes. The council, which comprises experts in the disciplines of Shariah, banking, finance, economics and law, are appointed by the Minister of Finance on the recommendation of the BNM, pursuant to section 16B(2) of the Act.
In essence, Justice Abdul Wahab's ruling stated that the BBA contracts considered in Arab Malaysian Finance Berhad v Taman Ihsan Jaya & Others (2008) were contrary to the Islamic Banking Act 1983 (IBA).
An initial inspection suggests that the judgment, if affirmed by Malaysia's Court of Appeal, or adopted by other High Court judges, can have major repercussions on the local Islamic financial sector. To begin with, Islamic banks are heavily reliant on BBA-related contracts. Bankers fear the judgment because this could mean that current BBA financing clients would only need to pay the facility amount and would escape from paying the profit portion, if they default. (By Halim Wahab & Habhajan Singh; The Malaysian Reserve, Oct 29, 2008, Page 1)