High Court says BBA rebates ‘must be granted’

by Habhajan Singh

Islamic banks 'must grant' a rebate even if the Bai Bithaman Ajil (BBA) contract is silent on the issue when a default occurs, ruled a recent High Court judgment.

The judgment, in four BBA cases heard together by High Court Judge Datuk Rohana Yusuf, brings to the fore an issue that has been a bone of contention for consumers making avail of Islamic home financing as Islamic banks deem rebate, or ibrar as it is known in Arabic, as discretionary. Consumers, on the other hand, would want more certainty in that matter.

"In doing so, the bank should not be allowed to enrich itself with an amount which is not due while at the same time taking cognisance of the customer’s right to redeem his property.

"Therefore where the BBA contract is silent on issue of rebate or the quantum of rebate, by implied term I hold that the bank must grant a rebate and such rebate shall be the amount of unearned profit as practiced by Islamic banks," she wrote in a 29-page judgment dated Jan 28 in Bank Islam Malaysia Bhd v Azhar Bin Osman, and three other cases. She also noted that legal documentations used by Islamic banks in financing should specify a formula for rebate, which at the moment is loosely attached to the principle loan agreement and whose implementation is very much left to bank's discretion.

In the judgment, Rohana touched on the issues of ibrar and the quantum that banks can claim in an event of a default, two areas that have seen some debate and discussion from the Shariah perspective.

"If the documents of the banks had in fact specified a formula of rebate or ibrar, it will demystify the intricacies of a BBA transaction. It will be easily understood by the customer who would then not be put in the dark as to what is ibrar and what would be the amount of ibrar he should be receiving," she said.

The judgment seems to suggest that Rohana has taken a different tack from a recent Court of Appeal decision on a bundle of BBA contract cases which originated from the much publicised April 2008 decision by High Court Judge Datuk Abdul Wahab Patail, while maintaining that she is still within the bounds of what constitutes a binding decision from the higher courts.

"This is quite a departure form some of her earlier judgments," said lawyer Mohamad Illiayas Seyed Ibrahim who has dealt extensively in Islamic finance cases.

Ibrar, one of the two issues at the heart of this judgment, means surrendering one’s right of claim over debt either partially or in full, according to the definition from a published document by Bank Negara Malaysia (BNM) which regulates Islamic finance outfits.

Ibrar had been a bone of contention with consumers as banks generally do not give them a specific guarantee that they are entitled to a rebate should their loan end prematurely, either due to early payment or a default.

The path pursued by Rohana, in this judgment, seems to push local Islamic banks to insert the ibrar clause explicitly into their financing documents, thus bringing about certainty to the issue of rebate and also streamlining the practice with what is already approved by BNM's Shariah Advisory Council (SAC).

Rohana ruled that "when an Islamic bank practices granting of rebate on a premature termination, it creates an implied term and legitimate expectation on the part of the customer. Accordingly it is only proper that such expectation and practice be read into the contract."

The central bank's SAC — which has the last say on matters pertaining to Shariah in Islamic finance as further reinforced in newly promulgated central bank regulations — had resolved in 2002 that 'Islamic banking institution may incorporate the clause on undertaking to provide ibra’ to customers who make early settlement in the Islamic financing agreement on the basis of public interest (maslahah)'.

The four cases in this judgement came from two sets of appeal before the Court of Appeal relating to BBA contracts in Islamic banking. The plaintiff in all the four cases was Bank Islam Malaysia Bhd (BIMB) who were represented by Oommen Koshy from Skrine & Co and Aedyla Bokari from Nassir Hafiz Nazri & Rahim.

In the first set involving 12 cases heard together, the Court of Appeal had decided on Aug 26, 2009 [Bank Islam Malaysia Berhad v Lim Kok Hoe & Anor and Other Appeals] that a BBA contract is valid and enforceable, thus reversing an earlier decision of the High Court in Arab-Malaysian Finance Bhd v Taman Ihsan Jaya Sdn Bhd & Ors.

The Taman Ihsan Jaya case made headlines when Abdul Wahab had ruled that the widely used BBA contracts were contrary to Malaysia’s Islamic banking regulations. The Malaysian Reserve first broke that story on Sept 8, 2008.

(This story appeared in The Malaysian Reserve on 19 April 2010. 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)

BBA judgement erroneous, rules Court of Appeal

By Habhajan Singh
The Court of Appeal, in a written judgement on the Bai Bithaman Ajil (BBA) case presided earlier by High Court judgde Datuk Justice Abdul Wahab Patail, had found that the judge had erred when equating profit with riba, misinterpreted a key definition in the Islamic banking regulations and had side stepped earlier rulings made by the Supreme Court.

The written judgment is for the March 31 unanimous decision when the Court of Appeal reversed the earlier High Court decision that BBA contracts were contrary to Malaysia's Islamic banking regulations, providing a relief to local Islamic banks that had earlier feared a potential spike in defaults of Islamic contracts, especially for home financing.

In the judgment dated Aug 26 and signed off by Justice Datuk Md Raus Sharif, he wrote that "judges in civil court should not take upon themselves to declare whether a matter is in accordance to the Religion of Islam or otherwise", further adding "whether the bank business is in accordance with the Religion of Islam, it needs consideration by eminent jurists who are properly qualified in the field of Islamic jurisprudence."

The judgment by Justice Md Raus, who sat together with justices Datuk Abdull Hamid Embong and Datuk Ahmad Maarop in a three-men panel, brings to closure the much-debated Abdul Wahab's judgment in 2008 which probably triggered Bank Negara Malaysia (BNM) into making it mandatory for the courts to refer to the central bank's Shariah Advisory council (SAC) when deciding on Shariah matters in Islamic banking and finance cases.

In the new Central Bank of Malaysia Act (CBA) 2009, which was gazetted on Sept 3, it now makes it mandatory for courts to refer to SAC for rulings concering Shariah matters.

Section 56 provides states that where 'in any proceeding relating to Islamic finance business before any court or arbitrator any question question arises concering a Shariah matter', the court or the arbitrator shall take into consideration SAC published rulings or refer such questions to the council for its ruling.
On top of that, CBA's Section 57 makes it clear that SAC rulings shall be binding on the Islamic financial institutions, the court or the arbitrator.

The judgment, in favour of plaintiff Bank Islam Malaysia Bhd (BIMB), was for nine BBA contract cases, including the case of Bank Islam Malaysia Bhd v Ghazali Shamsuddin & 2 Others.

The Malaysian Reserve first reported on Abdul Wahab's judgment on Sept 8, 2008.

PROFIT AND RIBA
In one of the salient points in the 31-page judgment, Justice Md Raus said that Justice Abdul Wahab was plainly wrong when he equated the profit earned by BIMB as being similar to riba or interest.
"We have no hesitation in accepting that riba or interest is prohibited in Islam. But the issue at hand is whether such comparison between a BBA contract and conventional loan agreement was appropriate.
"With respect, we do not think so. This is because the two instruments of financing are not alike and have different characteristics. BBA contract is a sale agreement whereas a conventional loan agreement is a money lending transaction. The profit in BBA contract is different from interest arising in a conventional loan transaction. The two transactions are diversely different and indeed diametrically opposed," he writes.

He also noted that the law applicable to BBA contracts is no different from the law applicable to loan given under the conventional banking.
"The law is the law of contract and the same principle should be applied in deciding these cases. Thus, if the contract is not vitiated by any vitiating factor recognised in law such as fraud, coercion, undue influence, etc. the court has a duty to defend, protect and uphold the sanctity of the contract entered into between the parties," he said.

REWRITING CONTRACT
The justices also commented on Justice Abdul Wahab's attempts to replace the sale price under the Property Purchase Agreement with an 'equitable interpretation' and substituting the obligation of customer to pay the sale price with a 'loan amount' and 'profit' computed on a daily basis, as Justice Abdul Wahab had expounded in Affin Bank Bhd. v Zulkifli Abdullah (Supra).
This, in the views of the Court of Appeal, was the act of "rewriting the contract for the parties".
"It is trite law that the Court should not rewrite the terms of the contract between the parties that it deems to be fair or equitable," writes Justice Md Raus.

WHAT IS ISLAMIC BANKING?
The judgment then commented on Abdul Wahab's interpretation of ‘Islamic banking business’ in section 2 of the Islamic Banking Act (IBA) 1983 where the High Court judge had argued that if a facility is to be offered as Islamic to Muslims generally, regardless of their mazhab, then the test to be applied by a civil court must logically be that there is no element not approved by the Religion of Islam under the interpretation of any of the recognised mazhabs.
Here, Justice Md Raus writes that it is our view that judges in civil court should not take upon themselves to declare whether a matter is in accordance to the Religion of Islam or otherwise.
"As rightly pointed out by Suriyadi J (as he then was) in Arab-Malaysian Merchant Bank Bhd [2005] 5 MLJ 210 that in the civil court ‘not every presiding judge is a Muslim, and even if so, may not be sufficiently equipped to deal with matters, which ulamak take years to comprehend’.
"Thus, whether the bank business is in accordance with the Religion of Islam, it needs consideration by eminent jurists who are properly qualified in the field of Islamic jurisprudence," he said.

PRECEDENTS
The Court of Appeal judgment also noted that the questions raised by Wahab Patail on the validity and enforceability of the BBA contracts is not novel and that it had been raised in previous cases and had been ruled upon.
It cited the case of Adnan bin Omar v Bank Islam Malaysia Berhad (unreported) where the Supreme Court upheld the validity and enforceability of the BBA contract. In that case, the Supreme Court accepted as correct and affirmed the judgment of Ranita Hussein JC.

Subsequently, it added that the validity and the enforceability of BBA contracts was again decided by this court in Datuk Hj Nik Mahmud Nik Daud v Bank Islam Malaysia Bhd [1998] 3 CLJ 605, and Bank Kerjasama Rakyat Malaysia Bhd v Emcee Corporation Sdn Bhd (Supra).
"From the above cases, it is clear that the validity and enforceability of the BBA contract had been ruled upon by the superior courts. It is trite law that based on the doctrine of stare decisis, a decision of a superior court is binding on all courts below it. The importance of this principle must not be taken lightly," writes Justice Raus.

(This story appeared in The Malaysian Reserve on Oct 19, 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)

Controversial BBA case put to rest

By Habhajan Singh
The Al-Bai Bithaman Ajil (BBA) case that shook the local Islamic banking industry has come to an end as the parties involved are not taking the case to the nation's highest court.
On March 31, the Court of Appeal reversed a High Court decision by Justice Datuk Abdul Wahab Patail that the application of BBA contracts in the cases before him were contrary to Malaysia's Islamic banking regulations. The move created ripples in the industry, which was very much dependent on BBA-related Shariah contracts.
The one-month window for parties to take the case to the Federal Court has ended with no signs of the case making its way to the nation's apex court.
"My client is not appealing," Datuk Harpal Singh told The Malaysian Reserve.
The partner, from the legal firm AJ Ariffin, Yeo & Harpal, had represented the appellant in the Bank Islam Malaysia Bhd vs Ghazali Shamsuddin & two others, and nine other cases.
In a unanimous decision, the Court of Appeal bench made up of Justices Datuk Md Raus Sharif, Datuk Abdull Hamid Embong and Datuk Ahmad Maarop, had reversed Abdul Wahab's decision in the Arab Malaysian Finance Bhd vs Taman Ihsan Jaya & two others (2008), and 12 other cases.
Though of keen public interest, it is understood that cost was one of the reasons for the parties not proceeding with an appeal. "If they loose the appeal, the client could end up having to pay a few hundred thousand (ringgit) in costs to the other party," said a corporate lawyer.
Since Abdul Wahab's string of judgments at the High Court, mostly dated July 18, the local Islamic finance fraternity had been rattled by whether their contracts were Shariah-compliant, 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.
On April 1, the same bench of the Court of Appeal had also decided to overturn another of Abdul Wahab's judgment, this time on Bai Inah. The bench ruled that Bai Inah, the concept of sale with an imediate repurchase widely used for personal and corporate financing, is a valid transaction.

(This story appeared in The Malaysian Reserve on May 7, 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)

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)

Malaysia's Court of Appeal reverses High Court BBA ruling

By Habhajan Singh
The Court of Appeal had on Mar 31 reversed an earlier High Court decision that Al-Bai Bithaman Ajil (BBA) contracts were contrary to Malaysia's Islamic banking regulations.
The move will certainly be a relief to local Islamic banks that had earlier feared a potential spike in defaults of Islamic contracts, especially for home financing.
The unanimous decision in the appeal in the Bank Islam Malaysia Bhd v Ghazali Shamsuddin & 2 Others, and nine other cases, would mean that Islamic banks need not worry about the possibility of a string of defaults in BBA-based financing on the basis that the facilities are not Shariah-compliant.
In Tuesday's [Mar 31, 2009] appeal, Bank Islam Malaysia Bhd (Bank Islam) had 10 cases bundled together in the appeal before Court of Appeal judges Datuk Md Raus Sharif, Datuk Abdull Hamid Embong and Datuk Ahmad Maarop.
The Malaysian Reserve first reported on Sept 8, last year on the BBA judgment by High Court judge Datuk Abdul Wahab Patail, that sent shockwaves through the local Islamic banking fraternity as they began deciphering its impact.
Before that, many Islamic finance bankers and lawyers had not seen Abdul Wahab's 54-page written judgment dated July 18, but which was made available to lawyers involved in the case only sometime in August.
Upon winning the appeal, Bank Islam yesterday issued a two-paragraph statement saying: "Customers of Bank Islam and the public at large can now take comfort from the certainty that Bai Bithaman Ajil (BBA) contracts are valid and binding.
"This follows the unanimous decision by judges of the Court of Appeal on March 31, 2009, during a proceeding involving Bank Islam. The said decision reaffirmed that Bank Islam's practices in relation to BBA contracts are Shariah-compliant and valid.
"The Court of Appeal also reiterated that a BBA contract is a sale transaction and therefore must not be compared to a loan transaction."
Bankers at outfits like Maybank Islamic Bhd, CIMB Islamic Bhd and RHB Islamic Bank Bhd were jolted by Abdul Wahab's ruling that the application of the BBA contracts in Arab Malaysian Finance Bhd vs Taman Ihsan Jaya & 2 Others (2008), and 12 other cases, were contrary to the Islamic Banking Act 1983 (IBA).
Abdul Wahab had argued that since some BBA contracts were structurally faulty, defaulters need not pay more than the original financing amount that they received, depriving banks of the profit they would have otherwise booked from the transaction.
Bankers feared that this could mean that current BBA financing clients would only need to pay the facility amount and would escape from paying the profit portion.
BBA is a hugely popular Islamic financing contract in Malaysia, though it is not accepted in many other jurisdictions, including most of the Middle East. In Malaysia, BBA has been the underlying concept for most Islamic financing in the last two decades.
Since Abdul Wahab's judgment, there has been some shift away from BBA. Towards the end of 2008, RHB Islamic, for example, completely phased out BBA in favour of the musharakah mutanaqisah concept for its home financing products.
At the full hearing on Tuesday, Mohamed Ismail Shariff from the law firm Skrine appeared as the lead counsel for Bank Islam, assisted by Oommen Koshy and Arief Emran, while Harpal Singh Grewal and Harminder Kaur appeared for one of the respondents. In this instance, the Arab Malaysian Finance Bhd v Taman Ihsan Jaya case proper was not one of the cases before the Court of Appeal.
When contacted, Ismail said the Court of Appeal ruled that the BBA agreement is valid as it is being done now, even without a novation agreement.
Post Abdul Wahab's BBA judgment, some banks were considering including a novation agreement in future BBA contracts as it was cleared by the judge.
"It also ruled that the amount that the bank is entitled to demand upon a default is the balance of the bank's selling price, subject to the bank giving an ibra [CORRECTED] or rebate, upon payment being received or realised," he said.
In the earlier judgment, Abdul Wahab had ruled that the sale element in the BBA is "not a bona fide sale" and had brought into question the profit portion of the facility.
Bank Negara Malaysia (BNM), which regulates the Islamic finance sector, was involved in the hearing as an intervener. It was represented by Karlos Israphil Bendlin from Zaid Ibrahim & Co. Association of Islamic Banking Institutions Malaysia [and not Institut Bank-Bank Malaysia (IBBM) as reported in original TMR 2/4//09 report] had also sent a counsel holding a watching brief.
Technically, the respondents can still appeal to the Federal Court, the highest court of the land. However, initial checks show that this is not likely to happen.
The BBA financing is a contract of deferred payment sale (the sale of goods on a deferred payment basis) at an agreed selling price, which includes a profit margin agreed on by the customer and the bank. Profits in this context is justified since they are derived from the buying and selling transaction as opposed to interest accruing from the principal lent out.

(This story appeared in The Malaysian Reserve on Apr 2, 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)

RHB Islamic phases out ‘disputed’ BBA financing

By HABHAJAN SINGH
RHB Islamic Bank Bhd has completely phased out Al-Bai Bithaman Ajil (BBA) in favour of the musharakah mutanaqisah concept for its home financing products. This probably makes it one of the first local Islamic subsidiaries of local banks to move away completely from BBA which has been under increasing scrutiny over the years.
The move by RHB Islamic, one of the 17 Islamic banks including Al Rajhi Banking & Investment Corporation (Malaysia) Bhd and Maybank Islamic Bhd licensed by Bank Negara Malaysia (BNM), signals a shift in the local Islamic home financing front away from BBA.
"RHB Islamic has taken a stance of phasing out products and services based on BBA or bai al-inah with effect Oct 1. This is based on (its) Shariah committee's advice to adopt globally accepted Shariah principles," RHB Islamic Head of Shariah Division Ahmad Suhaimi Yahya told The Malaysian Reserve.
He added that the move is in tandem with the bank’s strategy to position itself as the banker of choice for local and international customers looking for Shariah-compliant financial products and services. This is in reference to the fact that BBA, with underlying concepts of bai dayn (debt trading) and bai inah (sale with imediate repurchase), are shunned in jurisdictions like the Middle East and Pakistan. BBA, which may involve the two concepts, is a deferred sale contract for a sale price that includes the profit, with a repayment period agreed beforehand.
For so many years, local Islamic banks have made BBA the linchpin when carving out Islamic financing, which now stands around RM143.4 billion.
The Islamic banking assets, according to latest statistics from the central bank, have expanded by 23% to RM234.9 billion compared to a year ago. The Islamic banking industry now accounts for 16.7% of total assets in the industry. It is understood that other banks are also in the midst of preparing to put on the shelf more home financing offerings that are not based on BBA contracts.
The recent major trigger for the move away from BBA was the July 18 written judgment by High Court judge Justice Datuk Abdul Wahab Patail in Arab-Malaysian Finance Bhd vs Taman Ihsan Jaya, first reported by The Malaysian Reserve on Sept 8.
The judgment, a collective ruling on 12 cases now pending an appeal, sent shockwaves in the local Islamic banking fraternity as they began deciphering its impact.
For starters, the judge had ruled that the application of the BBA contracts in those cases were contrary to the Islamic Banking Act 1983 (IBA). The judge ruled that since some BBA contracts were structurally faulty, defaulters need not pay more than the original financing amount that they received, depriving banks of the profit they would have otherwise booked from the transaction.
Bankers fear that this judgement could mean that current BBA financing clients would only need to pay the facility amount and would escape from paying the profit portion.
Following the High Court ruling, BNM sent a circular dated Sept 8 to heads of Islamic financial institutions to "strongly advise" them to review their heavy reliance on the BBA concept in their transactions.
The circular noted the industry's seeming over dependence on BBA, adding that BBA is a Shariah concept introduced more than 20 years ago to facililtate growth and development of Islamic finance.
At its end, RHB Islamic is offering Equity Home Financing-i to its customers based on diminishing musharakah or musharakah mutanaqisah as an alternative to the earlier BBA home financing.
(The Malaysian Reserve, Dec 09, 2008, p1, By Habhajan Singh. The Malaysian Reserve is a daily business/finance newspaper published out of Kuala Lumpur, with a sectoral page on Islamic finance on Mondays)

SAC: ‘Regulations on Islamic finance should be amended’

By HALIM WAHAB & HABHAJAN SINGH
A number of Shariah scholars who are involved in Islamic finance transactions have suggested that Bank Negara Malaysia (BNM) should effect an amendment to regulations to make it mandatory for judges to refer to the central bank's Shariah Advisory Council (SAC) when dealing with Islamic finance matters.
At the moment, High Court judges are not mandated to refer to the SAC, the anchor outfit in deciding the Shariah-compliance of banking and takaful products offered by Islamic financial institutions in Malaysia.
This issues came to light following remarks by High Court judge Justice Datuk Abdul Wahab Patail in a written ruling dated July 18 in Arab Malaysian Finance Bhd v Taman Ihsan Jaya & Others (2008).
In one of the two recent BBA judgment-related seminars, Dr Ashraf Md Hashim, Shariah adviser at ZI Shariah Advisory Sdn Bhd, said the court reference to the SAC must be made compulsory in determining the Shariah compliance status of any Islamic banking and finance product.
He said this might require amendments to the Act and therefore would take time to materialise. He believed the SAC was the best option available as far as Malaysia is concerned, and as such felt that what is allowed by the council should be accepted as Shariah-complaint by the courts.
"Shariah is a science by itself. Those who are not trained in the discipline should refer any issue in question to the expert in the field. It is the practice of the court to refer issues to relevant experts such as physicians and scientists. It will be a consistent practice if reference is made to the Shariah specialist for Shariah-related issues," he added.
Dr Ashraf was speaking at a seminar entitled Whither BBA in Malaysia? — Analysis of Recent Decisions, organised by legal firm Zaid Ibrahim & Co. ZI Shariah is a unit of Zaid Ibrahim.
However, another speaker at the same forum took a different view. Responding to the suggestion, former High Court judge Datuk Faiza Thamby Chik said there was no need for High Court judges to refer to the SAC on such matters. He contended that it was the duty of judges to interpret the law and if the ruling had created unhappiness, then the solution is to train the judges.
International Syariah Research Academy for Islamic Finance executive director Dr Mohd Akram Laldin, who also spoke at the half-day seminar, said there was a need to strengthen the role of the SAC to avoid confusion in the industry. He agreed that the SAC should be made the sole reference point on matters regarding Islamic finance, adding that the Islamic banking industry should depart from "controversial" contracts to other alternatives. (By Hablim Wahab & Habhajan Singh; The Malaysian Reserve, Oct 29, 2008, Page 4)

GIFC08: Lively debate on BBA ruling expected

By Habhajan Singh
Islamic bankers can expect a lively discussion on the recent High Court judgment on Al-Bai' Bithaman Ajil (BBA) at the Second Global Islamic Finance Conference (GIFC 2008) that begins today in Kuala Lumpur. Shariah and product development is one of the first sessions for the two-day forum.
In one session, Dr Aznan Hasan, an assistant professor at the International Islamic University Malaysia's (IIUM) Kulliyah of Law, will lead a discussion on ensuring Shariah-compliant Islamic financial instruments.
Recently, High Court judge Justice Datuk Abdul Wahab Patail ruled that since some BBA contracts in the cases heard were structurally faulty, defaulters need not pay more than the original financing amount that they received, depriving banks of the profit they would have otherwise booked from the transactions.
Bankers fear that this judgement could mean that current BBA financing clients would only need to pay the facility amount and escape from paying the profit portion. The forum will also look at sukuk and efforts in promoting its secondary market. It will also touch on Islamic venture capital and private equity.
Among the areas expected to be covered are the opportunities and limitations of Islamic private equity and venture capital investments and ways and means to meet the legal, regulatory and judicial requirements.
Participants will also discuss the limitations to the growth of Islamic private equity and venture capital Ahmad Sanusi Husain, CEO and chief consultant of event organiser GlobalPro Consulting Sdn Bhd, will lead the session on human resources, another area of interest for the Islamic finance sector, especially with the current exodus of talent to the Middle East and other jurisdictions also promoting the sector.
Azmi Mohd Ali, managing partner of legal firm Azmi & Associates, is scheduled to discuss issues related to Islamic venture capital and private equity, where he will touch on the scope for Islamic private equity in mergers and acquisitions. The session will also discuss the oportunities and limitations of Islamic private equity and venture capital investments and ways and means to meet the legal, regulatory and judicial requirements. It will also touch on limitations to growth of Islamic private equity and venture capital.
In another session, Takaful Ikhlas Sdn Bhd executive vice president and chief operating officer Wan Mohd Fadzlullah Wan Abdullah will present a paper on innovation and solutions in takaful. He will discuss the new growth and global market opportunities for takaful and assess recent developments in the global takaful landscape.
On the second day, GIFC 2008 will have a session on risk management and accounting led by Crescent Risk and Wealth Management Consultancy Sdn Bhd managing director Hassan Ahmad and Amanie Business Solutions Sdn Bhd principal consultant Dr Syed Musa Al Habshi.
In the first session, it will look at risk analysis for Islamic banking, concerns about risk and unique risks in Islamic financial services. Dealing with issues on accounting and auditing for Islamic financial institutions, the speakers will inspect the framework for the preparation and presentation of financial statements for Islamic financial institutions and standards locally and internationally.
Minister in the Prime Minister’s Department Datuk Seri Dr Ahmad Zahid bin Hamidi will present the forum's keynote address entitled "Evolution and opportunities in Islamic finance". (By Habhajan Singh, The Malaysian Reserve, Oct 29, 2008, Page 8)

Ismail: ‘Time for banks to study BBA further’

By Habhajan Singh
The recent High Court judgments on Al-Bai' Bithaman Ajil (BBA) will have serious implications if it is held by the higher courts as representing the correct view in law of the BBA transaction, says a local lawyer familiar with Islamic finance transactions.
Lawyer Mohamed Ismail Shariff, who recently joined as a partner at a local law firm, Skrine & Co, said that the effects of the July 18 written judgments by High Court judge Justice Datuk Abdul Wahab Patail will reverberate across the Islamic financing industry in Malaysia.
However, Mohamed Ismail, who has been appointed by Bank Islam Malaysia Bhd as lead the counsel for the appeal against the High Court judgment, is confident that the higher courts will decide otherwise.
"The goodness of the judgment that was discussed here is not in its actual decision but more in the terms of the alarm it has caused among the local Islamic banks.
"That alarm should serve as a wake-up call and propel Islamic banks towards a more dynamic and proactive approach aimed at the greater excellence in all aspects of Islamic banking and practice," he told participants at the Islamic Banking and Finance Institute Malaysia (Ibfim) seminar on Tuesday in relation to the impact of Justice Abdul Wahab's ruling.
This is the second seminar on the topic in weeks. Last week, Zaid Ibrahim & Co, Malaysia's largest law firm, had organised another session. In a 54-page judgement, in the Arab-Malaysian Finance Bhd vs Taman Ihsan Jaya Sdn Bhd and other cases, Justice Abdul Wahab ruled that the application of the BBA contracts before the court were contrary to the Islamic Banking Act 1983 (Iba).
He noted that the sale element in the BBA is "not a bona fide sale", bringing into question the profit portion of the facility.
In the written judgement, the judge ruled that since some BBA contracts were structurally faulty, defaulters need not pay more than the original financing amount that they received, depriving banks of the profit they would have otherwise booked from the transaction.
Bankers fear that this judgement could mean that current BBA financing clients would only need to pay the facility amount and would escape from paying the profit portion.
In relation to the BBA contract, Rafe said the contemporary BBA is based on the classical murabaha contract (which is a simple supplier's credit sale, for example, when a customer buys a radio on credit terms). Mohamed Ismail said this is an opportunity for the banks to study the BBA contract critically to determine its suitability as a home financing contract.
In his conclusion, Mohamed Ismail noted that there are earlier cases on BBA transactions that have recognised them as valid and therefore allowing banks to claim the outstanding balance of the sale price, subject, of course, to the granting of the ibra by the bank for an early recovery or settlement.
"With respect, the present judgment runs counter to those judgments," he said, adding that the present judgment, being a High Court judgment, is not binding on other High Court judges.
"There are still two tiers available in the appeal process, the Court of Appeal and the Federal Court. It is my respectful opinion that the judgment will be reversed on appeal," he said.
Ismail also took the opportunity to highlight that there are other modes of financing, such as the musharakah mutanaqqisah and the ijarah muntahiyyah bit tamleek, which can be explored, studied and modified as it may be necessary to cater to the housing market.
(By Habhajan Singh, The Malaysian Reserve, Oct 24, 2008, Page 9)

BBA: Comments by Rafe Haneef

Stormy times ahead for Islamic banking
By Rafe Hanef - PART I

High Court judge Justice Datuk Abdul Wahab Patail’s judgment in Arab-Malaysian Finance Berhad vs Taman Ihsan Jaya Sdn Bhd & 2 Ors and 12 other cases has caught the attention of local Islamic finance players in Malaysia. The judgment dealt a blow to a concept much utilised by local Islamic bankers. In this first of a two-part series, Rafe Haneef, a former Islamic banker, shares his thoughts on the ruling.

The nascent Islamic banking industry appears to be yet again facing a storm. In a recent High Court judgement, Justice Datuk Abdul Wahab Patail has declared the ubiquitous Bai Bithaman Ajil (BBA) contracts as null and void and that the customers have to pay only the principal amount to the banks. It has undoubtedly created a lot of apprehension and confusion in the marketplace and the Islamic banks are scurrying to obtain legal opinions to get clarity on their BBA portfolios. This note is an attempt to briefly highlight the key elements of the judgement that relates only to the interpretation and application of the Shariah.
(The Malaysian Reserve, Oct 20, 2008, Page 30)
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‘BBA not meant for long-term’

By Habhajan Singh
Islamic financing under the concept of Al-Bai' Bithaman Ajil (BBA) was never intended to be for long-term contracts like home financing as is prevalent in Malaysia, an industry observer said. However, legal experts involved in Islamic finance say the banking industry, which has been forced to reevaluate the BBA following strong wording in a July judgement by High Court judge Justice Datuk Abdul Wahab Patail, should not adopt changes in a haphazard manner.
"The learned judge's decisions are, as yet, the most severe judicial indictment of the bona fides and propriety of the practice of Islamic banking in Malaysia. "The judge's comments in the judgments call into question the very integrity of Islamic banking practitioners here, including Shariah advisers.
"Not surprisingly, the affected banks are reported to be appealing the decisions," said lawyer Mohamad Illiayas Seyed Ibrahim who has been involved in structuring Islamic finance legal documents for years.
It is understood that Mohamed Ismail Mohamed Shariff, a lawyer with considerable experience in Islamic finance who recently joined one of the nation's largest law firm Skrine, has been entrusted with the task of taking the lead in the appeal to the Court of Appeal.
Managing director of Fajr Capital Bhd Rafe Haneef, who formerly oversaw Citibank's Islamic finance business in Asia, said the BBA has been significantly extended beyond its initial scope of facilitating short-term supplier's credit.
"It has now become apparent that the long-term BBA home financing products have caused some side effects to the users," he said in response to Abdul Wahab's judgement.
In a 54-page judgement dated July 18, in the Arab-Malaysian Finance Bhd vs Taman Ihsan Jaya Sdn Bhd and 12 other cases, Justice Abdul Wahab ruled that the application of the BBA contracts before the court were contrary to the Islamic Banking Act 1983 (IBA).
He noted that the sale element in the BBA is "not a bona fide sale", bringing into question the profit portion of the facility. In the written judgement, the judge ruled that since some BBA contracts were structurally faulty, defaulters need not pay more than the original financing amount that they received, depriving banks of the profit they would have otherwise booked from the transaction.
Bankers fear the judgement could mean that current BBA financing clients would only need to pay the facility amount and would escape from paying the profit portion. On the BBA contract, Rafe said the contemporary BBA is based on the classical murabaha contract (which is simply a supplier's credit sale, for example, when a customer buys a radio on credit terms).
"However, unlike the classical murabaha contract, the BBA combines a murabaha credit sale with a binding promise by the customer to buy the goods ordered by the bank.
"The BBA facilitates financial intermediaries like banks to buy assets 'ordered' by the customer who has given the 'binding promise' and to immediately sell the assets to the customer on a murabaha basis," he said.
Post-judgement, it is understood that some banks are considering including a novation agreement for future BBA contracts, cleared under Justice Abdul Wahab's ruling.
However, Mohamad Illiayas warned against rushing into a novation, an act of substituting an existing party or debt in a contract.
"Banks were to a great extent pushed to migrate from novation agreements to property purchase agreements (PPA) in the mid 1990s by the reluctance of vendors and developers to become parties to novation agreements.
"For people used to only the conventional financing model, requiring the vendors and developers to execute tripartite agreements with purchasers and their bankers was certainly an unusual and questionable condition.
"Despite the Taman Ihsan Jaya judgment, banks should be cautioned from rushing to re-embrace the novation setup. The novation agreement structure as adopted in BBA transactions in Malaysia is, arguably, beset with conceptual difficulties," he said.
Mohamad Illiayas' full arguments appear in a two-part series beginning in the Oct 13 (Monday) issue of The Malaysian Reserve and concluding today.
(The Malaysian Reserve, Oct 14, 2008, Page 1)

BNM asks banks to review over-reliance on BBA

By Habhajan Singh
Bank Negara Malaysia (BNM) has "strongly advised" Islamic banks to review their heavy reliance on Al-Bai' Bithaman Ajil (BBA) concept in their transactions.
The reminder from the central bank to Islamic banking institutions (IBIs) comes hot on the heel of a number of recent High Court judgements declaring a number of BBA-based home financing contracts to be contrary to Malaysia's Islamic Banking Act 1983 (IBA).
The concern on BBA was raised in the central bank's circular to to all chief executives of Islamic financial institutions, a copy of which was viewed by The Malaysian Reserve.
"IBIs are strongly advised to revisit the use of BBA as the underlying concept for providing Islamic financing particularly in financing of uncompleted properties," it told the chiefs of local Islamic banks and banks operating Islamic windows.
The BNM circular is dated Sept 8, the very day The Malaysian Reserve first reported on BAA judgement by High Court judge Justice Datuk Abdul Wahab Patail, sending the industry into a tailspin with regards to their heavy realiance on BBA.
BBA refers to the sale of goods on a deferred payment basis at a price which includes a profit margin agreed to by both parties. The concept, hugely popular in Islamic home financing from local banks, has been the lynchpin of billions of ringgit worth of home financing for some two decades now.
The BNM circular itself noted the industry's seeming over dependence on BBA, adding that BBA is a Shariah concept introduced more than 20 years ago to facililtate growth and development of the Islamic finance.
"Since then, the dynamism of Islamic finance over the years has seen a multitude of Shariah concepts that may be employed to better suit current environment," it said.
Signed by Bakarudin Ishak who heads BNM's department for Islamic banking and takaful, the circular was seen as an effort to get the industry to think beyond BBA, which is already happening with some banks introducing home financing via the concept of musharakah mutanaqisah (diminishing musharakah).
"Truth be told, local Islamic players have been overly reliant on BBA. The entire industry, in fact, is built around BBA," says one Shariah scholar.
In one 54-page judgement dated July 18, Justice Abdul Wahab ruled that the application of the BBA contracts before the court were contrary to the IBA, taking note that the sale element in the BBA is "not a bona fide sale" and bringing into question the profit portion of the facility.
The written judgement was a collective judgement for 11 separate cases involving Bank Islam Malaysia Bhd and one case involving Arab-Malaysian Finance Bhd, as the plantiffs.
At the heart of the written judgement by Justice Abdul Wahab is that since some BBA contracts were structurally faulty, defaulters need not pay more than the original financing amount that they received, depriving banks of the profit that they would have otherwise booked from the transaction.
Bankers also fear the judgement could mean that current BBA financing clients would only need to pay the facility amount and would escape from paying the profit portion.
Some of the players big into Islamic financing include CIMB Bank Bhd, Malayan Banking Bhd, Bank Islam Malaysia Bhd and Public Bank Bhd, all of whom have home financing facilities based on the BBA concept.
It is understood that the banks are appealing to the Court of Appeal to over turn the judgement, which has become a major point of discussion since this paper brought the judgement into the public domain.
BNM has yet to reply to queries from The Malaysian Reserve on the potential implication of the judgements.
(THE MALAYSIAN RESERVE, Oct 13, 2008, Page 1)

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.
(THE MALAYSIAN RESERVE, Oct 13, 2008)

Workshops on impact of BBA judgement

The local Islamic finance industry has started the process to understand the impact and repercussion of the judgements on Al-Bai' Bithaman Ajil (BBA) by High Court judge Datuk Justice Abdul Wahab Patail, with at least two seminars already in the pipeline. Zaid Ibrahim & Co, Malaysia's largest law firm, is organising a one-day seminar on Oct 14 while The Islamic Banking and Finance Institute Malaysia (IBFIM) is conducting another on Oct 22.
In July, Zaid Ibrahim led by its chairman Datuk Dr Nik Norzrul Thani announced that it was the first Asian law firm to have received approval from the Dubai Financial Services Authority (DIFC) to provide legal services to local, regional and international clients in and from the Dubai International Financial Centre (DIFC), a world-class global financial hub.
In a release, IBFIM noted that the Islamic finance industry has again been triggered with another controversial ruling by our High court on the legality of a well known facility of BBA.
"In this latest case, it was ruled that the sale element in the BBA is not a bona fide sale but is merely a financing facility.
"Hence, it is in conflict with the Islamic Banking Act 1984. This has significant impact on the players in the country as well as Malaysia’s image as the leader in Islamic finance," it said.
In this state of uncertainty, it said IBFIM is takign the initiative to organise a workshop to discuss the impact of the ruling.
The workshop will be facilitated by Mohamed Ismail Mohamed Shariff, who recently joined local legal firm Skrine and Shariah scholar Dr Aznan Hassan.
(By Habhajan Singh, THE MALAYSIAN RESERVE, Oct 13, 2008)

Minor impact from BBA ruling, says OSK

By Habhajan Singh
The controversy surrounding certain Al-Bai' Bithaman Ajil (BBA) contracts is unlikely to lead to an industry-wide fallout, says OSK Research.
In a research note, it said this view is further underpinned by the fact that Bank Negara Malaysia (BNM) has been pro-active in giving out new Islamic banking licenses to foreign Islamic banks to encourage further liberalisation and development of the sector.
It said this in a research note released last Friday commenting on a series of articles in The Malaysian Reserve last week on a recent judgement by High Court judge Justice Datuk Abdul Wahab Patail. One of his judgments, dated July 18 and running into 54-pages, has caused a stir in the fast-growing Islamic finance industry.
In the note, OSK said the impact of a potential fallout is much bigger for full-fledged Islamic banks. Total Islamic banking financing assets represents 13.8% of the total banking outstanding loan portfolio as at July 2008, while that of BBAs represent an even smaller 4.6%, it reported.
"If we were to solely focus on commercial banks' exposure to BBAs, the percentage contribution as a total of industry wide commercial and investment banks' loan books is 2.3% as at July 2008, significantly smaller than the exposure of full-fledged Islamic banks' of more than 40%," it said.
In an attemp to quantify the impact on the listed banks' earnings in the event of an industrywide fall out, OSK used the industry's BBA's earnings percentage contribution of roughly 40% to total the Islamic banking industry income as a benchmark for a worst-case simulation analysis. It discounted the individual bank's Islamic banking income by that percentage quantum.
Its "back-of-envelope calculations" indicated that the potential negative impact on banks could range from 6.5% to 18.7%, with the largest impact being on AMMB Holdings Bhd, EON Capital Bhd and Affin Holdings Bhd, as these banks have the largest Islamic banking income as a percentage of a total group income.
Although Malayan bank Bhd and CIMB Group are particularly strong in terms of the Islamic banking income market share, the report said the strength and size of their investments and conventional commercial banking income streams help to mitigate any downside risks.
It highlighted that certain banks will have different earning contributions from the various classes of Islamic banking assets, with Commerz being particularly strong in the sukuk market and Public Bank in the Islamic hire purchase segment (Ijarrah Thumma Al-Bai) and thus the actual impact will again vary among banks.
The BBA, in essence, is a contract of deferred payment sale (the sale of goods on a deferred payment basis) at an agreed selling price, which includes a profit margin agreed on by the customer and the bank.
It is widely used in various Islamic financing instruments, including bridging finance, cash line facilities, contract financing, project financing and letters of credit.
(The Malaysian Reserve, Sept 16, 2008)

BBA: Banking sector braces for impact from ruling

By HABHAJAN SINGHThe Islamic banking fraternity is bracing to face a fallout from the recent High Court rulling that the application of the Al-Bai' Bithaman Ajil (BBA), a widely used Islamic home financing contract, is contrary to the Islamic Banking Act 1983.
At the heart of the written judgement by Datuk Justice Abdul Wahab Patail is that since some BBA contracts were structurally faulty, defaulters need not pay more than the original financing amount that they received, depriving banks of the profit that they would have otherwise booked from the transaction.
Bankers also fear the judgement could mean that current BBA financing clients would only need to pay the facility amount and would escape from paying the profit portion.
The home financing facilty extended under the BBA concept runs into billions of ringgit. "It will impact (the industry) in a big way. Bankers and financiers are used to the idea that when a default takes place, they are entitled to recover the full balance of the sales price. This and the previous judgement by Justice Wahab has altered that," said a local lawyer who ranks among the pioneers in the field of Islamic finance.
Wahab's latest judgement, dated July 18, encompassed 11 separate cases involving Bank Islam Malaysia Bhd and Arab-Malaysian Finance Bhd as the plantiffs.
It is understood that the banks are appealing to the Court of Appeal to over turn the judgement which was received by lawyers involved in the case only last month.
Industry experts estimate that close to 70% of Islamic financing has been granted under the BBA concept which essentially is a deferred payment sale (the sale of goods on a deferred payment basis) at an agreed selling price, which includes a profit margin agreed on by the customer and the bank.
The BBA concept is widely used in various Islamic financing instruments, including for bridging finance, cash line facilities, contract financing, project financing and letters of credit.
Among the big local players on this front are CIMB Bank Bhd, Malayan Banking Bhd, Bank Islam Malaysia Bhd and Public Bank Bhd, all of whom have home financing facilities based on the BBA concept. Local banks like CIMB and Maybank now have full-fledged Islamic subsidiaries that handle such financing.
"Banks are worried this judgement will set off alarm bells with regard to confidence with BBA locally. As for foreign investors, they fear its potential ramification on Malaysia's efforts in becoming a global hub for Islamic finance.
"Our whole industry has been BBA-driven. Banks are fervently trying to find a solution," said an industry executive.
It is understood that the legal departments of some these banks are now trying to get their hands on Abdul Wahab's latest judgement which has yet to be published by any of the local regular sources for the legal fraternity.
On Monday, The Malaysian Reserve ran a report on Abdul Wahab's ruling followed by excerpts from the 54-page judgement the next day.
The judgement on the appplication of BBA, popular at home but much criticised abroad, is set to be another widely discussed judgement after Abdul Wahab's earlier ruling in the case of Affin Bank Bhd vs Zulkifli Abdullah, in which he passed a ruling on the calculation of the amount to be paid in the event of a foreclosure.
The 2006 case 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.
"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."
(The Malaysian Reserve, Sept 11, 2008)

BBA: Islamic financial bodies study impact of High Court ruling

By Habhajan Singh
Islamic financial institutions have begun gathering their legal eagles to take a close look at the potential impact of the recent High Court ruling that brought into question some elements of the highly contentious Al-Bai' Bithaman Ajil (BBA) financing facility.
It is understood that some Islamic banks have already requested advise from their panel of lawyers on the potential impact of the ruling by High Court Judge Datuk Abdul Wahab Patail.
Though dated July 18, The Malaysian Reserve understands that the lawyers involved in the cases only got their hands on the written judgement in the last two weeks.
"This is going to be another hot potato for the Islamic finance industry. I must say it is a well-written judgement," says one lawyer familiar with cases pertaining to Islamic finance. Another lawyer said that a careful reading of the 54-page judgement shows that the judge had covered much ground concerning Shariah and Islamic finance.
"It makes (for) instructive reading," he said on the judgement, which runs close to 11,000 words.
In this latest case, Abdul Wahab Patail ruled that the sale element in the BBA is "not a bona fide sale" and he also brought into question the profit portion of the facility.
However, one lawyer said that this decision will not be binding on another High Court judge, who may chose to adopt it, reject it or find a middle ground. The issue may also take a turn if the judgement is overturned by the Court of Appeal. It is understood that the parties involved have filed an appeal.
(The Malaysian Reserve, Sept 8, 2008, p31)

BBA judgement by Msia's Justice Wahab Patail

By Habhajan Singh
The High Court recently ruled that the application of the Al-Bai' Bithaman Ajil (BBA), a hugely popular Islamic home loan financing contract in Malaysia for the last two decades but much criticised abroad, is contrary to Malaysia's Islamic Banking Act 1983.
In what is set to be another widely discussed judgement, High Court Judge Datuk Abdul Wahab Patail ruled that the sale element in the BBA is "not a bona fide sale". He also brought into question the profit portion of the facility. The written judgement, dated July 18 but made available to lawyers involved in the case late last month, may force Islamic banks and financial institutions to re-examine their legal documentations.
Carrying the stamp of the Kuala Lumpur High Court commercial court division, the 54-page judgement was a collective judgement for 11 cases involving Bank Islam Malaysia Bhd and Arab-Malaysian Finance Bhd as the plantiffs.
The BBA house financing is a contract of deferred payment sale (the sale of goods on a deferred payment basis) at an agreed selling price, which includes a profit margin agreed on by the customer and the bank.
Profits in this context is justified since it is derived from the buying and selling transaction as opposed to interests accruing from the principal lent out, according Bank Negara Malaysia's (BNM) website.
BNM is the regulator of Malaysia's financial institutions, including Islamic financial institutions operating in the country. However, Abdul Wahab's judgement does not concur with the said notion.
"This Court holds that where the bank purchased directly from its customer and sold back to the customer with deferred payment at a higher price in total, the sale is not a bona fide sale, but a financing transaction, and the profit portion of such Al-Bai' Bithaman Ajil facility rendered the facility contrary to the Islamic Banking Act 1983 or the Banking and Financial Institutions Act 1989, as the case may be," he said in his judgement (point No. 69).
In his reasoning earlier, the judge pointed out that "there is no dispute that the concepts" of BBA and several other contracts are "in principle, Islamic in nature since no interest is involved".
"The function of this Court is to examine the application of these Islamic concepts, as to whether as implemented, and in the particular cases before it, the transactions do not involve any element not approved in the Religion of Islam.
"It is a question of looking at the particular facts. That remains the judicial function of the Court which it cannot abdicate," he wrote.
In another point, the judge also made his earlier stand in the case of Affin Bank Bhd vs Zulkifli Abdullah, in which he passed a ruling on the calculation of the amount to be paid in the event of a foreclosure.
The 2006 case 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.
In his latest judgement, Abdul Wahab wrote: "This Court accepts that where the bank is the owner or had become the owner under a novation agreement, the sale to the customer is a bona fide sale, and the selling price is as interpreted in Affin Bank vs Zulkifli Abdullah.
"Thus, where the bank is the owner of the property, by a direct purchase from the vendor or by a novation from its customer, and then sold the property to the customer, the plaintiffs' (the banks) interpretation of the bank's selling price is rejected and the Court applies the equitable interpretation."
It is understood that the banks are appealing the judgement.