BNM asks banks to review over-reliance on BBA

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

BNM: Beef up legal docs

By Habhajan Singh
Bank Negara Malaysia (BNM) has urged local Islamic banking outfits to beef up their legal documentation, an area that makes or break a contract when taken to the courts.
In a recent circular to Islamic ourfits, the central bank has urged them to appreciate the importance of proper drafting of Islamic financing legal documentation and cause papers in litigation.
It called on Islamic banks to ensure they employ law firms with the right set of expertise to prepare their legal documentation and handle litigation work.
It also required Islamic banking institutions to ensure that proper internal controls are in place to "preserve the quality and consistency of such legal documentation and cause papers".
The reminder to chiefs of local Islamic banks and financial institutions with Islamic banking activities came in view of the issues that cropped up following a number of judgements on Al-Bai' Bithaman Ajil (BBA) by High Court judge Datuk Justice Abdul Wahab Patail.
In the circular, BNM which supervises the Islamic banks and takaful operators operating in Malaysia, had also "strongly advised" Islamic banks to review their heavy reliance on the BBA concept in a huge number of their transactions.
Justic Abdul Wahab's judgement on the appplication of BBA, a concept popular at home but much criticised abroad, is set to be another widely discussed judgement after his earlier ruling in the case of Affin Bank Bhd vs Zulkifli Abdullah.
In that 2006 case, he passed a ruling on the calculation of the amount to be paid in the event of a foreclosure.
It attracted much attention, and is still the subject of seminars today, as it turned on its head the way bank practitioners calculated the outstanding amount to be repaid by borrowers who had defaulted on their BBA contracts.
Some banks had calculated the amount up to the full period of the facility, even though the borrowers may have defaulted only a few years into the financing. to be fair, though, banks usually have a defaulter rebate, which is at their sole discretion.
Similarly, legal and Shariah experts will be looking at the impact of the latest judgement by Justic Abdul Wahab, which will be scrutinised by the Court of Appeal as an appeal is pending.
"The effect of this judgement is that customers are obliged to pay only the principle that had been extended to them.
"Since the court holds this contract null and void, Section 66 of the Contract Act will apply," said a lawyer.
Section 66 of the act states that "when an agreement is discovered to be void, or when a contract becomes void, any person who has received any advantage under the agreement or contract is bound to restore it, or to make compensation for it, to the person from whom he received it."
In Malaysia, Islamic banking institutions refer to Islamic banks licensed under Section 3(1) of Islamic Banking Act 1983 (IBA) and commercial banks, merchant banks, finance companies and discount houses licensed under Section 6(4) of Banking and Financial Institutions Act 1989 (BAFIA) that participate in the Islamic banking scheme.
(THE MALAYSIAN RESERVE, Oct 13, 2008)

Workshops on impact of BBA judgement

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

Lawyer Ismail joins Skrine

By Habhajan Singh
Top-notch Islamic finance legal brain, Mohamed Ismail Shariff, has joined local legal firm Skrine to establish an Islamic finance practice at the 45-year-old firm. Ismail, one of the legal pioneer's on the local Islamic finance front, joins as a partner at Skrine. At the moment, the company does not have any significant presence in the sphere of Islamic finance.
"To be able to compete with other international firms, and with Malaysia becoming an Islamic banking hub, there is a need for size and quality of services," Mohamed Ismail told The Malaysian Reserve recently. That must be backed with a big set up, where other necessary services are available. This is to meet the present trend," he said.
The move to Skrine means that his company Mohamed Ismail & Co has ceased to exist as a firm as of Oct 1. On April 24, another major local legal firm, Azmi & Associates, announced its merger with 12-year-old legal firm Illiayas, headed by Mohamad Illiayas Seyed Ibrahim. Azmi & Associates and Illiayas had entered into a merger agreement to create a "larger Malaysian law firm with expanded practice areas and partnership base", it said in a statement then.
Meanwhile, in a letter to fellow lawyers, Mohamed Ismail said with the combined strength and expertise of both the firms, comprising 89 lawyers, Skrine will be in a better position to provide a wider range of legal professional services of international standards.
"A notable addition to Skrine’s considerable and highly-regarded expertise will be an enhanced range of Islamic banking and finance, and takaful services," said Mohamed Ismail, who began practicing law in 1970. He added that Skrine has a varied and extensive practice, and his role would be to enhance the firm's Islamic finance practice.
Among others, the legal firm has practices in the areas of banking and finance, capital markets, corporate and commercial, intellectual property and tax.
According to its website, Islamic finance is listed as one of the services under the company's banking and finance practice, which also includes acquisition finance, asset finance and leasing, corporate recovery and insolvency, and retail banking.
In a note on its website, Skrine says it has advised on many international public and private transactions, usually dealing with complicated and layered financing based on local law (including tax and regulatory matters) and cross-border issues. Skrine was founded in 1963 as Skrine & Co by John Skrine, Stanley Peddie, Peter Mooney, William Donald Bewsher and Chin Yoong Chong.
(The Malaysian Reserve, Oct 6, 2008, p32)