Call to review interest in court judgements

By Habhajan Singh
The provision for High Court judges to grant interest upon judgment needs to be looked into as far as Islamic finance is concerned, a former senior Malaysian judge told an international conference. Interest is highly frowned upon in Islamic law as it is deemed to be riba, an element considered haram in Islam.
In Malaysia, the Rules of Court allows the court to make an order of interest of up to 8% from the date of judgment until the date of full payment. This also involves Islamic finance, banking and takaful cases adjudicated by the same set of courts as with conventional banking and insurance matters.
"This provision was made long before the existence of Islamic banking in Malaysia. It was meant for all judgments. No amendment has been made until today, for application to Islamic banking cases," said former chief of justice Tun Abdul Hamid Mohamad when presenting a paper at the Islamic Financial Services Industry Legal Forum 2009.
The two-day forum, which ended on Sept 29, was organised by the International Financial Services board (IFSB), the Kuala Lumpur-based international standard-setting body. IFSB aims to promote and enhance the soundness and stability of the Islamic financial services industry by issuing global prudential standards and guiding principles for the industry, broadly defined to include banking, capital markets and insurance sectors. Abdul Hamid was a speaker at one of the session together with Taylor Wessing UAE partner Hasan Rizvi and UK’s Bird & Bird partner Dr Charles Proctor. It was chaired by Roberta Calares who is Dubai Financial Services Authority’s (DFSA) legislative counsel and director in policy and legal services division.

Discussing the issue, Abdul Hamid recollected that at a seminar four or five years ago, a bank officer complained that the civil court was giving interest in Islamic banking cases.
"My reply was: If you don’t want it, don’t ask for it. Don’t blame the court for giving it when you ask for it. The rules allow the court to give it, you ask for it, on what ground is the court going to refuse it?"
"But, that is not the problem, really. The real problem is this: so long as the provision is there, when the court makes an order, it is in the form of interest, which is prohibited. "If it is not asked for or is refused by the court, it may encourage the judgment debtor to delay payment of Islamic banking or a takaful judgment sum, because whether he pays it now or ten years later, he still pays the same amount," he said in his paper entitled
"Interlink/interface between civil law system and Shariah rules and principles and effective dispute resolution mechanism’.
He noted that on May 26, 2005, and Aug 24, 2006, the Shariah Advisory Council (SAC) of Bank Negara Malaysia (BNM) had made a ruling that it is permissible for the Islamic banking institutions to get an order of compensation of up to 8% of the judgment sum.
However, it may only take for itself an amount equivalent to the actual loss, which is calculated based on the annual average for overnight weighted rate of the Islamic money market of the preceding year. The rest should be given to charity.
"This should be made a rule of court. After all, the Central Bank of Malaysia Act 2009 has now formally recognised the dual financial system that Malaysia has been having over 40 years. It’s about time that other laws and procedures follow suit," he said. On another matter, Abdul Hamid noted that there is no effective alternative dispute resolution mechanism for Islamic banking, Islamic finance and takaful cases in Malaysia, but the civil court system remains relevant.
"But, I do not think that it really matters. I think that the present system is workable under the present circumstances and within the ambit of the existing constitutional provisions. "In fact, in my view, the civil court system remains relevant, indeed irreplaceable.
"This is more so, when we consider the various remedies that only the civil court can offer to enforce the judgments, e.g, bankruptcy, winding-up, order for sale and others. Civil court judges are familiar in this area of laws," he said.
He also said that he does not see the necessity to call for the amendment of the Constitution, "another popular response but, quite often, without really understanding the problems to be solved and what solutions to offer".

(This story appeared in The Malaysian Reserve on Oct 5, 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)