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Islamic Banking and Finance Cases, Central Bank of Malaysia Act 2009, Islamic Financial Services Act 2013, Practise of I...

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ENSURING SHARIAH COMPLIANCE AT THE COURTS AND THE ROLE OF THE SHARIAH ADVISORY COUNCIL IN MALAYSIA* DR. SHERIN KUNHIBAVA** According to the Islamic Financial Services Act 2013, an Islamic financial institution must comply with Shariah, this includes Shariah compliance for all its products and services. There are in place a number of mechanisms to ensure that the products and services of an Islamic financial institution are Shariah compliant especially at the product development and application stage. However at the product enforcement and dispute resolution stage, Shariah compliance is an issue. This research investigates Shariah compliance at the dispute resolution stage by analysing past case law in Malaysian courts where Shariah compliancy has been disputed. The changes in the laws and cases during each period are also discussed. This research recommends that the role of the Shariah Advisory Council of Bank Negara be extended to more than just ‘ascertaining Islamic law’. It also recommends allowing other parties to seek advice from the Shariah Advisory Council, that the resolutions of the Shariah Advisory Council are updated regularly, and the questions referred to it by the courts and arbitrators are recorded in a standardised manner. Keywords: Shariah Compliance, Shariah Advisory Council, Dispute Resolution, Islamic Banking and Finance Cases, Central Bank of Malaysia Act 2009, Islamic Financial Services Act 2013, Practise of Islamic banking, Ascertainment of Islamic Law. INTRODUCTION Shariah compliance is at the heart of Islamic finance; it is what distinguishes Islamic finance from conventional or commercial finance. Shariah compliance is also a head to toe requirement since all the ‘activities, operations, business and aims’ of an Islamic financial institution (‘IFI’) must comply with Shariah: s 28(1)of the Islamic Financial Services Act 2013 . Thus in an IFI Shariah compliance is required in three stages: at the product development stage, during the product application, and lastly at the enforcement, and possible dispute resolution of the product and transaction. At the product development stage, Shariah compliance is achieved through firstly the consultation, vetting procedure and approval of the individual

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Shariah Committees1 of IFIs and then the vetting and final approval by the Shariah Advisory Council (‘SAC’) and Bank Negara Malaysia (‘BNM’). At the product application stage, according to the Shariah Governance Framework, Shariah compliance is achieved through Shariah review, the Shariah risk management mechanism, Shariah auditing and consultation with the Shariah committees of IFIs. At the enforcement and dispute resolution stage, Shariah compliance is a joint effort by the court or arbitrator and the SAC. A great amount of effort is spent by the various organs outlined above to ensure that products comply with Shariah at the product development stage and application stage; it is however at the dispute resolution and enforcement stage that Shariah compliance may be left unchecked. As observed by Assoc Prof Engku Rabiah: In the case of disputes arising between an Islamic financial institution and its clients, they will have to refer the matter to the civil or common law courts that have jurisdiction to hear the litigation. This may result in decisions that may not comply with the Shariah rules. This problem is further exacerbated by the non-existence of any substantive law on Islamic financial services and banking practices in such countries. In short, although the transactions entered by the parties may be Shariah compliant in the first place, but upon enforcement of the contracts, the court may make orders and decisions that may sideline the Islamic legal principles.2

This article provides insight into this understudied area of Shariah compliance and its effectiveness at the enforcement stage at the courts by analysing past case law where Shariah compliance was one of the issues facing the court judge. This research will focus on whether Shariah compliance is achieved at the Malaysian courts. The methodology used in this research is case law and case judgment analysis. This consists of selecting and analysing cases from case law3 databases in Malaysia where the parties in the cases have claimed Shariah noncompliance of Islamic financial products or services. Thus the inclusion criteria for analysis of the cases in this study are: firstly Islamic banking and finance

1 2

3

For further information on the role of the Shariah advisory committee on Shariah compliance see this article: Rusni Hassan, Agus Triyanta, and Adnan Yusoff, ‘Shariah Compliance Process in Malaysian Islamic Banking’ [2011] 5 MLJ lxxx. See Engku Rabiah Adawiah Engku Ali, 'Constraints and Opportunities in Harmonization of Civil Law and Shariah in the Islamic Financial Services Industry,' [2008] MLJ 4 pg ill. Quoted by J Mohd Zawai in Tan Sri Abdul Khalid bin Ibrahim v Bank Islam Malaysia Bhd [2012] 7 MLJ 597p 612. Such as LexisNexis, CLJ Law and West Law.

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products and services, and secondly a claim that there has been Shariah non-compliance. Cases where Shariah non-compliance was impliedly contested and not expressly contested were also included in the analysis. In other words, not all past case laws on Islamic banking and finance products and services have been included in this research, only those that fall within the inclusion criteria. In analysing the case law and Shariah compliance, the SAC’s role in jointly resolving issues of Shariah compliance at the dispute resolution stage and how it has evolved is also explored. This research is presented in the following way: the first section of this article begins with an analysis of cases prior to the SAC and then discusses the evolution of the SAC. Thereafter, this research analyses the cases chronologically according to the amendments made to the relevant laws. This study ends with further thoughts and recommendations for better Shariah compliance at the enforcement stage. SHARIAH COMPLIANCE IN ISLAMIC BANKING IN MALAYSIAN COURTS BEFORE THE SAC In Malaysia, Shariah compliance has been an issue in local cases possibly from as early as 1987, before the SAC was set up, and before the SAC was given the mandate to be the ultimate authority on Shariah matters in the industry. It is ‘possibly’ the first case claiming Shariah non-compliance, because no mention of Shariah or Shariah non-compliance is made in the case, however the defaulting party claimed the transaction was actually a loan agreement and not a leasing agreement as claimed by the IFI. In the case of Tinta Press Sdn Bhd v Bank Islam Malaysia [1987] 2 MLJ 192 ( ‘Tinta Press’) in the Supreme Court Civil Appeal, Bank Islam Bhd, the respondent, bought printing equipment from the appellant and leased the equipment back to them — thus providing financing. There was a first agreement for a lease of seven years. The appellant had to pay rentals and also two rental deposits. The appellant defaulted. The parties entered into a second agreement whereby, while there were no rental deposits, there was a security deposit and rentals to be paid by the appellants. The appellants again defaulted. Bank Islam Bhd took steps to take possession of the equipment but was prevented from doing so because the appellant shut down the premises. Bank Islam Bhd applied ex parte for a mandatory injunction which was granted. The appellants appealed. One of the main issues raised by the appellant was that the lease agreement was in fact a loan agreement. The Supreme Court held that this was incorrect

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according to the documents attached and the affidavit evidence. The relationship between the parties was that of a lessor and a lessee; the respondents were the legal owners of the equipment, thereby retaining ownership of it while the appellant at whose request the equipment was purchased had the possession and use of the equipment. The Supreme Court did not examine whether the transaction was really a lease according to Shariah principles or just a loan agreement. Islamic banking was at a very early stage during the time the transaction was entered into; it was actually entered in December 1983, the very year Bank Islam Bhd was incorporated and the Islamic Banking Act 1983 was passed. After Tinta Press, there were other cases which involved parties who had engaged in Islamic banking but in none of these cases was the defence of Shariah non-compliance raised,4 until the unreported case of Bank Islam Malaysia Bhd v Shamsuddin Bin Haji Ahmad [1999] MLJU 450 in the High Court of Alor Setar. In this case, the defendant claimed that there was the presence of ‘interest’ in the charge of the case and this was prohibited in Islam and was against the Islamic Banking Act 1983. The court held that this argument was not raised by the defendant in his affidavit but only in his defence, thus thwarting the plaintiff ’s opportunity to defend and explain itself through the affidavits. The court thus held that it did not have to consider this point. However, as the plaintiff had nevertheless given an explanation on the point of ‘interest’, the judge believed it to be the correct position. The judge stated that no interest existed in the transaction because the amount claimed was the resale price to the defendant. Both of the above cases reveal the judges’ literal approach in viewing the transactions. The transactions were read at face value only with no questions asked by the judges on the actual practise of Islamic banking. The judges believed that the arguments made by the former customers of the IFI were made to escape from paying the amount due. While in all honesty this was correct, one wonders what would have happened to the Malaysian Islamic financial industry if the judges at this stage of case development had taken a more purposive approach and searched deeper as to whether there was interest or whether the lease was actually a loan? Had the judges done so, would the bankers have taken more care when conducting Islamic business to ensure Shariah compliancy? Or alternatively could the judges have done a favour to

4

See Bank Islam Malaysia Berhad v Adnan bin Omar [1994] MLJU 221; [1994] 3 CLJ 735; [1994] 3 AMR 44;; [1994] 4 BLJ 372, Dato' Nik Mahmud bin Daud v Bank Islam Malaysia Bhd [1996] 4 MLJ 295.

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the Islamic financial industry by ensuring its continued progress by upholding the transactions? These questions and many more will never be answered. The defence that Islamic banking transactions did not comply with Shariah was naturally raised in further cases. However these cases existed after the legislative developments which led to the requirement of referring a Shariah matter to the SAC. The next part of the article will explain the development of the legislation and the SAC. EVOLUTION OF THE SAC’S ROLE IN SHARIAH COMPLIANCE AT THE MALAYSIAN COURTS Islamic banking was formally introduced in Malaysia through the enactment of the Islamic Banking Act 1983 and the establishment of Bank Islam Bhd in the same year. Bank Islam Bhd was the first fully fledged Islamic bank that offered Islamic banking products and services. This was to remain for ten years.5 During this time, the Shariah committee of Bank Islam Bhd ensured that products offered by Bank Islam Bhd to the industry were Shariah compliant.6 As there was only one Islamic bank, one Shariah committee was sufficient. Then in 1993, commercial banks, merchant banks and finance companies were allowed to offer Islamic banking products and services under what was known as the Islamic banking scheme also known as ‘Islamic windows’.7 This move was to enable a larger proportion of the public whether Muslim or non-Muslim to participate in Islamic banking. In light of this, and the fact that each institution offering Islamic banking products could have their own Shariah committee, it became essential to have one ultimate authority to have the final say as to whether a product was Shariah compliant to ensure consistency in the market, and prevent a situation where different financial institutions would be offering different Islamic banking products based on the interpretation of their individual Shariah committee.

5 6 7

Nik Norzul Thani, Mohamed Ridza Abdullah, and Megat Hiziani Hassan, Law and Practice of Islamic Banking and Finance, 2nd Ed (Petaling Jaya: Sweet & Maxwell Asia, 2010) p 103. Abdul Hamid Mohamad and Adnan Trakic, 'The Shariah Advisory Council's Role in Resolving Islamic Banking Disputes in Malaysia: A Model to Follow?' Isra Research Paper 47 (2012): 3. Thani, Abdullah, and Hassan p 245.

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Thus the SAC was established at Bank Negara in 1997 to be the ultimate authority in Islamic banking and takaful on Shariah compliance for products introduced by IFIs. 8 However it was only in 2004 that the role of the SAC was extended through s 16B(8) of the Central Bank of Malaysia (Amendment) Act 2003 (Act A1213),. The SAC was given the mandate to be the ultimate authority to ascertain Islamic law for the purposes of dispute resolutions in Malaysia. Section 16(8)of the Central Bank Act 1958 set out that in any proceedings involving Shariah issues the court or arbitrator may take into consideration any written directives issued by Bank Negara after consultation with the SAC or refer the issue to the SAC for a ruling. The decision of the SAC was binding on an arbitrator but not on a court. However this discretion given to the court was revoked in 2009 with the coming into force of the Central Bank of Malaysia Act 2009 (‘CBMA 2009’), where it is now mandatory for courts to refer to any published rulings and in the absence of published rulings, refer a question to the SAC for a ruling on Shariah matters and the ruling ‘shall’ be followed by a court of law: ss 56 & 57 of the CBMA 2009. It would seem that the courts are required to refer to published rulings of the SAC first and if there is no rulings on that point, then the court can refer the matter to the SAC, this sequence of reference is suggested in the Manual Rujukan Mahkamah dan Penimbang Tara kepada Majlis Penasihat Syariah Bank Negara Malaysia (Manual for Reference by the Courts and Arbitrators to the Shariah Advisory Council of Bank Negara Malaysia)9 in Appendix A. Thus it is important to have access to the recent rulings of the SAC. The latest published rulings of the SAC known as the resolutions of the SAC are downloadable from Bank Negara’s website and include all the rulings made by the SAC with Shariah sources added as of 2011 in English and 2012 in Malay. The resolutions are easy to search and the court that is trying to find a ruling on a matter need only do a simple search on the document once it is downloaded. As for the more recent or contemporary rulings of the SAC, these are also found on BNM’s website in summarised form for the SAC meetings from 30 April 2013 onwards (ie from the 134th meeting of the SAC onwards). This means that when the SAC meets and discusses Shariah issues on a monthly or

8 9

Mohamad and Trakic: 3. BNM, Manual Rujukan Mahkamah Dan Penimbang Tara Kepada Majlis Penasihat Syariah Bank Negara Malaysia Di Bawah Seksyen 51 Dan Seksyen 56 Akta Bank Negara Malaysia 2009(2014, accessed 31 October 2014); available at http://www.bnm.gov.my/ index.php?ch=7&pg=1038&ac=419bb=file1. Published on February 10 2014.

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more frequent basis, the rulings made by them are summarised in English and made accessible to the public. To access the ruling, one has to click on each individual meeting held by the SAC, for example ‘The Shariah Advisory Council Bank Negara (SAC) 154th meeting’: The Shariah Advisory Council of Bank Negara Malaysia (the SAC) 154th Meeting The Shariah Advisory Council of Bank Negara Malaysia (SAC) held its 154th meeting on 17 December 2014. The meeting discussed issues mainly relating to the draft Shariah Standard on Wakalah. Among the key decisions reached by the SAC on Wakalah relates to the situation where the wakil under wakalah bil ujrah (fee based agency) shall be entitled to a fee in undertaking the task mandated by the muwakkil. With regard to the arrangement of wakalah with kafalah, the SAC decided that both contracts may be combined in one agreement provided that:

(i)

the validity of one contract is not contingent upon the other; and

(ii)

such combination shall not result in guaranteeing the investment capital by the wakil.10

This is definitely a good move. However these rulings are brief and are not backed up with Shariah sources. Further the rulings of the meetings from 2012 - April 2013 are not available. Also the question or issue faced that led to the ruling has not been added. The most challenging part for a researcher or judge seeking a recent ruling relevant to the case before it is the inability to easily search for the SAC rulings from the meetings on a particular Shariah point. For example, if the Shariah issue facing the court is on Musharakah mutanqisah, a simple search with these keywords would not be possible for contemporary rulings. A judge would have to click open each and every separate meeting and read it before being able to find a ruling relevant to it. Even then if a ruling is found, the summary provided may be too brief to answer the issue before the court. It is suggested that the resolutions which was last updated in 2011 in English and 2012 in Malay are updated frequently and all the latest rulings be added so that judges, arbitrators, lawyers, bank officers and all members of the Islamic financial industry have access to the latest Shariah rulings and updates. With the rate of development of Islamic banking and finance, a ruling made in

10 BNM, Shariah Advisory Council of Bank Negara (Sac) 154th Meeting (2014, accessed 11 February 2014); available at http://www.bnm.gov.my/index.php?ch=en_about&pg=en_ sac_updatesac=439.

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2012 is not considered recent enough. The lack of detailed contemporary and new SAC rulings could deprive the industry of much needed guidance on Shariah. Another point is when a Shariah issue is referred to the SAC by the courts or arbitrators, details of the question posed by the court or arbitrator and the subsequent rulings on the Shariah matter need to be published for the use of the industry. In fact the court and the case name should also be made known so that in the event research needs to be done on the Shariah issue and the facts of the case, the researcher who could be a judge, arbitrator, or lawyer could easily find the information. Currently the only information available on the website is the fact that the SAC discussed a Shariah issue referred to it by the courts: The Shariah Advisory Council of Bank Negara Malaysia (the SAC) 141st Meeting The Shariah Advisory Council of Bank Negara Malaysia (SAC) held its 141st meeting on 26 November 2013.... ... SAC has also deliberated issues related to the Islamic financial transaction referred by the court.11

Thus greater emphasis on the accuracy and availability of rulings should be made by BNM to help the courts, lawyers, bankers and even the customers in understanding the Shariah provision applicable to them. Next this research moves on to analysing case law on how Shariah compliancy was ensured during the period when it was at the court’s discretion whether to refer a Shariah issue to the SAC. THE ROLE OF THE SAC IN SHARIAH COMPLIANCY AT THE COURT AND THE CASES DURING SECTION 16B(8) OF THE CENTRAL BANK ACT 1958 Prior to the CBMA 2009 during the period from 2004 to 2009, it was only optional for the court to take into consideration any written directives issued by BNM after consultation with the SAC or refer Shariah matters to the SAC. During this phase, a number of cases were decided where the Shariah compliancy of the transaction was questioned by the defendants (former customers of the IFI).

11 Ibid.

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During this period, the fact that the courts were given an option to refer Shariah matters to the SAC was acknowledged, however none of the cases during this period actually referred any Shariah matter to the SAC for any ruling. A. Shariah Compliance Handled by the Courts Alone The first case in which the court extensively discussed Shariah compliance of an Islamic banking product is Arab-Malaysian Merchant Bank Bhd v Silver Concept Sdn Bhd [2005] MLJU 201. This case is interesting because the parties to this case met three different times at three different courts under three different judges based on the same set of facts. In all three cases, the defendants claimed that the Islamic banking facility was not Shariah compliant. The cases, courts and the judges are: 1.

Arab-Malaysian Merchant Bank Bhd v Silver Concept Sdn Bhd [2005] MLJU 201; [2006] 8 CLJ 9 at the High Court Malaya, Shah Alam heard by Suriyadi Halim Omar J (as he was then).

2.

Arab-Malaysian Merchant Bank Bhd v Silver Concept Sdn Bhd [2008] 6 MLJ 295 at the High Court (Kuala Lumpur) heard by Abdul Wahab Patail J (as he was then).

3.

Arab-Malaysian merchant Bank Bhd v Silver Concept Sdn Bhd [2010] 3 MLJ 702 at the High Court (Kuala Lumpur) heard by Datuk Rohana J (as she was then).

In addition to the above, foreclosure proceedings was also taken out against Silver Concept Sdn Bhd as chargor at the land office in respect of the charged properties held under land office title. The cases involved an Al Bai Bithamin Ajil (BBA) facility and a Al-Wujuh facility which were secured by charges on a number of titles on a land. To understand why there were three cases on the same set of facts the lawyer, Ms Fadzilah Mohd Pilus who appeared as counsel for the plaintiff in all three cases, was contacted. According to Ms Fadzilah the first case was a foreclosure action against the property, the second case was a civil action on the BBA facility and the third case was a civil action on the Al-Wujuh facility. The facts for all three cases are the same: The defendant had bought a large tract of land ('the land') from Ng Eng Plantations Sdn Bhd and to part finance the acquisition of the land, the defendant had requested a consortium of financial institutions, with the plaintiff as the arranger and agent to help out. The assistance sought was for a

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BBA facility. An Al-Wujuh agreement was also executed between the defendant and the vendors to provide the defendant a revolving Al-Wujuh facility. The Al-Wujuh agreement consisted of a BBA facility and revolving drawing rights on an account maintained by the plaintiff as part agent. In executing the BBA facility the defendant, the plaintiff as agent and Ng Eng Plantations Sdn Bhd entered into a sale and purchase novation agreement (‘the novation agreement’). This novation agreement involved a tri-partite agreement whereby certain rights and obligations between Ng Eng Hiam plantations Sdn Bhd and the defendant under the original sale and purchase agreement were novated from the defendant to the plaintiff on behalf of the consortium. The BBA facility and the Al-Wujuh facility were secured by way of two charges entered on the land. The defendant later defaulted in an instalment payment on both facilities. The plaintiff cancelled the facilities and commenced foreclosure proceedings in respect of the land at the Shah Alam High Court for titles held under registry title and commenced foreclosure proceedings at the land office in respect of titles held under land office title. Among the defences raised by the defendant was that the Al-Wujuh Facility was a loan agreement and not a sale agreement with fixed interest rate payable by the defendant. Likewise the BBA Facility had the same flaws. The very fact that the properties were charged accentuated and confirmed the loan status. On behalf of the plaintiff, it was contended that just because a charge was created and a debenture was issued, it did not mean that the transaction was a loan transaction. Further, the transaction was made with the full knowledge of the defendant that the transaction was created within the boundaries of Shariah compliance. Also it was submitted that the profit element in the case was based upon Islamic banking principles. In all three cases the plaintiff ’s claim succeeded. The learned judges decided the issue of Shariah compliance without referral to the SAC.12 The first case actually summarises the approach of the courts in dealing with Shariah

12 The third and last case was decided after the Court of Appeal decision in Bank Islam Berhad v Lim Kok Hoe & Anor and Other Appeals [2009] 6 MLJ 839 which had upheld the Al-Bai Bithamin Ajil contract, and thus the learned High Court Judge Rohana Yusoff following precedent upheld the agreement and held that the al-Wujuh revolving facility ‘is made on the basis of a fluctuating facility on a short to medium term…method of financing via the principle of Bai Bithamin Ajil…It is wrong for the defendant to say it is interest when both agreed them to be profit.’

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compliance during this era. That is - the courts recognised the role of the SAC but decided for themselves whether the agreements were Shariah compliant. In the first case, learned Judge Suriyadi Halim Omar explained the role of the SAC and its importance of resolving Shariah issues, however went into great lengths explaining the intricacies of Islamic banking and its sources and then decided on the Shariah compliance of the transaction without referring any Shariah issue to the SAC: Learned Suriyadi J on the SAC Under the Central Bank of Malaysia (Amendment) Act (Act A1213) new provision of 16B (8), where in any proceedings relating to Islamic banking business etc. before any court or arbitrator, any question that arises concerning a Syariah matter, the court may refer such question to the SAC. The court thus may even refer the matter to that body in the midst of any proceedings. 13 ... With the above mind boggling minefield awaiting lawyers and judges alike it is small wonder that the Syariah Advisory Body has been mandated to be formulated. It is when rulings are required that the latter body must give its opinion. Under the above new section 16B of Act A1213, the Syariah Advisory Body appears to have a rather wide scope of referral, and not merely confined to the issue of whether the matter at hand involves any element which is not approved by the Religion of Islam. Needless to say the final say must rest with the presiding judge (see s 16B(9)(a)).14

The judge deciding without reference to the SAC on the Shariah compliance of the transaction: Notwithstanding the above, I reject any argument that injects the argument that it is not permissible to buy on credit, especially when there is mutual consent. Even Prophet Muhammad had occasion to buy some grain from a Jew to be paid at a specific time, with his coat of mail as security. I am unable to acquiesce to any argument too that, just because a larger sum is agreed to be paid back founded on a buy back concept, with the defendant openly having requested for deferred payment, and with the differential sum resembling interest, the agreement must be void. I am unable to acquiesce to such a suggestion as there is no clear text that prohibits such a transaction entrenched with all those ingredients. Even the followers of the Shafii and Hanafi schools and the majority of Muslim scholars consider it lawful, calling it 'Shifa al ilal fi hokum ziyadat al-thamam li mujarrad al-ajal (translated: The reason for increasing the price due to lapse of time)' (The Lawful and Prohibited in Islam by Yusuf al-Qaradawi). I therefore reject the

13 [2005] MLJU 201; [2006] 8 CLJ 17, para 18. 14 Ibid p 18 at para 25.

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argument of the defendant that, just because the defendant pays more than what was needed to buy the impugned property, such sum (here called profit) must be interest per se.’15

One would wonder as to why the learned judge did not refer the matter to the SAC for a ruling, the answer is provided in the second case by learned judge Abdul Wahab Patail16 It was submitted for the plaintiff that the Syariah Advisory Council had determined that the Al-Bai’ Bithaman Ajil complied with the Shariah and once the determination is made on the issue of Shariah compliance by the said Syariah Advisory any question on their said determination can be referred to the Syariah Advisory Council. Section 16B of the Central Bank of Malaysia Act 1958 (Act 591) however does not make reference mandatory. It clearly did not intend the Syariah Advisory Council in the executive branch of government to be the judicial authority. Thus, its rulings are binding only upon the arbitrator where reference is made by an arbitrator. In the case of reference by the court, the ruling is not binding but shall be taken into consideration. Given that reference is discretionary and the rulings are not binding, and taking into consideration the issue is not as to the Shariah compliance of the ABBA facility but the interpretation of its terms, the court is of the opinion reference is not necessary.17

J Abdul Wahab Patail succinctly stated that reference to the SAC is not mandatory by the courts and the SAC’s rulings are not binding thus reference to the SAC was not made. Another pertinent point made by the learned judge is that the issue faced by the court was not on the Shariah compliance of the BBA product, for this has already been vetted by the SAC, but the Shariah compliance of how the BBA contract is being practised. This is a matter of interpretation of the terms.

15 [2005] MLJU 201; [2006] 8 CLJ 17, para 34. 16 J Abdul Wahab Patail decided for the plaintiffs based on two reasons, firstly the agreement entered into was a novation arrangement and thus in the learned judge’s opinion was valid as it involved the three parties --the original vendor, the purchaser and the new or substituting vendor, in other words it was not just an arrangement between the defendant and the plaintiff which resembled very much the conventional practice of a loan – this was the fatal flaw in the transaction arrangement in Arab-Malaysian Finance Bhd v Taman Ihsan Jaya Sdn Bhd & Ors (Koperasi Seri Kota Bukit Cheraka Bhd, third party) [2008] 5 MLJ 631; [2009] 1 CLJ 419. Secondly the financing term had expired and thus the whole amount of money became due, there was no issue of ‘unearned profit’ a term coined by the learned judge in Arab-Malaysian Finance Bhd v Taman Ihsan Jaya Sdn Bhd & Ors (Koperasi Seri Kota Bukit Cheraka Bhd, third party), taken to mean the amount of profit claimed by the financial institute for the period not yet expired in the financing duration when the customer defaults. 17 [2008] 6 MLJ 295 para 12.

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Does this mean that the role of the SAC is limited to the ensuring Shariah compliance of the product before it is offered to the public, and not Shariah compliance of the transaction as it is being practised? To answer this lets have a look at some other cases during this period. B. Shariah Compliance and the Practise of Islamic banking The next case is Affin Bank Bhd v Zulkifli bin Abdullah [2006] 3 MLJ 67; [2006] 1 CLJ 438 ( ‘Affin case’) in the High Court Malaya, Kuala Lumpur before Abdul Wahab Patail J. In this case, it was not stated in the judgment that the defendant claimed the facility was Shariah non-compliant however the court compared a conventional home loan to the BBA financing and decided the latter was more onerous than the former, thus bringing up issues of Shariah and compliance. The learned judge also highlighted the function of the SAC and why it was not referred to in this case. The facts are as follows: In 1997, and subsequently by a revised agreement in 1999, the defendant took a secured house financing of RM394,172.06 from the plaintiff bank through the Islamic financing scheme of BBA (‘the facility’). The facility specified, inter alia, that upon default, the defendant would repay not only the sum financed but also the bank’s profit margin spanning through the 25-year tenure of the facility (pre-quantified and known as the ‘bank selling price’). The defendant defaulted in 2002 after paying the bank RM33,454.19, and the bank, pursuant to the terms of the facility, claimed from the defendant the bank selling price of RM958,909.2118 and applied for an order for sale of the charged property. The issue arose as to amount the defendant had to pay and whether the whole amount of RM958,909.21 should be paid by the defendant, notwithstanding the fact that he had only enjoyed a few years of the facility. The judge noted that in a conventional loan which procured interest, a debtor would be far better off by not having to pay more than the tenure for which he enjoyed the financing facility. The learned judge refused to allow the Islamic bank to claim the whole bank selling price and went on to calculate the amount that should be paid by the defendant. As for the fact that ibrar (rebate)

18 It should be noted that the original sum owed by the defendant to the Islamic bank was much lower as he had been an employee of the Islamic bank at that time, the amount was revised when the defendant left his job at the Islamic bank.

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may be given by the bank and was discretionary, the judge felt, was irrelevant, the court also felt that it could not leave it to the discretion of one party whether to give rebate or not.19 On the SAC, Abdul Wahab Patail J explained the reason for not referring a question to the Shariah body An initial thought was to consider referring the question to the National Syariah Advisory Council under the Banking and Financial Institutions Act after first ascertaining all the relevant facts ... Since the question before the court is the interpretation and application of the terms of the contractual documents between the parties and of the decisions of the courts, reference of this case to another forum for a decision would be an indefensible abdication by this court of its function and duty to apply established principles to the question before it. It is not a question of Syariah law. It is the conclusion of this court, therefore, that there is no necessity to refer the question to another forum.20

Thus the learned judge recognises the role of the SAC but believes that the issue before it is not a question on Shariah law but one on interpretation and application of the terms of the contractual documents before it. This is the same approach the same judge took later in the case of Arab Malaysian Merchant Bank v Silver Concept Sdn Bhd [2008] 6 MLJ 295 (as stated above). While it is correct that the issue is one of interpretation of the term ‘bank selling price’ – whether the bank selling price in cases of early termination due to default means the bank is entitled to the whole bank sale price or only the amount for the tenure up to the default. Nevertheless, it is opined that to interpret the issue, a clear understanding of Shariah is required especially the nature of the BBA contract which is actually a sale agreement and ibrar which

19 The case of Malayan Banking Bhd v Marilyn Ho Siok Lin [2006] 7 MLJ 249; [2006] 3 CLJ 796 in the High Court of Sabah & Sarawak, Kuching, JC David Wong Dak Wah, which chronologically came after the Affin case followed the approach taken by J Abdul Wahab Patail. The facts were similar to the Affin case. The defendant obtained an Al-Bai bithamin Ajil financing from the plaintiff bank. The instalments were for 240 months but the defendant defaulted after 14 months. The question arose as to whether the plaintiff could claim for the whole bank selling price minus the instalments made. The learned judge held that in the interest of equity which was consistent with the teachings of Islam and consistent with the approach of the Affin case it would not be equitable to allow the plaintiff bank to recover the sale price as defined when the tenure of the facility is terminated prematurely. The learned judge went on to calculate the amount due by the defendant. No mention was made by the court on referring a question to the SAC. The court also did not discuss ibrar. 20 Ibid at p 448 para 22.

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is unilateral and discretionary in nature. It is also true that a learned judge of the high court has available to him many resources to refer to when making a judgment. With all these resources at hand, it could be that in the case of understanding Shariah law, the courts will not turn to the SAC for an answer. This was what was concluded in the next case, that is, the SAC is only one of the resources available to the courts when it is faced with a Shariah issue. In Malayan Banking Bhd v Ya' kup bin Oje & Anor [2007] 6 MLJ 389; [2007] 5 CLJ 311, in the High Court Sabah & Sarawak, Kuching Hamid Sultan Abu Backer JC had to again decide whether the bank was entitled to the whole bank selling price when the defendant defaulted on a BBA financing facility. In this eloquently written judgment, the learned judge reviewed previous authorities, reviewed in detail justice and equity in Islam, went into detail about the need to avoid riba and gharar in Islamic transactions, and noted that Islamic banks were actually trading houses rather than financial institutions because of the permissibility of trading and the prohibition of riba in Islam. The learned judge noted that the issue in the case was not about the validity of the BBA but on the interpretation of whether the Islamic bank could claim for the bank selling price. He also ruled that justice means justice to the defendants and plaintiffs, and took note of the fact that ibrar is normally exercised by the Islamic banks and that Islamic law of commercial transactions will not permit the Islamic bank to state the rebate for default in the BBA. However he also noted that in the name of justice and equity and to ensure transparency there was nothing that prevented the Islamic banks from openly stating their policy and rates of rebate without stating them in the BBA agreements. The learned judge decided:21 as equity applied to the plaintiff and the defendant, the plaintiff was to be given the opportunity to demonstrate equity, by filing an affidavit which stated the rebate, and the amount of rebate. The learned judge required the amount of rebate to be according to the prevailing market practises of Islamic banks taking into account the decision of the Affin case. The judge was to review the amount and if satisfied allow it, but if not satisfied make such other order as the justice of the case required. On matters of Islamic law, the learned judge believed that a judge has the choice to decide on its own the issue, or refer to expert opinion, or alternatively

21 [2007] 6 MLJ 389, pp417–417; [2007] 5 CLJ 311, pp 351–353

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refer the relevant questions to the SAC. In other words, the SAC was only one of the resources available to the courts to refer to on questions of Islamic law: Islamic contract relating to commercial transactions is not only subject to the terms of the contract but must be decided subject to the Qur’anic injunctions and/or Islamic worldview as the case may be. For this very purpose, the court can on their own motion decide the issue or alternatively call experts to give their views, pursuant to s 45 of the Evidence Act 1950 or pose the necessary questions to the SAC for their views. 22

The next case that discussed the SAC was Arab-Malaysian Finance Bhd v Taman Ihsan Jaya Sdn Bhd & Ors (Koperasi Seri Kota Bukit Cheraka Bhd, third party) [2008] 5 MLJ 631; [2009] 1 CLJ 419 ( ‘Taman Ihsan Jaya’) in the High Court Malaya, Kuala Lumpur Abdul Wahab Patail J. This infamous case literally changed the landscape of Islamic home financing. The case involved several cases which were bundled together and decided jointly by the learned judge. All the defendants in the cases were customers who obtained the BBA facility to finance their home purchase. In all the cases, the defendants had already purchased their property from a third party and partly paid the price. They had then sought Islamic banking financing from the plaintiff banks. The plaintiff banks entered into a direct bilateral agreement which involved the selling of the property by the defendants to the plaintiffs under a Property Purchase Agreement (PPA) and then the plaintiffs selling it immediately back to the defendants under a Property Sale Agreement (PSA); in other words a Bai-inah was executed, the original vendor was not a party to the agreements and there was no novation agreement performed. The defendants defaulted, and the plaintiffs claimed for the whole bank selling price. The defendants raised the issue of whether the agreements entered into involved elements not approved by the religion of Islam, that is, whether the agreements were Shariah compliant. The learned judge in delivering his judgment discussed, inter alia, the meaning of the term ‘religion of Islam’, ‘riba’ and the difference between profit in a sale and interest in a loan. He believed the difference between the two could not be in form alone but must be in substance as well. He stated it ‘is the reality and not the form and labels that matter.’23 The learned judge also noted that the SAC had already approved the BBA contract and Bai inah, and other Islamic contracts and thus these contracts did not have elements which were

22 Malayan Banking Bhd v Ya' kup bin Oje & Anor [2007] 6 MLJ 389; [2007] 5 CLJ 311 at para 12. 23 [2007] 5 CLJ 311at para 29.

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not approved by the religion of Islam. There was thus ‘neither necessity nor reason to refer these concepts to the SAC for any ruling, which in any case, while they are to be taken into consideration, are not binding upon the court.’24 The learned judge concluded that it was the function of the court ‘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.’25 The learned judge believed that as the SAC had approved the Islamic contracts it was not an issue of whether these contracts were Shariah compliant but a question of how these contracts were applied in practise. In other words, whether the application of these Islamic contracts were Shariah compliant, and it was the function of the court to determine this. This approach taken by J Abdul Wahab Patail was consistent with his former rulings. On the facts of the case, the learned judge concluded that where parties to the contract entered into a novation agreement which involved the substitution of the original vendor with the bank, the sale to the customer is a bona fide sale, and the selling price is as interpreted in Affin case. In other words, the court will calculate the ibra to be given and not leave it to the discretion of the Islamic bank. On the other hand, in cases where there was no novation agreement and the bank directly buys the property from the customer and sells it back to the customer, it is not a bona fide sale. In such cases, it is a financing transaction and contrary to the Islamic Banking Act 1983 and the Banking and Financial Institutions Act 1989. In such cases, as the present, the plaintiffs are entitled under s 66 of the Contracts Act 1950, the return of the original facility amount they had extended. The learned judge thus concluded that when Islamic banks practise BBA, it must be Shariah compliant not only in form but in substance and thus where

24 Ibid at para 30. 25 Ibid at para 31.

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the bank just bought from and sold to the customer without the original vendor it was nothing more than a financing agreement and not a bona fide sale. 26

It is opined that this judgment is significant because the judge distinguishes between theory and practise. While the theory has been approved by the SAC as Shariah compliant, it is the practise which has to be examined for Shariah compliance. Whose function is this? Is this the job of the civil courts only or does the SAC have a role in this? The SAC’s role according to the Central Bank of Malaysia Act 1958 and the CBMA 2009 is to ascertain Islamic law, the question occurs whether this includes determining whether the practise of Islamic banking and finance is Shariah compliant? More on this will be examined below when discussing the next case which was the appeal of the Taman Ihsan Jaya. This issue was explored directly as we will see later in the case of Mohd Alias bin Ibrahim v RHB Bank Bhd & Anor [2011] 3 MLJ 26; [2011] 4 CLJ 654. The case of Bank Islam Malaysia Bhd v Lim Kok Hoe & Anor and other Appeals [2009] 6 MLJ 839 (‘Lim Kok Hoe’) was the appeal case of Taman Ihsan Jaya and was heard at the Court of Appeal by Raus Sharif, Abdul Hamid Embong and Ahmad Maarop JJCA. The Court of Appeal allowed the appeal and held that J Abdul Wahab Patail had erred in his judgment and concluded that the BBA was a valid agreement. They based their judgment on the following reasons: Firstly, the BBA is a sale agreement and should not have been compared to a conventional loan agreement which is a money lending transaction. The profit earned by the BBA transaction by the Islamic bank is not the same as the interest of a conventional loan. However the laws that apply to both the transactions are the same. Secondly, J Abdul Wahab Patail had rewritten the contracts of the parties by stating that the profit should be calculated by the court as in Affin’s case when the BBA was conducted by novation and the term had not expired yet. This was wrong.

26 This judgment shook the Islamic banking industry and many Islamic finance experts wrote on the judgment of J Abdul Wahab Patail, some defending the BBA contract and its practise others not. See for example Fakihah Azahari, 'Islamic Banking: Perspectives on Recent Case Development' [2009] 1 MLJ xci. Ashgar Ali Ali Mohamed, 'Al-Bai' Bithaman Ajil - Its Consistency with the Religion of Islam: With Special Reference to Arab-Malaysian Finance Bhd V Taman Ihsan Jaya Sdn Bhd & Ors and Other Cases' [2008] 6 MLJ xiv.

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Thirdly, the court of Appeal disagreed with J Abdul Wahab Patail’s interpretation of the term ‘religion of Islam’. The Court of appeal held that the religion of Islam does not mean as approved by the four madzhab in Islam, and that in actual fact there are more than four madzhabs anyway. Fourthly, there exists a legal infrastructure for the courts to rely on the SAC on matters relating to the religion of Islam; the Court of Appeal held that the court cannot take it upon itself to decide what the religion of Islam is when the Shariah board and the SAC exist and have approved the products. Lastly, there existed case law precedent that the BBA was binding such as in the case of Bank Islam Malaysia v Adnan Bin Omar [1994] MLJU 221 and this should have been followed. The Court of Appeal did not address the fact that J Abdul Wahab Patail had actually acknowledged that the BBA was found to be Shariah compliant in theory, it was with the practise of the BBA that he was concerned with, and it is with practise that the J Abdul Wahab Patail opined should be within the purview of the court’s jurisdiction. Instead, the Court of Appeal held that as the SAC had approved the instrument it should thus be valid. It is opined that Shariah compliance should not be assumed in practise just because in theory the contract has been approved to be Shariah complaint. With respect to the Court of Appeal it is the writer’s opinion that the High Court judge’s approach in examining the practise was correct. The question remains however whether the role of the SAC includes practise and whether the courts should refer it to the SAC to decide or whether it is within the purview of the court’s jurisdiction. If J Abdul Wahab’s approach is taken and it is for the courts to decide, then the role of the SAC is severely diminished. The truth of the matter is that practise must be Shariah compliant and this is a very important requirement. If the role of the SAC is only to explain and ascertain the Islamic law on an issue and not decide on whether the practise of the industry is Shariah compliant, then the role of the SAC is narrow with regards to ensuring Shariah compliance when the product is at the enforcement stage. At the same time, it is the court’s jurisdiction to decide a case on the facts of the case and this should include whether a matter is practised in a Shariah compliant manner. However the question arises as to whether the courts are equipped to decide on whether the products have been practised in a Shariah compliant way. To answer this question, we move on to the next case and see how the High Court decides on whether a matter is Shariah compliant in practise. C. An Enquiry Referred to the SAC

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Just prior to the decision of the Court of Appeal in Lim Kok Hoe (as a matter of fact prior by only five days), justice Datuk Rohana Yusof (as she was then) delivered the decision of the case of Tan Sri Abdul Khalid bin Ibrahim v Bank Islam Malaysia Bhd and another suit [2009] 6 MLJ 416; [2010] 4 CLJ 388 (‘Tan Sri Khalid case’).27 This case is significant because it is the first case that forwarded an enquiry to the SAC. The case involved the restructuring of two Murabaha facilities offered by Bank Islam to Tan Sri Khalid to redeem and acquire more shares in a particular company. The restructuring of the Murabaha facilities was carried out because of the repeated breaches of the Murabaha facilities by Tan Sri Khalid. The two facilities were restructured into a Revolving Al-Bai Bithaman Ajil Facility (BBA Facility Agreement) and were consented to by Tan Sri Khalid. Tan Sri Khalid defaulted on the first payment of the BBA Facility Agreement, and Bank Islam applied to enter summary judgment; Tan Sri Khalid on the other hand, inter alia, challenged the validity of the BBA Facility Agreements due to Shariah non-compliance. The learned judge in her judgment discussed at length the role and functions of the SAC vis-a-vis Bank Negara and the provisions of the Central Bank of Malaysia Act 1958, and decided to send an enquiry to the SAC as to whether a ruling had been made on the validity of the BBA. Datuk J Rohana stated the following in her judgment28 at pp 399–400 – [16] Under s 16B(8), it is provided that in any proceedings before the court when a question arises concerning a Syariah matter, the court or the arbitrator may take into consideration any written directives issued pursuant to sub-s. (7) or refer such question to the SAC for its ruling. Relying on this clause in fact, after the submissions was made before me by both counsels on the Syariah issue raised; I had caused an enquiry to be made to the SAC as to whether a ruling has been made on the status of BBA Agreement. The secretariat to SAC responded with a written ruling from the SAC which states essentially, that BBA Agreement is acceptable and a recognised transaction in Islam. I have furnished the said written ruling from the SAC to both counsels. Thereafter, counsel for Tan Sri Khalid in a letter dated 5 May 2009 seeks leave for a further submission on the Syariah issue. In a further written submission, learned counsel contends that the mode of execution of APA and ASA was improper because Tan Sri Khalid was made to sign both agreements first before they were passed back to be completed by the bank. There was therefore no separation of the APA with the ASA and no distinction in term of time of execution as required under the said ruling of the SAC. As such there was no complete sale of shares to the bank under the APA

27 This case received a lot of publicity at the appeal stages because of the position held by the plaintiff who was then the Chief Minister of the State of Selangor in Malaysia. 28 [2009] 6 MLJ 416 at pp 425–426; [2010] 4 CLJ 388

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before the bank can resell shares to Tan Sri Khalid in the ASA. To my mind, this issue is based on mere technicality and a trivial one. The consensus between parties has been arrived at the point the letter of offer was accepted by Tan Sri Khalid. The agreement to be bound is subject to the formalities of the execution of various documents. Signing of the written agreements is to formalise and to translate the consensus of parties in the terms clearly agreed upon. Besides, it has always been a practice, for the borrower to affix signatures on all banking documents before the bank executes the same, and it is rather inconceivable to suggest that it can affect the validity of the contract. Furthermore, a written confirmation from the bank’s own Syariah Council in exh. GN4 confirmed that the mode employed for the execution of the documents in the present case is in order and has no bearing from Syariah perspective. With seven sets of APA and ASA documents signed in the same manner, the parties would have condoned and accepted such practice. As such, I fail to see how these agreements will not be binding on parties merely because they are signed without following orders of precedent, when after entering into the seven sets of transaction the defendant never protests or raises any issue.

Datuk J Rohana sent an enquiry to the SAC as to whether a ruling on the validity of the BBA had been made, it should be noted that this enquiry was not a question on a Shariah issue, and thus this is not exactly the first case to utilise the SAC to give a ruling on a Shariah issue. The enquiry was answered by the secretariat which confirmed that a ruling had been made and that the BBA was a valid contract. Thereafter Tan Sri Khalid’s counsel requested that another Shariah issue be decided by the SAC, this Shariah issue was actually on the practise and execution of the BBA contract. They claimed that the sequence of signing the contracts was wrong and therefore the contract should be void. This, a question of whether the practise of executing the contract was Shariah compliant, was not submitted to the SAC by Datuk J Rohana who decided on the facts of the case and proof of the Shariah Board’s acceptance of the practise. As can be seen from this case, even though J Rohana did not mention the dichotomy between theory and practise of Shariah contracts the learned judge herself decided on the matter rather than referring it to the SAC. It could be that when it comes to practise of Shariah contracts it is the role of judges to decide on the matter. The saga of the Shariah issues in this case and whether to refer a question to the SAC did not end with this summary judgment. Dissatisfied with the decision of Datuk J Rohana, Tan Sri Khalid appealed to the Court of Appeal vide Civil Appeal W-02 (IM)-1828–09. The Court of Appeal allowed the appeal and stated in its brief grounds that in view of the conflict of views of the experts, the matter ought to proceed to a full blown trial. The case proceeded to the High Court and was decided by J Mohd Zawawi Salleh. The case was

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decided after the coming into force of the CBMA 2009 and will thus be discussed below under the next section. A review of these case law prior to the CBMA 2009 and during s 16B(8), demonstrates that none of the courts referred the SAC with questions on Shariah. The general approach was that since referring a matter was at the discretion of the court and the decision of the SAC was not binding, referral to the SAC was unnecessary. J Abdul Wahab Patail believed that when it came to the practise of Islamic banking it was within the sole jurisdiction of the court to resolve these issues without referring the matter to the SAC. Hamid Sultan Abu Backer JC noted that the SAC was only one of the sources for the courts to turn to when faced with an issue on Shariah. The one case that elevated the role of the SAC during this period was the last case during this period — the Tan Sri Khalid case. J Datuk Rohana went into great detail in her judgment about the role of the SAC and even caused an enquiry to be referred to the SAC. The dichotomy between theory and practise raised by J Abdul Wahab Patail was unfortunately not addressed by the Court of Appeal in Lim Kok Hoe. We shall see whether in the next section this was addressed and whether the courts changed their approach with the coming into force of the CBMA 2009. CASES POST THE CBMA 2009 A. Early Case Post the CBMA 2009 Bank Islam Malaysia Bhd v Azhar bin Osman and other cases [2010] 9 MLJ 192; [2010] 5 CLJ 54heard by Datuk Rohana Yusuf J was decided shortly after the CBMA 2009 was passed. This case was the continuation of the Taman Ihsan Jaya saga. The Court of Appeal in Lim Kok Hoe had held that the BBA was a valid sale contract and then sent down these cases to the High Court to decide on the quantum of claim. The issue in this case was whether the bank could claim for the full sale price notwithstanding the fact the facility had been prematurely terminated. Following this was the Shariah issue of whether rebate (ibrar) was to be left at the sole discretion of the bank or whether the court could dictate that rebate should be given. Datuk Rohana Yusuf did not refer the matter to the SAC even though the CBMA 2009 was in effect, perhaps due to the fact that the learned judge did not believe it was a Shariah issue but rather an issue of interpretation of the documents.29 Instead the learned judge implied a term that the bank must grant a rebate and such rebate shall be the

29 See Mohamad and Trakic: 29.

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amount of unearned profit as practiced by Islamic banks. It is interesting to note that on appeal of this case, the Court of Appeal in Bank Islam v Mohd Azmi bin Mohd Salleh Civil Appeal: W-02-609-2010, reversed the decision of Datuk Rohana Yusuf J and in their broad grounds decided that an Islamic bank could claim the whole sale price of the contract because it was a sale transaction, and further the quantum was at the discretion of an Islamic bank. In other words, ibra is given in early settlement cases but not for early termination due to default. It is opined that the Court of Appeal took a literal approach in interpreting the BBA contract as a sale contract; in a way it is a harsh approach as Islamic banking customers that default in their payment would be at the mercy of Islamic banks as to whether they will get a rebate and if so, what the quantum would be. Be that as it may, it is heartening to note that through Bank Negara Guidelines on Ibra’ (Rebate) for Sale-Based Financing in 2013, the ibra issue is now settled. It is now a requirement that IFIs grant ibra to all customers who settle their financing before the end of the financing tenure, and this includes default cases as well. Further to ensure legal certainty of providing ibra, IFIs are required to incorporate in their offer letter and other legal documentation related to the sale-based financing, a clause on its commitment to provide ibra. B. First Case to discuss the Provisions of the CBMA 2009 The first case to discuss the new provisions of the CBMA 2009 was Mohd Alias bin Ibrahim v RHB Bank Bhd & Anor [2011] 3 MLJ 26; [2011] 4 CLJ 654 (‘Alias’). This case is significant because it decided on the constitutionality of

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the provisions of ss 56 & 57 of the CBMA 2009.30 Due to the significance of the issues raised, the high court invited the Attorney General’s Chambers and BNM as amicus curiae to proffer their views on the matter. The case was an application by the plaintiff to decide on, inter alia, three main matters: Firstly: by making the ruling of the SAC binding upon the court, whether the SAC is usurping the jurisdiction of the court in determining issues of law which are properly within the jurisdiction of the court as provided by art 121(1) of the Federal Constitution and the Courts of Judicature Act 1964; and whether in the absence of an express provision allowing the judiciary to delegate its judicial powers to any other person or body, ss 56 and 57 of the Central Bank of Malaysia Act 2009 are inconsistent with art 121(1) of the Federal Constitution . Secondly: whether parties to the litigation are being deprived of their right to be heard, as there are no provisions to enable parties to address the SAC. Thirdly: Whether ss 56 and57 of the Central Bank of Malaysia Act 2009 can have retrospective effect on transactions which occurred prior to the date the said legislation came into effect. On the first matter, the judge31 believed that because the SAC were ascertaining and not determining the Islamic law on an issue it was not performing a judicial or quasi-judicial role,32 it was merely acting as an expert body33 for Islamic law for the court. Thus the function and role of the SAC did not conflict with that of the court of law.

30 Sections 56 and 57— Section 56: Reference to Shariah Advisory Council for ruling from court or arbitrator (1) Where in any proceedings relating to Islamic financial business before any court or arbitrator any question arises concerning a Shariah matter, the court or the arbitrator, as the case may be, shall: (a) take into consideration any published rulings of the Shariah Advisory Council; or (b) refer such question to the Shariah Advisory Council for its ruling. Section 57: Effect of Shariah rulings Any ruling made by the Shariah Advisory Council pursuant to a reference made under this Part shall be binding on the Islamic financial institutions under section 55 and the court or arbitrator making a reference under section 56. The new provisions of the CBMA 2009 now required the courts not only to mandatorily refer a Shariah issue to the SAC but to be bound by the ruling. 31 [2011] 3 MLJ 26 at p 55; [2011] 4 CLJ 654 at p 682 32 Ibid at p 65 para 102 (MLJ); p 684 para 102 (CLJ) . 33 Ibid at p 56 para 109 (MLJ); p 686 para 109 (CLJ).

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The judge stated at pp 683–684 on the role of the SAC: [95] Act 701 is a federal law and its contents are consistent to the words employed in the Federal Constitution. In this sense, it can be seen that the SAC is not in a position to issue a new hukm Syara’ but to find out which one of the available hukm is the best applicable in Malaysia for the purpose of ascertaining the relevant Islamic laws concerning the question posed to them. [96] For example, in a matter where there are differences of opinion regarding the validity of a certain Islamic finance facility, the SAC can be referred to ascertain which opinion of the jurist is applicable in Malaysia. This ascertainment of Islamic law will be binding upon the courts as per the Impugned Provisions. It will then be up to the courts to apply the ascertained law to the facts of the case. At the end of the matter, the application and final decision of the matter remains with the court. The court still has to decide the ultimate issues which have been pleaded by the parties. After all, the issue whether the facility is Shariah compliant or not is only one of the issues to be decided by the court. (Emphasis added).

The judge explains that the role of the SAC is to ascertain which opinion is the best to be applied in Malaysia in the event there is a conflict of jurists’ opinion. It is the role of the judge to apply this to the facts of the case. The ruling of the SAC is binding on the court. The question that occurs is what about issues on the practise of the parties and whether the practise of the parties are Shariah compliant – is this considered to be ascertainment of Islamic law and within the role of the SAC? It would seem from the judgment that the SAC is to ascertain the Islamic law on the matter, but the final decision on whether the practise of the parties is Shariah compliant would be within the role and function of the courts. It is opined that the role of the SAC while narrowed, is maintained as a body for ‘ascertainment’ of Islamic law only. The decision making process is with the court of law alone. On the second matter on the right to be heard at the SAC, the court did not decide on whether the parties have a right to be heard, because Bank Negara as amicus curiae pointed out that the SAC had not come out with a procedure yet on whether parties in a proceeding have a right to be heard. Therefore this matter could not be decided. However since the decision of the court the manual has been published as highlighted above. More on the right of the parties to be heard will be discussed in the next section. On the last issue of whether the CBMA applies retrospectively, the court held at p 692 that:

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[140] Since there is no limitation imposed on the SAC in the performance of its statutory duties in the Act 701 prior to 25 November 2009 (which is the date the Act is in force), the court should not add or infer any term to suggest any cut off point to Act 701 (see Tribunal Tuntutan Pembeli Rumah v. Westcourt Corporation Sdn Bhd & Other Appeals). [141] Be that as it may, this case was registered on 28 January 2010, a date well after the date Act 701 came into force, therefore, the retrospective issue is of no relevance. At the time the parties signed the agreements which were somewhere in 2003, there were no disputes which required the reference to the SAC.

The court did not restrict the enforcement of the CBMA 2009 from its date of enactment and believed that the CBMA 2009 itself did not state a cut-off point, further based on the facts of the case whether the CBMA 2009 applies retrospectively was irrelevant. 34 The judge also noted a very important fact at p 689 at para 122: To ignore the functions of the SAC is to open a flood gate for lawyers and cause a tsunami of applications to call any expert at their own interest and benefit, not only from Malaysia but also from other countries who might not be familiar with our legal system, administration of Islamic law and local conditions, just to challenge the Islamic banking transactions in this country.

This fact is true and can be seen in the Tan Sri Khalid case — where the Court of Appeal allowed the appeal contrary to J Datuk Rohana’s order for summary judgment because of the conflict between expert opinions. The conflict of expert opinion is not a new problem faced by the court, however when there exists the SAC to resolve any such conflict, why proceed with individual expert opinion? More on this will be discussed below. C. First time Shariah Question Referred to the SAC by a court According to a paper written by Abdul Hamid Mohamad, and Adnan Trakic in 2012,35 the first real Shariah question was referred from the courts to the SAC

34 Later on in the case of Tan Sri Abdul Khalid bin Ibrahim v Bank Islam Malaysia Bhd [2012] 7 MLJ 597 J Mohd Zawawi Salleh clarified this point on retrospective effect and stated at p 611 para 35 ‘On hindsight, with all humility, the court agrees that the language used in Alias’s case has imported confusion on the true effect of the ruling on this issue. What the court intended to state was this: since there is no limitation imposed on SAC in the performance of its statutory duty in Act 701, ss 56 and 57 could be applied retrospectively.’ 35 Mohamad and Trakic: 31.

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around the middle of 2011 after an arbitration case36 referred its first Shariah question to the SAC. The judge who referred the question was J Mohd Zawawi Salleh. The question that was asked was whether the rate of ta’widh could be fixed or agreed upon (predetermined) by the parties to the agreement without any proof of loss suffered by the bank.37 The case in which the issue arose was not mentioned in the paper and a review of the judgments by J Mohd Zawawi Salleh during mid-2011 to mid-2012 did not reveal in any of the learned judge’s judgment whether he had referred a question to the SAC. It is possible that the learned judge did not state in his judgment during that time that a question was referred to the SAC because the Shariah question may not have been requested by the parties to the case to be referred to the SAC, and rather it was the judge’s own initiative, or alternatively the issue asked of the SAC did not directly relate to the issues before the learned judge and therefore did not require to be stated in the judgment. Whatever the reason, it is opined with respect, that for the sake of certainty for future cases, Shariah questions raised to the SAC should be stated in the judgments of the judge so there will be a precedent available on that Shariah question. Cases Post the CBMA 2009 that referred to the Resolutions of the SAC or Referred a Shariah Question to the SAC The next case is CIMB Islamic Bank Bhd v LCL Corporation Bhd & Anor [2012] 3 MLJ 869; [2011] 7 CLJ 594 where the presiding judge J Mohd Zawawi Salleh referred to the SAC’s resolutions in his judgment.38 The material facts of the case were as follows: the plaintiff had provided a First BBA facility to the defendant to refinance a Short Term Advance Facility granted by CIMB Bank Berhad. On application of the defendant, the plaintiff later granted another BBA facility to refinance the first one. The defendant defaulted. The plaintiff

36 Swiber Marine (Malaysia) Sdn Bhd and Bank Islam Bhd (2011). This arbitration case was about late payment charges and the questions raised to the SAC and the reply can be found at p 30 in Ibid. 37 For the answer see ibid. p 31 38 See Surianom Miskam, Noor Aimi Mohamad Puad, and Nurauliani Jamlus Rafdi, 'Reference to the Shari'ah Advisory Council in Islamic Finance: Preliminary Analysis on Civil Court Decisions,' in Proceeding of the Social Sciences Research ICSSR 2014 (Kota Kinanbalu Sabah: http://WorldConferences.net, 2014) p 424.

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applied for a summary judgment for amounts owing and also for ta’widh.39 The defendant claimed, inter alia, that the BBA Facility should be null and void because it was a disguise to reschedule repayments under the First Facility as the First Facility had not been terminated and the same asset was utilised in both BBA transactions. The defendants also claimed that the amount claimed was wrong and they were entitled to ibra and that ta’wid was wrongly calculated. The learned judge held that the BBA facility was not for rescheduling but for refinancing the First Facility, there was no evidence to show the amount claimed was wrong, and as for ibra, since this was a case of early termination due to default, the plaintiff was under no obligation neither duty to grant an ibra’ to the defendants. As for ta’wid J Mohd Zawawi Salleh quoted the SAC resolutions and stated at p 609: [48] The imposition of ta’widh is essential. In its 95th meeting on 28 January 2010, SAC had this to say: As a deterrent mechanism against cases of default by customers in discharging their financial obligation arising from Islamic contracts, the imposition of late payment charge by Islamic banking institutions that comprises both concepts of gharamah (fine or penalty) and ta’widh (compensation) is allowable. [49] It is undisputed that the plaintiff has the right to impose the ta’widh on the defendants on the above said circumstances.

The judge then went on to agree with the plaintiff ’s revised calculations of the ta’wid and granted the summary judgment. In this case, the judge had actually at numerous times referred to the resolutions of the SAC in coming to a decision based on the facts of the case. It is possible that it was in this case the J Mohd Zawawi Salleh referred the first question on ta’wid to the SAC, however nothing was stated in his judgment about this fact. Whatever the case, it can be seen that post the CBMA 2009 there is definitely a greater influence of the SAC in the Islamic banking cases coming before the courts. This can be evidenced in the case of Bank Islam

39 Ta’wid is compensation for damage done to another. The Fiqh Academy journal has defined it as ‘payment of a financial compensation or counter-value, which is obligatory as a result of loss caused to others.’ Majallah Majma’ al –Fiqh al-Islami, v 14, pt 4, p 510, as quoted in Muhamad Akram Laldin, 'The Principles of Compensation and Penalty Charges in Dealing with Loan Default in Islamic Finance,' in Contemporary Issues in Islamic Finance: Deliberation at the International Shariah Scholars Dialogue 2006, ed BNM (Kuala Lumpur: BNM, 2008). Many cases from this time period started claiming for ta’wid see Apnizan Abdullah and Hakimah Yaacob, 'The Trend of Legal Suits Involving Islamic Financial Transactions in Malaysia: Evidence from the Reported Cases,' in ISRA Research Paper (2013), 32.

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Malaysia Bhd v Mustaffar @ Mustaffa Bin Yacob & Anor [2012] 6 MLJ 252; [2012] 1 LNS 548 where J Mohd Zawawi Salleh referred to the SAC’s resolution to enumerate the conditions for imposing ta’wid. Also in Bank Muamalat Malaysia Bhd lwn Kong Sun Enterprise Sdn Bhd dan lain-lain [2012] 10 MLJ 665, J Kamarudin Hashim referred to the SAC resolutions as one of the sources to conclude that the ijara contract is valid. In this case also the judge rejected that a lawyer can give expert opinion on Islamic banking and finance and added that the members of the SAC are those who are qualified to give opinions on Islamic banking and finance. The next case is also significant because J Mohd Zawawi Salleh had to again rule on the interpretation of ss 56 and 57 of the CBMA 2009 and referring Shariah issues to the SAC. The case Tan Sri Abdul Khalid bin Ibrahim v Bank Islam Malaysia Bhd [2012] 7 MLJ 597 was the product of the Court of Appeal reversing the decision of J Datuk Rohana to grant summary judgment (see above). The parties contentions were as follows: during case management, Bank Islam submitted that Tan Sri Khalid had raised Shariah issues and as such, under s 56 of the CBMA 2009 these issues should be referred to the SAC, whose ruling would be binding on the court by virtue of s57 of the Act. Tan Sri Khalid objected to the application, inter alia, on the grounds that there had been a prior reference to the SAC at the summary judgment stage; that ss 56 and 57 of the CBMA 2009 did not operate retrospectively; that ss 56 and 57 contravened the Federal Constitution; that the Shariah issues were not appropriate for reference to the SAC, and the application of ss. 56 and s 57 of the CBMA 2009 would affect Tan Sri Khalid’s vested rights to lead expert evidence on matters of Islamic law. J Mohd Zawawi Salleh held the followingFirstly, there were Shariah issues to be decided in the case and reference to the SAC should be allowed. The learned judge canvassed the Shariah questions by agreement of the parties as follows: (a) whether, pursuant to the terms of the BBA facility agreements, the mode of execution of asset sale agreements and purchase agreements by the defendant (‘Bank Islam’) and the plaintiff (‘Tan Sri Khalid’) at six monthly intervals, is contrary to the principles of Shariah; (b) whether it is a requirement under Shariah law for Bank Islam, after having declared a default of the terms of the BBA facility agreements to obtain Khalid’s consent prior to the disposal of the shares pledged by him as security under the said agreements;

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(c) in the event that BBA facility agreements are found to be contrary to the principles of Shariah, what would be obligations of the parties?; (d) (i) whether it is the opinion of the Shafie Madzhab that there must be two district and separate contracts/transactions between the first and the second sale in bai-inah transactions; (ii) if so, whether in light of the, inter alia, para D and E of the recital and article 2.3.1, 2.3.2 and 3.1(a) of the master revolving al-Bai Bithaman Ajil agreement dated 30 April 2001 (‘BBA facility’) and/or the fact that the BBA facility is a restructuring of earlier Murabahah agreements, whether the qualification referred has been violated?; and (e) Whether, in the circumstances of this case, the revolving element of BBA facility is tantamount to multiple contracts on the same subject matter ie the Kumpulan Guthrie shares, and it so, whether is contrary to the Shariah principles and the BNM SAC Resolution No 131. (‘Shariah issue’). 40

As can be seen from the questions, the questions posed are questions on the practise of Islamic banking by the parties; in other words, whether the practise of the parties were Shariah compliant in light of the facts of the case. For example question d(ii) requires the SAC to read and interpret the contract, and question (e) refers to ‘the circumstances of the case’ and whether the practise is contrary to ‘Shariah principles’. It is opined that the questions posed are more than just ‘ascertainment of Islamic law’ but includes the SAC’s input on the practise of the parties and its Shariah compliance. If these questions are allowed then the role of the SAC would be wider, and their determination of the issue at hand would be done with an in depth knowledge of Shariah and fiqh. One could argue that the SAC’s input on whether the practise of the parties are Shariah compliant would improve the Islamic finance industry as Shariah compliancy would be ensured at the enforcement stage of the transaction. This would ensure Shariah compliance from the product development stage all the way to the practise and enforcement of the transaction. However, the trial judge has more knowledge of the facts of the case and is in a better position to make a decision on the facts of the case, and it cannot be denied that if the SAC were to decide on whether the party’s practise is Shariah compliant, it would be more than ‘ascertainment’ of Islamic law. It is opined that one way to solve this impasse is to make it compulsory to refer to the SAC questions of Shariah but the ruling of the SAC should not be binding on the trial judge. In this way the trial judge would have the last say,

40 [2012] 7 MLJ 597 at p 602.

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issues of constitutionality would not arise and the court can easily refer questions to the SAC on whether the practise of the parties are Shariah compliant. Continuing with the judgment, the second point J Mohd Zawawi Salleh held was that J Datuk Rohana’s inquiry was not ‘a reference to the SAC for a new ruling on Shariah issue.’41 It was just an inquiry whether there existed any resolution passed by the SAC and thus did not ‘address any specific issue to be decided by SAC.’42 Thus Tan Sri Khalid’s contention that there had been a prior reference to the SAC at the summary judgment stage could not stand. Thirdly, on the issue of whether the CBMA 2009 applies retrospectively J Mohd Zawawi Salleh held that ss 56 and 57 of the CBMA 2009 are procedural and as such should apply retrospectively since there is a ‘presumption that amendments to purely procedural statutes are to be given retrospective effect and amendments that change substantial rights be given prospective effects.’43 Further the learned judge added that there would be no adverse effect to any substantive right of Tan Sri Khalid, since the only difference introduced by the CBMA 2009 would be taking away the discretion of the court to refer a matter to the SAC and the ruling would be binding on the court. On the issue of Tan Sri Khalid’s vested rights to lead expert witness, J Mohd Zawawi Salleh rejected the argument on the following grounds at p 614: [44] To my mind, the proposition that Tan Sri Khalid has a vested right to lead expert evidence is untenable because SAC is a statute appointed expert. SAC has been tasked with ascertaining Islamic law for the purpose of Islamic financial business since the amendment to the Central Bank Malaysia Act, 1958 in 2003, well before this action was brought before the court.

This observation by the judge is correct, the SAC is the expert witness appointed by statute and Shariah issues are required to be referred to them, there is actually no need for the parties to engage experts as they have the SAC to refer to. This should be the case, however if one takes a look at the manual on the procedure for courts and arbitrators to refer Shariah issues to the SAC,44 without an expert in Shariah the parties to the case would not have a right to be heard at the SAC. The manual allows the parties the right to be heard only through their experts on Shariah, the experts are allowed to submit a paper of

41 42 43 44

Ibid at 609 paras 28 and 29. Ibid. Ibid at 611 para 35. See above note 14.

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their arguments when a matter is referred to the SAC. The SAC may also invite the experts to explain their point on the Shariah matter. Thus it would seem that expert opinion would be crucial when matters of Shariah issues crop up in Islamic banking cases. Lastly, on the constitutionality of ss 56 and 57 of the CBMA 2009, J Mohd Zawawi Salleh repeated his decision in the Alias case, and confirmed the constitutionality of the sections. The learned judge ended his judgment with a warning on the complexities of Islamic law and the incapability of Civil Court judges to resolve them even with the help of expert evidence, and the necessity of a special body like the SAC to resolve the Shariah issues. At pp 617 and 618 J Mohd Zawawi stated: [56] Even if expert evidence is allowed to be given in court to explain or clarify any point of law relating to Islamic banking, civil judges would be in a difficult situation to decide because the divergence of opinions among Islamic jurists and scholars to which the opposing experts might have and which they will urge the court to adopt may be so complex to enable civil judges to make an independent determination of Shariah principles. [57] Thus, as has been expounded in Alias’s case, the necessity of a special body like the SAC to ascertain the Islamic law most applicable in Malaysia especially in this Islamic banking industry is undeniable. Difference of opinion on Shariah issues relating to Islamic banking should be resolved within SAC.

The judge thus allowed the Shariah questions to be referred to the SAC under s 56, however before this could be done, Tan Sri Khalid appealed against the decision. The Court of Appeal case is Tan Sri Abdul Khalid Ibrahim v Bank Islam (M) Bhd [2013] 3 MLJ 269 at p 277; [2012] 1 LNS 634. After considering the facts and arguments of the appellant, the Court of Appeal dismissed the appeal and came to the following conclusions — the previous reference to the SAC by J Datuk Rohana was merely a request for information thus J Mohd Zawawi Salleh could refer Shariah questions to the SAC. Sections 56 and 57 are valid and constitutional. Justice Mohd Zawawi Salleh was correct in taking the position that s 56 and s 57 have retrospective effect. On the role of the SAC the Court of Appeal stated that –45 The duty of the SAC is confined exclusively to the ascertainment of the Islamic Law on financial matters or business. The judicial function is within the domain of the court ie, to decide on the issues which the parties have pleaded. The fact

45 [2013] 3 MLJ 269 at p 277; [2012] 1 LNS 634 at p 10–11

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that the court is bound by the ruling of the SAC under s 57 does not detract from the judicial functions and duties of the court in providing a resolution to the dispute(s) which the parties have submitted to the jurisdiction of the court. In applying the SAC ruling to the particular facts of the case before the court, the judicial functions of the court to hear and determine a dispute remain inviolate. The SAC, like any other expert, does not perform any judicial function in the determination of the ultimate outcome of the litigation before the court, and so cannot be said to usurp the judicial functions of the court. Hence, s 56 and s 57 are valid and constitutional.

The Court Appeal separated the function of the SAC from the courts function and confirmed that the function of the court was to apply the SAC ruling to the particular facts. Thus whether the practise of the parties are Shariah compliant should be within the purview of the court not the SAC. This is confirmed by the manual on the procedure for courts and arbitrators to refer Shariah issues to the SAC,46 where the manual strictly explains in paragraphs 5 and 6 and its illustrations what type of questions are acceptable to be asked of the SAC.47 One then wonders about the Shariah questions canvassed by J Mohd Zawawi Salleh and agreed upon by the parties in the High Court – were they not more than just questions on the Islamic law? The Shariah questions were never officially sent to the SAC because Tan Sri Khalid appealed again and the Federal Court granted leave for an appeal to be brought to the apex court on the effect of ss 56 and 57 of the CBMA 2009.48 However before the appeal could be heard the case was settled out of court by Bank Islam Bhd and Tan Sri Khalid.49

46 See above note 14. 47 See paras 5–6 of BNM, Manual Rujukan Mahkamah Dan Penimbang Tara Kepada Majlis Penasihat Syariah Bank Negara Malaysia Di Bawah Seksyen 51 Dan Seksyen 56 Akta Bank Negara Malaysia 2009 (accessed). 48 Izahairani Izani, The Role of the Shariah Advisory Council in Islamic Banking Disputes in Malaysia, 13:1 (Shern Delamore & Co, 2014, accessed 18 January 2015); available at http://www.shearndelamore.com/assets/templates/images/pdf/2014/NewletterSD_March%202014.pdf. 49 One of the latest cases that touched on the SAC was the Federal Court case of CIMB Bank Berhad v Maybank Trustees Bhd and other appeals [2014] 3 MLJ 169. One of the issues on appeal was whether a pre-judgment interest claim of the bondholders should be allowed. The High Court had dismissed the application due to a clause in the Trust Deed where the parties had agreed that no interest would be charged. The Court of Appeal had reversed this decision and allowed a 3% pre-judgment penalty. The respondent argued that to allow the pre-judgment penalty would amount to riba which is prohibited. The Federal Court allowed the appeal on this point because of two reasons: firstly, according to the Trust Deed the parties had agreed not to impose any interest between them and thus based on this contract no pre-judgment interest could be charged. Secondly, no evidence was adduced as to the applicable rate imposed by the SAC and thus the order of the Court of Appeal was set aside and the respondent did not have to pay any pre-judgment interest.

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The cases during this period show greater reliance on the SAC resolutions, which is in line with s 56 of the CBMA 2009. Reference of questions to the SAC have also taken place during this period however no records of it are found in the judgments of the courts except for in Tan Sri Khalid’s case with J Mohd Zawawi Salleh. However in that case no answers to the questions were obtained because the case was eventually settled out of court. Evidence that questions are being referred to the SAC can be found when mentioned in the brief explanations of the SAC meetings found on BNM’s website. There is, it is opined, a need to record the questions, the case where the questions came from, and the answers. FINDINGS, FURTHER THOUGHTS AND RECOMMENDATIONS Under this section, the findings of this research and possible recommendations are discussed under the following headings: A. Expert Evidence The SAC is a statute appointed expert witness for Islamic banking and finance; the question remains on why parties should have their own experts to give evidence in the courts if reference to the SAC is compulsory. Expert evidence would be crucial for the parties to perhaps understand Islamic law and seek advice on the consequences of the transaction, however when it comes to Shariah questions that need to be resolved in court, should not the SAC be consulted rather than expert witness from both parties? Each party will have an expert that forms an opinion which supports their own case, so there would be a conflict of expert opinions which is allowed in Shariah, however how would the trial judge make the right decision? The SAC was formed to stamp out possible differences of Shariah opinions of the many Shariah committees on the Shariah compliance of products to ensure certainty in the Islamic financial industry in Malaysia. Sections 56 and 57 were enacted for the same reason — to ensure certainty in the outcome of disputes involving Islamic banking and finance. If experts are allowed to give their opinion on Shariah matters and contradict each other in court, would not the purpose of having the SAC to ensure certainty be defeated? Another take on this point is, if the SAC’s role is confined to matters of ascertainment of Islamic law alone then the courts may want to seek expert opinion on whether the practise of the parties were Shariah compliant. With Islamic banking and finance matters becoming complex would it not be more useful for the SAC to have the role as the sole expert opinion in courts? It is opined that the SAC would be the best option to give expert opinion.

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B. Right to be Heard The manual on the procedure for courts and arbitrators to refer Shariah issues to the SAC,50 allows the parties the right to be heard only through their experts on Shariah, the experts are allowed to submit a paper of their arguments when a matter is referred to the SAC. The SAC may also invite the experts to explain their point on the Shariah matter. The question arises on why only Shariah experts are allowed to address the SAC. Why not the lawyers or even the parties to the case? The simple answer would be that this is to ensure that the function of the SAC is to ‘ascertain’ Islamic law only and not encroach into the functions of the courts. C. Shariah Compliance and Practise of the Parties — ss 56 & 57 At the stage of enforcement of the transaction, the actual crucial question that has to be answered is whether the parties conducted their affairs in a Shariah compliant manner. This is the crucial question because prior to this, the contracts around which the transaction revolves would have been vetted and approved by the Shariah committee of the IFI and approved by the SAC. So the question that remains at the enforcement stage is not whether the BBA contract is valid and approved by the SAC, but in light of the practise of the parties was the transaction Shariah compliant? This crucial question it would seem is within the purview of the courts. However are the courts equipped with the right knowledge to come to the right decision? Are the courts qualified to decide whether a matter is in practise according to Shariah? Should not the role of the SAC be extended to look into the practise of the parties? Would not such role extension benefit the Islamic financial industry by ensuring that at the enforcement stage, Shariah compliance is taken very seriously? It is opined that the role of the SAC should be extended to examining whether the practise of the parties are Shariah compliant. The solution to allowing the SAC to decide on such matters without encroaching on the functions of the court is to have legislative changes to s 57 of the CBMA 2009. It should be compulsory to refer to the SAC questions of Shariah and thus maintain s 56, however the ruling of the SAC should not be binding on the trial judge. In other words, s 57 should be reverted to the old provision of s 16(8). The court ‘may’ take into account the decision of the SAC. In this way, the trial judge would have the last say, issues of constitutionality would not arise and the court can easily refer questions to the SAC on whether

50 See above note 14.

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the practise of the parties are Shariah compliant. After all an expert opinion is exactly that — it should be at the end of the day up to the trial judge to take the ruling made by the SAC into consideration or not to take it into consideration when making a decision.51 D. Role of the SAC to be extended According to the Capital Markets and Services Act 2007, s 316E on the advice or ruling of Shariah Advisory Council of the Securities Commission: Any licensed person, stock exchange, futures exchange, clearing house, central depository, listed corporation or any other person may:(a) seek the advice; or (b) refer for a ruling, of the Shariah Advisory Council on any matter relating to its Islamic capital market business or transaction to ascertain whether such Islamic capital market business or transaction involves any element which is inconsistent with the Shariah.

This provision is similar to s 55(2) of the CBMA 2009 except that the s 55(2) only allows an IFI to refer Shariah matters to the SAC: (2) Any Islamic financial institution in respect of its Islamic financial business, may— (a) refer for a ruling; or (b) seek the advice, of the Shariah Advisory Council on the operations of its business in order to ascertain that it does not involve any element which is inconsistent with the Shariah.

The two sections when compared show that in the case of the SAC of the Securities access is easier since 'any other person' can refer any matter relating to the Islamic capital market to the SAC of the Securities Commission; whereas for the SAC of BNM, access to the advice of the SAC is restricted to IFIs only. Why is there better access to the SAC of the Securities Commission? Why are lawyers and bank customers not allowed access to seek advice of the SAC on

51 It should be noted that there are authors who believe that the SAC members should be called as expert witnesses to court see Ruzian Markom and others, 'Adjudication of Islamic Banking and Finance Cases in the Civil Courts of Malaysia,' European Journal of Law and Economics 6, no 1 (2013) p 24.

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Shariah matters? Would it not be better if lawyers of customers were allowed to seek the advice of the SAC on Shariah matters without having to wait for the courts to refer the matter?It is opined that the role of the SAC should be extended to not only BNM, IFIs, the court and arbitrators. They should be more accessible to other persons who require their much needed guidance on Shariah matters. If the SAC of the Securities Commission can open up their doors, why not the SAC of BNM? To assist the Islamic financial industry, it is crucial for the SAC of BNM to be more accessible to other stakeholders in the industry. It is opined that the role of the SAC should be extended to not only BNM, IFIs, the court and arbitrators. They should be more accessible to other persons who require their much needed guidance on Shariah matters. If the SAC of the Securities Commission can open up their doors, why not the SAC of BNM? To assist the Islamic financial industry, it is crucial for the SAC of BNM to be more accessible to other stakeholders in the industry. E. Questions referred to the SAC should be Recorded As stated above there are judges who have referred to the SAC questions on Shariah matters after the passing of the CBMA 2009, however the questions asked and the answers received have not been recorded in the judgments. It is necessary to record the questions and the answers provided for by the SAC whether it be in the judgment or elsewhere. The case which referred the questions should also be recorded so that researchers can understand the facts of the case from which the questions arose. The importance of this cannot be emphasised enough. It is important for the sake of transparency, and as a record for future cases. It is also important for the development of fiqh in the area of Islamic banking and finance. F. Update the Resolutions of the SAC The resolutions passed by the SAC should be readily available to the public, so that lawyers, Shariah experts, Shariah advisors, the judges and even the customers have access to the latest resolutions to make informed decisions. Since it is now recommended in the manual on referring matters to the SAC by the courts and arbitration that the court and arbitrator refer to the resolutions of the SAC first, it is of utmost importance that the resolutions are released and updated frequently. CONCLUSION

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Shariah compliance is what distinguishes conventional banking and finance practises from Islamic banking and finance. It is thus crucial that Shariah is complied with at all stages of a transaction. At the enforcement stage, the evolution of cases in the courts reveal that judges have grappled with Shariah compliance and have usually decided on their own whether the contract has breached Shariah, without reference to the resolutions or to the expert opinion of the SAC. This trend is slowly changing as more judges are referring to the resolutions of the SAC. Post the CBMA 2009, the courts have been referring questions to the SAC as well, however the answers by the SAC have yet to be recorded in a standardised manner. This research recommends that the role of the SAC should be extended in two ways; firstly the SAC should have the mandate to go further than just ‘ascertaining’ Islamic law. The SAC should also determine whether a contract has been practised in a Shariah compliant manner, in this way Shariah compliance will be ensured by those who have knowledge on how Shariah should be applied in practise. Secondly, the SAC should not only be confined to give advice to BNM and IFIs but should also be accessible to other persons who need clarification on Shariah matters such as lawyers, customers, and parties to a dispute. To extend the role of the SAC, ss 55(2) and 57 should be amended. Section 55(2) should be amended to include ‘other persons’ who can seek the advice of the SAC apart from IFIs. Section 57 should be amended to take away the binding effect of the advice of the SAC. In this way, the judge would have a choice whether to follow the advice of the SAC and questions of constitutionality, or the court usurping the functions of the court, would not arise. This research also recommends that expert opinion should be confined to the SAC only when disputes arise in the court and that the resolutions of the SAC are published regularly so that they can be a source of reference to the courts, arbitrators, lawyers and parties to the dispute. Reference Abdullah, Apnizan, and Hakimah Yaacob 'The Trend of Legal Suits Involving Islamic Financial Transactions in Malaysia: Evidence from the Reported Cases.' In ISRA Research Paper, Research Paper No 48, 2013. Ali, Engku Rabiah Adawiah Engku 'Constraints and Opportunities in Harmonization of Civil Law and Shariah in the Islamic Financial Services Industry.' [2008] 4 MLJ i: Azahari, Fakihah 'Islamic Banking: Perspectives on Recent Case Development.' [2009] 1 MLJ xci.

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BNM. Manual Rujukan Mahkamah Dan Penimbang Tara Kepada Majlis Penasihat Syariah Bank Negara Malaysia Di Bawah Seksyen 51 Dan Seksyen 56 Akta Bank Negara Malaysia 2009 2014, accessed 31 October 2014; Available at http://www.bnm.gov.my/index. php?ch=7&pg=1038&ac=419&bb=file1. Shariah Advisory Council of Bank Negara (Sac) 154th Meeting 2014, accessed 11 February 2014; Available at http://www.bnm.gov.my/index. php?ch=en_about&pg=en_sac_updates&ac=439. Hassan, Rusni, Agus Triyanta, and Adnan Yusoff 'Shariah Compliance Process in Malaysian Islamic Banking ' Malayan Law Journal Articles 5th Ed (2011). Izani, Izahairani. The Role of the Shariah Advisory Council in Islamic Banking Disputes in Malaysia Shern Delamore & Co, 2014, accessed 18 January 2015; Available at http://www.shearndelamore.com/assets/templates/ images/pdf/2014/NewletterSD_March%202014.pdf. Laldin, Muhamad Akram. 'The Principles of Compensation and Penalty Charges in Dealing with Loan Default in Islamic Finance.' In Contemporary Issues in Islamic Finance: Deliberation at the International Shariah Scholars Dialogue 2006 Ed BNM. Kuala Lumpur: BNM, 2008. Markom, Ruzian, Sharina Ali Pitchay, Zinatul Ashiqin Zainol, Anita Abdul Rahim, and Rooshida Merican Abdul Rahim Merican 'Adjudication of Islamic Banking and Finance Cases in the Civil Courts of Malaysia.' European Journal of Law and Economics 6, No 1 (2013). Miskam, Surianom, Noor Aimi Mohamad Puad, and Nurauliani Jamlus Rafdi. 'Reference to the Shari'ah Advisory Council in Islamic Finance: Preliminary Analysis on Civil Court Decisions.' In Proceeding of the Social SciencesResearchICSSR2014.KotaKinanbaluSabah:http://WorldConferences. net, 2014. Mohamad, Abdul Hamid, and Adnan Trakic. 'The Shariah Advisory Council's Role in Resolving Islamic Banking Disputes in Malaysia: A Model to Follow?' Isra Research Paper 47 (2012). Mohamed, Ashgar Ali Ali. 'Al-Bai' Bithaman Ajil - Its Consistency with the Religion of Islam: With Special Reference to Arab-Malaysian Finance Bhd V Taman Ihsan Jaya Sdn Bhd & Ors and Other Cases.' [2008] 6 MLJ xiv.

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Thani, Nik Norzul, Mohamed Ridza Abdullah, and Megat Hiziani Hassan. Law and Practice of Islamic Banking and Finance. 2nd Ed. Petaling Jaya Sweet & Maxwell Asia, 2010. * The author would like to express her gratitude to Logan Cochrane for his comments on an earlier version of this paper, and Fadzilah Pilus for the information provided in the cases of Arab-Malaysian Merchant Bank Bhd v. Silver Concept Sdn Bhd. ** Consultant at Wisdom Management Consultancy Sdn Bhd. She can be contracted at [email protected] or [email protected]

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