Standardising Shariah legal documentation

By Habhajan Singh
There is no standard documentation process for structuring Islamic financial products made available by local Islamic banks to customers, a lawyer told a recent forum on Islamic finance.
However, the speaker told the forum that the legal documentat ion process has evolved along with the development of Islamic finance products made available to the market since its existence in Malaysia 20 years ago.
"In Islamic financing principle, we must ensure that Shariah-compliant aspects are adhered to in every product especially on the legal documentation process which distinguishes Islamic finance with the conventional process," said Mohamed Ridza & Co managing partner Mohamed Ridza Mohamed Abdullah.
He presented a paper entitled "Legal Documentations — New Products" at the recent National Symposium on Islamic Banking and Finance jointly organised by the Bar Council Islamic Finance Committee and Association of Islamic Banking Institutions Malaysia (AIBIM).
He said banks have come up with their own standard template of Islamic finance documents with changes made from time to time, taking into account the introduction of new laws, amendments made to existing laws, and the interpretation made by Shariah advisors.
When contacted, Mohamed Ridza told The Malaysian Reserve that banks have their own standard mechaism when handling the documentation process in relation to Islamic financing products like istisna, mudharabah, musharakah, ijarah, murabahah and musharakah mutanaqisah.
"Nothing is standard amongst themselves. There are variations in documentations, from one bank to another," he said.
Asked how it impacts customers, he said it provides them with options as the underlying principles are same.
"Take musharakah mutanaqisah. Some banks take ownership, some don't," he said, taking the example of the diminishing partnership contract now being introduced by some local banks for home financing compliant with Shariah.
Mohamed Ridza is the coauthor of the book Law and Practice of Islamic Banking and Finance, together with Datuk Dr Nik Norzrul Thani and Megat Hizaini Hassan.
In her presentation, Islamic University Malaysia (IIUM)'s Associate Professor Dr Engku Rabiah Adawiah noted that case law on Islamic banking in Malaysia is mainly on Al-Bai Bithaman Ajil (BBA) and a little on istisna, noting that BBA had been used right from the start of Islamic banking in Malaysia, citing the example of Bank Islam Malaysia Bhd's (BIMB) house financing since 1983.
"BBA is still the main contract for asset financing in Malaysia though some Islamic banks have started to use some other contracts.
"Istisna had been used by some Islamic banks to finance assets under construction," said Engku Rabiah who is attached to IIUM's Ahmad Ibrahim Kulliyyah of Laws.
The usability of BBA, from the Shariah point of view, was keenly debated in some quarters of the Malaysian Islamic finance fraternity following a judgment by the High Court finding its application to be contrary to Malaysia's Islamic banking regulations, a decision recently overturned on appeal.
In July 2008, High Court judge Datuk Abdul Wahab Patail had ruled that the application of the BBA contracts in Arab Malaysian Finance Berhad v Taman Ihsan Jaya & Others (2008) was contrary to the Islamic Banking Act 1983 (IBA).
On March 31, the Court of Appeal unanimously overturned Abdul Wahab 's much-debated judgment in the Bank Islam Malaysia Bhd v Ghazali Shamsuddin & Two Others, and nine other cases.
The two presentations were followed by a discussion led by panelists Andri Aidham from Kadir Andri & Partners, Mohd Shuhaimi Ismail from Hisham Sobri & Kadir and Muhamad Illiayas from Illiayas.
It was chaired by Yasmeen Muhammad Shariff from Yasmeen Hajar & Hairudin. Some 500 lawyers attended the one-day forum where Bank Negara Malaysia deputy govenor Datuk Mohd Razif Abdul Kadir had presented the keynote address. Also present were Malaysian Bar president Ragunath Kesavan and AIBIM president Datuk Zukri Samat.

(This story appeared in The Malaysian Reserve on Apr 20, 2009. The Malaysian Reserve is a daily business/finance newspaper published out of Kuala Lumpur, with a sectoral page on Islamic finance on Mondays, edited by Habhajan Singh)