Malaysian constitution may allow for Brunei-style Shariah laws

Tun Abdul Hamid presenting his paper at IAIS public talk on hudud law

The planned Brunei-style Shariah laws, with provisions to introduce hudud, could be implemented under Malaysia’s federal law which will also impact non-Muslims, said former Chief Justice of Malaysia Tun Abdul Hamid Mohamad.

In a lengthy speech yesterday on Brunei’s recent move to introduce the Shariah Penal Code 2013, Abdul Hamid said there is no “constitutional impediment” for criminal offences under the Penal Code to be made punishable with hudud, a view that is expected to be hotly contested by some constitutional experts.

“Parliament may choose whatever punishments to be provided for criminal offences, including punishments according to Shariah. If done that way, they may be extended to Muslims and non-Muslims alike.

“Criminal law is under the jurisdiction of the civil courts. Civil courts have jurisdiction over Muslims and non-Muslims alike.

“For Parliament to make such law, no amendment to the Constitution is required and the bill can be passed by a simple majority. This situation is comparable to the law on Islamic banking and finance and takaful,” he said.

Abdul Hamid, who retired as the nation’s top judge in October 2008, made the remarks in his 12-page speech entitled Implementaion of hudud in Brunei: Differrence between Brunei and Malaysia at a public lecture organised by the International Institute of Advanced Islamic Studies (IAIS) in Petaling Jaya recently. The full speech is available on his website at www.tunabdulhamid. my.

Abdul Hamid, who is also a sitting member of Brunei’s Shariah and civil law harmonising committee, was commenting on the move by Brunei, the oil-rich absolute monarchy sandwiched between Sabah and Sarawak, that had on Oct 22, 2013, gazetted the Shariah penal code with a view to introduce the hudud and qisas punishments in the country. The order has yet to be brought into force.

He made the above remarks as to whether such a move could be made in Malaysia purely from a “legal perspective neutrally and professionally like a judge delivering a judgment”.

“Many people think that since the offences are hudud and qisas offences according to Shariah and ‘Islamic law’ which is under the jurisdiction of the State, therefore State Legislature may make such law. At the most, they are partially right. In Malaysia, any law made must be consistent with the Constitution,” he said.

He noted that some of those offences lie within federal and civil courts’ jurisdiction, hence, if they are made state law, clearly they are unconstitutional, null and void.

“We often hear people saying that the law will be made applicable to Muslims only. Again, this is only partially right,” he said, citing three reasons.

“Criminal law is a public law. The offences are offences against the state, not just against the victim. That is why it is the public prosecutor who prosecutes, on behalf of the State,” he said.

When drawing his conclusion on the move, he said: “In my view, any law, no matter how good it is, if it is implemented without proper preparation, without taking into account the relevant factors or implemented inefficiently or unprofessionally, may lead to injustice. Good intention alone is not enough. Technical know-how, expertise and discipline are among the factors essential for the success of the implementation.”

[THE MALAYSIAN RESERVE, 14 Feb 2014]

SOME NEWS/MATERIAL RELATED TO THE ABOVE STORY:

1. Government Gazette from Brunei's Attorney General 's Chamber. Bil S 69.

2. The Malay version for Perintah Kanun Hukum Jenayah Syariah, 2013

3.. PRESS RELEASE: Syariah Criminal Law Officiated

Prime Minister's Office and Ministry of Religious Affairs, Negara Brunei Darussalam held Majlis Ilmu 2013 which was one of the main events in conjunction with the 67th birthday celebration of His Majesty Paduka Seri Baginda Sultan Haji Hassanal Bolkiah Mu'izzaddin Waddaulah ibni Al-Marhum Sultan Haji Omar 'Ali Saifuddien Sa'adul Khairi Waddien, Sultan and Yang Di-Pertuan of Brunei Darussalam. The event was held for 3 consecutive days on 22 October 2013 to 24 October 2013. The event took place at the International Convention Centre (ICC) Berakas, Negara Brunei Darussalam.

4.. BRUNEI RULER'S SPEECH 

I am most grateful to Allah the Almighty, because today's "Majlis Ilmu", that is to say Knowledge Convention, in conjunction with my birthday celebrations is to include historic events, pertaining to the Syariah Penal Code. With the blessings of Allah, this legislation will be gazetted today, the 22nd of October, 2013, and will come into force six months hereafter in phases.

5. Pelita Brunei report on the gazetting of the Brunei Shariah law

'Akta Perinta Kanun Hukuman Jenayah: sya'riah mula digazetkan 22 Oktober 2013'

BANDAR SERI BEGAWAN, Selasa, 22 Oktober. - Negara Brunei Darussalam hari ini melakar sejarah besar apabila mengazetkan Akta Perintah Kanun Hukuman Jenayah Syar'iah yang berkuat kuasa enam bulan selepasnya secara berfasa.

Kebawah Duli Yang Maha Mulia Paduka Seri Baginda Sultan Haji Hassanal Bolkiah Mu'izzaddin Waddaulah ibni Al-Marhum Sultan Haji Omar 'Ali Saifuddien Sa'adul Khairi Waddien, Sultan dan Yang Di-Pertuan Negara Brunei Darussalam mengumumkan perkara itu ketika bertitah pada Perasmian Majlis Ilmu 2013 di Pusat Persidangan Antarabangsa, Berakas.

Bloomberg: Fitch Joins HSBC Seeing Record 2014 Sukuk Sale

Persian Gulf government spending will help drive what may be a record year for Islamic bond sales, Fitch Ratings said, echoing HSBC Holdings Plc (HSBA) forecasts, reports Bloomberg (Jan 20, 2014).

Sales will probably match the 2012 high, the rating company said in a note last week even amid the slowest start to issuance since 2010. Mohammed Dawood, global head of sukuk financing at HSBC, said last month that sales will rebound from a decline last year.

Borrowers sold $133 million of syndicated sukuk to Jan. 19, the least since $47 million in the same period four years ago, according to data compiled by Bloomberg.

Economic growth in the oil-rich Gulf Cooperation Council countries and possible debut Islamic debt sales from the U.K. and Hong Kong will help the long-term outlook for sukuk sales, Fitch said. Qatar’s plans for the 2022 soccer world cup, Dubai’s preparations for the Expo world fair in 2020, and Saudi Arabia and Abu Dhabi’s spending commitments should boost issuance, according to the rating company.

The report quoted Rizwan Kanji, Dubai-based partner at King& Spalding LLP, as saying: “There has been preparation work done, issuers just haven’t gone to market yet. Everyone is taking a breather after the record close to last year. We expect an active, fruitful year.”

Call to review interest in court judgements

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

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

(This story appeared in The Malaysian Reserve on Oct 5, 2009. The Malaysian Reserve is a daily business/finance newspaper published out of Kuala Lumpur, with a sectoral page on Islamic finance on Mondays, edited by Habhajan Singh)

Legal wrangles to test Islamic banking: Reuters

A wave of debt defaults is set to hit Islamic banks as deals sour amid the global slowdown, testing the legal framework and stability of an industry already facing the biggest slump in its 30-year history. The global economic downturn that punctured Islamic banking's growth bubble is also expected to bring many sharia financing structures under the legal microscope for the first time in centres such as Dubai, Bahrain and Malaysia, reports Reuters (May 12, 2009).
The report added that expected increase in commercial disputes raises questions about whether conventional legal systems can deal with the highly specialised niche industry which has evolved into a $1 trillion industry handling government and corporate debt.
It could also test the foundations of the Islamic banking system, which the Asian Development Bank estimates is growing by 10-15 percent a year, but which some bankers and lawyers say still lacks a strong cohesive regulatory and legal framework.
Judges will have to weigh conventional law and sharia (Islamic law) used in contracts, and legal uncertainty over key contract provisions could hurt the industry's ability to bounce back when the global economy recovers, it added.
"The industry will be watching to ensure any legal disputes are settled in a transparent manner which gives certainty to the contract terms entered into," Davide Barzilai, a London-based Islamic finance lawyer with Norton Rose told the newswire. "If there a string of cases which result in contracts being overturned by the court for breach of sharia alone, then this could have a material impact on the growth of the industry."
THE REPORT GOES ON:
Fuelled by a recent rush of oil money, Islamic bankers innovated on the basic financing model, taking it beyond sale and profit-sharing contracts to more complex derivatives which are harder for courts to deal with.
Islam's rules on transparency kept sharia banks from subprime mortgage loans that mauled Western banks, but their vast exposure to the property sector, especially in the Gulf, is taking a toll as global real estate markets slide.
Gulf Arab companies deemed most vulnerable to the downturn include large United Arab Emirates (UAE) real estate developers, such as Dubai-listed Islamic mortgage firms Amlak and Tamweel.
CRUNCH TIME?
Defaults and litigation are expected to jump as the ailing world economy, tough financial markets and stalled projects make it harder for firms to repay banks and asset values plummet.
Over half of the residential and commercial property projects due for completion in Dubai between 2009 and 2012 have been cancelled or suspended, Jones Lang LaSalle said in March.
But Islamic banking's legal framework is as fragmented as other aspects of the industry, with little case law to guide judges. Many judges are also unskilled in sharia, and the relationship between Islamic and secular law is unclear.
"It's a contest between sharia law and common law," said Islamic banking lawyer Mohamad Illiayas.
"Cases have gone to court where there is a problem of conflicts and inconsistencies but the English courts have always ruled in favour of common law."
He cited a 2004 case involving Shamil Bank of Bahrain where an English court refused to apply sharia law to a murabaha contract (a popular contract of sale). The court said two systems of law cannot govern one contract.
In Malaysia, home to the world's top Islamic bond market, only a handful of cases have come before the high courts in almost three decades, with most involving basic home loan cases.
Judges' expertise has been in focus after some courts questioned the validity of the bai bithaman ajil contract, a type of deferred payment sale, sowing confusion in the industry.
The contract was recently declared valid by an appellate court, but Malaysian authorities now plan to force judges to refer to national sharia advisers when handling Islamic finance cases.
"Looking purely at the formal qualifications and experience of judges, it would be hard to expect them to be fully aware of all the relevant intricacies of Islamic finance," said Megat Hizaini Hassan, an Islamic finance lawyer with Zaid Ibrahim.
In the Gulf Arab region, law firms have started to build up Islamic finance expertise but their skills is almost exclusively limited to consulting banks on deal structures and drafting contracts, and most have yet to see a court room from inside.
Islamic finance disputes can be referred to arbitration by specialists but many Malaysian cases still go court. In Bahrain, such cases have mostly gone to dispute resolution committees staffed by judges and specialised central bank officials.
But arbitration is not problem-free, either.
"We will still have to resort to common law at one stage or the other," said Illiayas. "Even after the arbitration award is given, if you want to enforce that award you still have to go to court."

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)

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)

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)

What now for local legal firms with Middle East operations?

What is the fate of legal firm which have recently made inroads into the Middle East market in search of a slice of the pie within the Islamic finance business?
The main factors persuading firms to leap toward the Middle East are the proximity to the large client base and the region's importance for new industry developments, says the Asia Legal Business magazine.
It noted that Islamic finance practices of firms within East Asia have been eyeing the Gulf as a growth strategy for some time and asked if recent global financial events will put their ambitions on hold.
As Asian authorities have intensified their pursuit of a larger slice of the Islamic finance market, the region's law firms have followed suit — some of them even establishing offices in the Gulf region, it noted.
"The Middle East will recover from the economic downturn faster than other parts of the world, and this alone provides enough incentive for forward-thinking law firms to relocate or expand," said Farid Hussain, partner heading the Dubai office of Zaid Ibrahim & Co.
"Here, the business communities' exposure to and knowledge of Islamic finance is growing, so this will also create demand for work," he told the magazine.
Last year, it noted Zaid Ibrahim & Co became the first law firm within Asia approved to operate in the region's leading finance hub, the Dubai International Financial Centre.
In the article entitled 'Islamic finance: Gulf strategies vary in uncertain times', the magazine reports that another firm keen on expanding to the Middle East, but taking a steadier approach, is Azmi & Associates.
"We will do so only after consolidating and enhancing our position here in Malaysia and within the South-East Asian region, something we intend to pursue in the next two years," the firm's managing partner, Azmi Mohd Ali was quoted saying.
Muthanna Abdullah, managing partner of Lee Hishammuddin Allen & Gledhill was also quoted in the magazine as saying: "[Expansion] meets the need to be close to the Gulf clients — who require far more personal contact. It is their high liquidity which drives the Islamic finance market. Certainly, proximity to the Gulf is also needed to understand the developments of Islamic finance better."

(The Malaysian Reserve, Mar 30, 2009, p31)

BRITAIN: Islamic finance firms in Britain sitting pretty

Neill Gibson, a partner in Trowers & Hamlins who works on many Islamic finance matters, told The Times in a recent article that Islamic finance would not have touched the subprime markets "but it won’t have been protected from other badly hit sectors, such as real estate".
The article entitled "Crossing over to Islamic banking: Shariah-compliant finance is prospering in Britain", quoted a lawyer dabbling in Islamic finance as saying that Shariah can permit certain futures and options structures, such as the "salaam" (sale contract with a deferred delivery) and "arboun" (sale contract with a non refundable deposit), it prohibits convoluted derivative products.
"An asset has to be visible. If you can’t see it, it’s unlikely to be Shariah-compliant," Hamid Yunis, the head of the law firm Taylor Wessing’s Islamic finance practice, said in the report. The article began by saying that as the credit crunch has mutated inexorably into a recession, with bankers having eclipsed politicians, lawyers and even journalists as public enemy number one, the growing number of Islamic finance institutions in Britain might just be sitting pretty.
It noted that UK now has five fully Shariah-compliant banks and another 17 financial institutions have set up special branches or firms.
They include the Qatar Islamic Bank (QIB), with its London-based European Finance House in Berkeley Square, and the Islamic Bank of Britain, which has headquarters in Birmingham. The report also quoted an Islamic bank marketeer as to why Shariah banking would have survived the onslaught of the credit crisis. "Our core business will always be Muslims but the number of non-Muslims are really picking up.
"We’ve had massive interest — and that’s down to a number of reasons, all of which have kept us insulated from the credit crunch," said Steve Amos who heads marketing at Islamic Bank of Britain. He alludes to the nuances of Islamic banking — specifically that Islamic finance has to be Shariah, or Islamic law, compliant.

Kazakhstan job for Msian legal firm

By Habhajan Singh
Zaid Ibrahim & Co has been appointed to ensure Kazakhstan's proposed Islamic banking laws are in line with prevailing international standards.
The law firm, which has an active Islamic finance practice and is expanding its regional footprint in conventional legal work, is understood to have secured the job through an international Islamic agency. The appointment demonstrates the strength of Malaysia's largest law firm.
When contacted, Zaid Ibrahim chairman Datuk Dr Nik Norzrul Thani Nik Hassan Thani confirmed that the firm had bagged the job, but declined to provide further details. "It is an interesting job. It demonstrates our ability to export our Islamic finance expertise to these countries," he told The Malaysian Reserve.
Kazakhstan, a former state under the Soviet Union empire, is looking to enter Islamic banking and finance, with ambitions to position the country as a regional hub for the sector. Several Islamic finance officials and consultants from Kazakhstan held discussions with their local counterparts in Kuala Lumpur recently.
"At least three Islamic banks are waiting in the wings to spring into action," a consultant told The Malaysian Reserve. Another consultant said that there are a number of jobs in Islamic finance up for grabs in Kazakhstan.
"Once the Islamic regulations are in place, the pace should pick up for local and foreign players," he said.
Zaid Ibrahim had recently set-up an Islamic finance advisory outfit under ZI Shariah Advisory Sdn Bhd and has since been active in crossborder Islamic deals. It is the first Malaysian legal firm with an associate company to be granted approval by the Securities Commission to act as a Shariah advisor for sukuk issuances and unit trusts. ZI Shariah provides advisory services in line with Shariah principles, international Shariah standards and resolutions made by the Shariah advisory councils on Malaysian regulatory authorities.
Over the last few years, Zaid Ibrahim said it has structured some of the most innovative financing transactions in the region. In Brunei, it was appointed as advisor for the country's first issuance of Islamic bonds based on the Shariah principles of sukuk ijarah, while in Indonesia it advised on an Islamic financing structure based on the Shariah principle of murabahah.
It has also worked on a US$100 million (RM364 million) sukuk ijarah Islamic financing facility in Brunei, an Islamic financing product bond on the principle of murabahah in the UK, a US$35 million murabahah Islamic trade finance facility in South Africa and a US$10 million bai al-dayn Islamic facility in Canada.
Locally, it has worked on the RM5.57 billion MTN issued under the istina principle to finance all costs associated with the initial operations of a power plant and a RM5.1 billion al-bai' bithaman ajil Islamic debt securities for a highway-related client. It has also advised a number of financial institutions on standardising their Islamic banking documentation. (The Malaysian Reserve, Nov 24, 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)

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)

Loyens & Loeff sets up office in Dubai

Netherlands-based law firm Loyens & Loeff has announced that it has established an office at the Dubai International Financial Centre (DIFC). The firm has an an Islamic finance team, the first integrated civil and tax law-oriented team to target Islamic finance transactions from the point of view of customers in Belgium, Netherlands and Luxemburg (Benelux).
This makes Loyens & Loeff the firm the first continental-European legal and tax service provider to establish an office at the DIFC, according to a DIFC statement. With over 850 lawyers including over 350 tax specialists and 100 fund lawyers working in seven offices in the Netherlands, Belgium and Luxembourg and eleven offices in the world's major financial centres, it is one of the largest continental European law firms and has a strong international focus, it added.
The Dubai office advises on international tax efficiency, investment protection, private equity, the EU real estate funds and matters related to family offices. (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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Aussie Maddock: Malaysia as bridge between Gulf, Australia

By Habhajan Singh
As an Islamic financial hub, Malaysia is best placed to act as a bridge between the capital in the Gulf and the financing opportunities in Australia, said Shahriar Mofakhami, a partner with Australian legal firm Maddocks. Shahriar, who was appointed a partner with the Maddocks Tax & Revenue team in July, was one of the members during a recent Australian trade delegation to Malaysia.
Australian minister for trade Simon Crean and his Malaysian counterpart, along with representatives of large domestic Australian banks and Malaysia's investment banks, Bank Negara Malaysia (BNM) and Malaysian Securities Commission (SC), met in Kuala Lumpur on Oct 7, to explore opportunities to expand Australia's financial services trade, the legal firm said in a statement.
It added that Shahriar and Tina Savona from Maddocks Tax & Revenue group were invited to attend the 14th Australia-Malaysia joint trade committee meeting as part of the Australian delegation. At the request of the Australian government, Shahriar presented on Shariah compliant investment and financing structures for investment in Australia alongside representatives of the Kuwait Finance House (Australia) and the Muslim Community Cooperative (Australia) Ltd, it said.
In a recent article, The Australian Financial Review reported that the combination of the crisis in credit markets and the vast oil-fuelled wealth being accumulated in the Middle East has Maddocks sensing an opportunity — creating investment structures compliant with rules of Islamic finance. In its statement, Maddocks said with a strong background in structuring crossborder (inbound and outbound) transactions, Shahriar has established a dedicated Islamic finance practice at the legal firm.
"In essence, Islamic finance is a trade-based mode of financing. In the course of advising on particular transactions, our views were sought in relation to structuring Shariah compliant investment platforms within the existing 'conventional' Australian financing and tax framework.
"This provided us with an opportunity for in depth consideration as to how Shariahcompliant financing structures can fit within the existing legal framework in Australia," said Shahriar.
Although still relatively uncommon in Australia, the firm said the global Islamic finance industry has recently shown significant growth and maturity in Europe, Asia and the Middle East.
In March 2008, it was reported that pure Islamic banks, along with Islamic subsidiaries and "windows"' of conventional banks, controlled close to US$400 billion (RM1.41 trillion) in assets globally compared with US$100 billion in assets in 2000.
With an estimated global worth in the hundreds of billions of dollars and an anticipated growth rate of 15%-25% per annum over the next five years, global assets managed according to Islamic (Shariah) principles are tipped to exceed US$1 trillion, according to Boston Consulting Group, April 2008 data.
A major factor in the Islamic financing boom has been the high price of oil leading to increased wealth in the Gulf Cooperation Council states and Iran, among others. This has in turn resulted in an increase in the number of Islamic institutions seeking specialist financial products.
Maddocks Islamic Finance advises both onshore and offshore Islamic financial institutions in relation to structured finance, institutional transactions as well as retail Shariah compliant financial products, it said.
(By Habhajan Singh, The Malaysian Reserve, Oct 20, 2008, Page 32)