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)

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)