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)

High Court to consult SAC on Islamic finance cases

By LEE CHERNG WEE
The High Court will be compelled to consult the Shariah Advisory Council (SAC) of Bank Negara Malaysia (BNM) when hearing Islamic finance disputes when a new central banking act is passed.
"In the new central banking act which is due to be presented in parliament, the court shall refer to the Shariah Advisory Council (SAC) on Shariah matters," BNM governor Tan Sri Dr Zeti Akhtar Aziz told an Islamic finance forum in London on Friday, reports Reuters.
"It would allow for the consistent application of the interpretation given by the Shariah advisory council," she said.
Under proposed changes to the law, Zeti said judges would be guided by either the central bank or the capital market regulator's Shariah advisory body in deciding Islamic banking matters, according to the news wire report.
When contacted yesterday, BNM spokesperson confirmed the statement, but declined to give further elaboration on the matter.
The proposal confirmed a report by The Malaysian Reserve on Oct 29, 2008, that plans were underway to compel the High Court to refer to the SAC when presiding over Islamic banking and finance-related cases, unlike presently, where High Court judges are neither required to consult the Shariah experts nor heed their advise.
It was then learnt that the central bank was reviewing the necessary laws to make that possible. The development came on the heels of an intense debate over the Islamic financing under concepts like Al-Bai' Bithaman Ajil (BBA) and Bai Inah following a High Court ruling in July 2008 that had found its application to be contrary to Malaysia's Islamic banking laws.
Industry players were also debating on the role of the SAC, a body formed under the wings of the central body, in determining the compliance status of Islamic finance products.
Presently, SAC has the final say on Shariah matters for financial institutions involved in Islamic financing, whether it be approving new products or Shariah concepts, making the advisory body a powerful outfit. It is currently chaired by Shariah scholar Dr Mohd Daud Bakar.
When contacted, Zaid Ibrahim & Co chairman Datuk Dr Nik Norzrul Thani Nik Hassan Thani said the move by BNM was not entirely unexpected.
"It will provide certainty to the players. It will also alow for the development of the Islamic jurisprudence on Islamic finance cases and concepts," said the head of the nation’s largest law firm.
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), as the sale element in the BBA was deemed "not a bona fide sale".
The judgment brought 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.
This reopened the debate on the usability of BBA from the Shariah point of view. However, on March 31, the Court of Appeal unanimously overturned Abdul Wahab 's much-debated judgment in Bank Islam Malaysia Bhd v Ghazali Shamsuddin & Two Others, and nine other cases.

(This story appeared in The Malaysian Reserve on Apr 22, 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)

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.

Bai Inah not contrary to Islamic banking

By HABHAJAN SINGH
AFTER reversing High Court judge Datuk Abdul Wahab Patail's judgment on Al-Bai Bithaman Ajil (BBA), a widely used Shariah enabler in Islamic financing, the Court of Appeal last week also overturned a judgment on the concept of Bai Inah.
Last Wednesday [Apr 1, 2009], the Court of Appeal ruled that Bai Inah, the concept of sale with an imediate 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.
The Court of Appeal bench was made up of judges Datuk Md Raus Sharif, Datuk Abdull Hamid Embong and Datuk Ahmad Maarop — the same bench that had delivered what would be a much discussed judgment just the day earlier.
They had earlier delivered the ruling in the case of Bank Kerjasama Rakyat Malaysia Bhd v Fadason Holdings Sdn Bhd and three others.
It was also the same bench that delivered the BBA judgment on March 31. As in the earlier BBA judgment, this ruling will also see local Islamic financial institutions breathing a lot easier now that the matter has been clarified and the Shariah concept cleared for use.
"This judgment will see Bank Rakyat letting out a huge sigh of relief. They have a huge portfolio wrapped around the Bai Inah concept," a banker with a local Islamic bank told The Malaysian Reserve. "We are talking about financing, including personal financing, running into billions of ringgit," he added.
Since Abdul Wahab's string of judgments, mostly dated July 18, local Islamic banks have been rattled on the point of whether their contracts are 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.
In this most recent case, Khairuddin Abd Ghani from Amir Ruhana & Khairuddin appeared for Bank Rakyat while the respondents were represented by S L Tan of SL Tan Associates.
The court is expected to deliver a written judgment later. On March 31, the same bench had unanimously reversed Abdul Wahab's judgment that BBA contracts were contrary to Malaysia's Islamic banking regulations in Bank Islam Malaysia Bhd v Ghazali Shamsuddin & two others, and nine other cases.
The Malaysian Reserve first reported on Abdul Wahab's BBA judgement on Sept 8, 2008, sending shockwaves through the local Islamic banking fraternity as they began deciphering its impact. Until the news broke, many Islamic finance bankers and lawyers had not had the chance to read 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.
In Bank Rakyat's case, the cooperative bank is claiming from Fadason and three others the sum of RM2.47 million, as at 2004, being the balance from a RM10 million facility granted under the Bai Inah concept.
On the concept of Bai Inah, Abdul Wahah wrote that it is a combination of two separate agreements, the first being the Al-Bai, meaning a sale by the financier to the client, and the second being the buyback by the financier from the client. The purchase price paid by the financier under the second agreement and the deferred payments under the first agreement provides the client with the immediate funds that he desired, and the facility to pay back over a period of time, he added.
In this case, the facility was provided under the Bai Inah concept by the bank selling five blocks of shares quoted on the stock exchange for RM12.31 million (being the sale price) to be paid by the clients in 18 monthly instalments.
On the same day, the bank purchased from the clients the shares for RM10 million, thus making a profit of RM2.31 million while the client obtained funds amounting RM10 million.
In the earlier High Court written judgment, Abdul Wahab acknowledged that Bai Inah is an acceptable concept as it is approved by Bank Negara Malaysia's Shariah Advisory Council.
However, he had deemed the "profit element" as riba, or usury, an element expressly forbidden in Islam.
He wrote: "Such increase or profit may not have been expressed as a percentage but as a sum, but it is no less riba in a usurious loan. "Upon the facts of this case, the foregong reasoning leads to the conclusion that the Bai Al-Inah transaction as impleented contains the element of riba, an element not approved by the Religion of Islam."

(This story appeared in The Malaysian Reserve on Apr 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)

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)

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)

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 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.