Tuesday, April 14, 2009

RULINGS: Islamic bankers breathe easier with ruling reversal

By Habhajan Singh
Bankers in the Islamic finance sector will certainly be breathing a lot easier now that the Court of Appeal, the second highest court in Malaysia, has provided certainty to the usage of two key Shariah principals.
In two separate judgments, the Court of Appeal had reversed the rulings by High Court judge Datuk Abdul Wahab Patail on Al-Bai Bithaman Ajil (BBA) and Bai Inah, two key concepts in structuring products for home, corporate and personal financing.
Some bankers, while acknowledging the significance of the judgments, pointed out that the earlier High Court judgment did not have far reaching implications in terms of business on the ground.
"We expected it to be reversed. Knowing Shariah to be what it is, the decision cannot be in any other form. "Hence, the industry had every confidence it would reverse the earlier decision," said CIMB Islamic Bank Bhd chief executive officer Badlisyah Abdul Ghani.
But an immediate statement from Bank Islam underscores the industry's relief, when it stated that its customers "can now take comfort from the certainty" that BBA contracts are valid and binding.
On March 31, the Court of Appeal reversed Abdul Wahab's judgment that BBA contracts were contrary to Malaysia's Islamic banking regulations in Bank Islam Malaysia Bhd vs Ghazali Shamsuddin & two others, and nine other cases. The next day, the same court ruled that Bai Inah, the concept of sale with an immediate repurchase widely used for personal and corporate financing, is a valid transaction, overturning Abdul Wahab's contention that the application of the Bai Inah contracts were against Islamic banking regulations, in the case of Bank Kerjasama Rakyat Malaysia Bhd vs Fadason Holdings Sdn Bhd and three others.
The Court of Appeal bench was made up of judges Datuk Md Raus Sharif, Datuk Abdull Hamid Embong and Datuk Ahmad Maarop.
Since Abdul Wahab's string of judgments, mostly dated July 18, the local Islamic finance fraternity had been rattled on the point of whether their contracts are Shariahcompliant, a key element that has to be observed diligently in any Islamic finance transaction or contract.
These have revolved around the concepts of BBA and Bai Inah, both heavily used by various Islamic financial outfits on the local front, but rejected by Shariah scholars in most jurisdictions in the Middle East and some other parts of the world.
Badlisyah, who heads the Islamic banking outfit most active in structuring sukuk, contended that the original Abdul Wahab's judgements did not impact the industry at all.
"As a result, the Court of Appeal decision is an important decision, but a non-event for the industry. It's business as usual," he told The Malaysian Reserve.
In Bank Islam Malaysia Bhd vs Ghazali Shamsuddin, the Court of Appeal had ruled that the BBA contracts in the cases before it were valid and binding contracts.
It had also said that the BBA contract must not be compared with the conventional loan agreement, as the BBA is a sale contract while a conventional loan is a money lending transaction.
"The Court of Appeal has decided that you cannot rewrite contracts," said Mohamed Ismail Shariff who appeared as the lead counsel for Bank Islam.
"Under the contract, you are entitled to pay the selling price. Now you go to the court and claim that this contract is not valid as the price you are paying is too high.
"You ask for a fair selling price? It's not for the courts to say," said Mohamed Ismail, a partner at the law firm Skrine.
But not everyone is in agreement with the latest decision.
Mustafa Omar Mohammed from International Islamic University Malaysia (IIUM) is one of the dissenting voices on this point, though he stresses that a proper comment can only come upon reading the written judgment, which has yet to be made available.
"But as it stands, I fully agree with the earlier judgement by the High Court Judge. His judgements were based on solid grounds.
"In fact his judgement has helped the industry to revisit its direction. We cannot continue to rely on legal tricks and superficial sales," he said.
Mustafa is a lecturer at IIUM's Kulliyyah of Economics and Management Sciences. He also lecturers at the IIUM Institute of Islamic Finance and Banking (IIiBF), with his areas of specialisation stated as Islamic economics, fiqh and usul al-fiqh.
While the matter has been settled, the debate on BBA and other such Shariah enablers will always be around.

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