brief on islamic finance cases 1987-2009

BRIEF OF ISLAMIC FINANCE CASES 1987-2009

1. Case name Tinta Press Sdn Bhd v Bank Islam (M) Bhd

Citation [1987] CLJ 396 / [1987] 2 MLJ 192

Court / Date decided

Supreme Court, KL / 23 December 1986

Facts • In this case the respondents had leased certain printing equipment to the appellants under the lease agreement of its letter of credit financing facility. The appellants having defaulted in payment of the monthly rentals, the respondents brought an action to recover possession of the equipment and to recover the arrears of rent. The respondents also made an ex parte application for and obtained a mandatory injunction to enable the respondents to recover possession of the equipment. The appellants then applied to dissolve and set aside the mandatory injunction. This was refused and the appellants appealed.

Judgment The court set aside the appeal. (1) The court has the discretion to grant an interlocutory

mandatory injunction before trial but the discretion must be exercised and an injunction granted only in exceptional and extremely rare cases. The case must be unusually strong and clear in that the court must feel assured that a similar injunction would probably be granted at the trial on the ground that it would be just and equitable that the plaintiff's interest be protected by the immediate issue of an injunction, otherwise irreparable injury and inconvenience would result. Where the case is one of urgency an application can be made ex parte;

(2) The learned Judge on the facts and circumstances of the case rightly concluded that this was an exceptional case where the court was justified in granting a mandatory injunction on an ex parte application before the trial;

(3) The learned judge rightly concluded from the documents and the affidavit evidence that the agreement in this case was a lease agreement and not a loan agreement;

(4) There was a clear breach of the lease agreement in this

case by the appellant and the respondent therefore became entitled to immediate possession of the equipment. The learned Judge was confident that the court would grant a mandatory injunction at the trial of the suit and rightly held that if the injunction had not been granted earlier the respondent would suffer irreparable damage and greater hardship. The balance of convenience was very much in favour of the respondent and the application was one of urgency. There was no unreasonable delay on the part of the respondent in filing the writ and the ex parte application for injunction;

(5) This was a case where the learned Judge was more than justified in granting a mandatory injunction on an ex parte application.

Note ISLAMIC CONTRACT OF IJARAH UPHELD The Islamic contract is Ijarah. The court pointed out that this is leasing contract and not loan. As such, the court upheld the decision of the courts below that the equipments are owned by the respondent (as lessor). The appellants do not have the right to the equipments until full payment of the lease rentals to the respondents.

2. Case name Bank Islam Malaysia Berhad v Adnan Bin Omar

Citation [1994] 3 CLJ 735 / [1994] MLJU 221


High Court, Shah Alam / 18 July 1994

Facts • By a letter of offer extended to the defendant which the defendant accepted, the plaintiff granted the defendant a loan of RM583,000, secured upon a charge over a certain parcel of land. The plaintiff granted this facility under the Islamic Bai-Baithaman Ajil loan scheme which in effect involved the execution of three simultaneous transactions between the parties, namely (1) the sale of the subject property by the defendant to the plaintiff for RM265,000 which was duly paid by the plaintiff (2) the plaintiff reselling the same to the defendant for RM583,000 payable in 180 instalments and (3) the defendant executing a charge over the land as security for the said debt of RM583,000.

• It was a term of the charge document that in the event of any default in the payment of the loan instalments by the defendant, the plaintiff would be entitled to sell the charged land. The defendant defaulted in his payments and the plaintiff accordingly filed an originating summons under O.83 Rules of the High Court 1980 praying for an order for the sale of the land to recover the said loan. The defendant challenged the plaintiff's right to relief under the said O.83 on the ground that there was no compliance with Rule 3(3) thereof.

• The main issue was whether by virtue of the fact that the defendant only received RM265,000 of the stated loan amount of RM583,000, and by virtue further that the plaintiff's claim did not include the claim for interest, the Bai-Baithaman Ajil loan scheme ascribed to by the parties herein had failed to comply with the provisions of r.3(3)(a)(c) and (d) of O.83 RHC 1980.

Judgment (1) The transactions between the parties were above board

and made with the full knowledge of the defendant who knew that the entire exercise was to implement the grant of a loan to him in such a way as to bring the loan

transaction within the limits of Islamic Law. His knowledge of this is evidenced by his acceptance of the letter of offer containing all the terms of the loan. In the circumstances the parties were ad idem in treating the amount of RM583,000 as the facility amount given to the defendant by the plaintiff, which amount coincided with the price of the land in the second sale and purchase agreement whereby the land was resold to the defendant and for which the charge was meant to secure. This being the case, this Court can only accept the plaintiff's statement of the amount of advance under O.83 r.3(3)(a) as being RM583,000. The amount is in accord with the intention of the parties and the defendant cannot now dispute the amount.

(2) In any event the words "except where the Court in any case or class otherwise directs" in the preambular part of r.3(3) of O.83 RHC indicates that the Court may exercise its discretion to allow a certain flexibility in the requirements of that provision in particular cases. The instant case is one instance where such discretion should be exercised.

(3) A reading of r.3(3) of O.83 RHC in the context of the purpose of the whole order can only lead to one reasonable interpretation and that is, that there must be an amount of interest or an amount of instalment in arrears at the given date, but not necessarily both. The crucial precondition is the fact of default of payment of whatever amount. In the present case there is no question of there being any interest because of the Islamic nature of the loan. Be that as it may, as the defendant's default is in respect of the instalment payments and as this has been duly particularised by the plaintiff, there has been compliance with the said provision.

Note ISLAMIC CONTRACT OF BBA UPHELD The court took the approach that the defendant when signing the agreements was fully aware of the nature and consequences, and he is now estopped from denying that the plaintiff has the right to claim from him the total sale price indicated in the property sale agreement. It will be inequitable to allow the defendant’s claim where he himself has willingly entered into the contract in the first place.

3. Case name Dato’ Hj Nik Mahmud Daud v Bank Islam Malaysia Bhd Citation [1998] 3 CLJ 605 Court / Date decided

Court of Appeal, KL / 8 June 1998

Facts • The plaintiff, on 6 May 1984, had executed two agreements, namely the 'property purchase agreement' and the 'property sale agreement' with the defendant under the defendant’s BBA property financing facility. There was a purchase by the defendant through the former agreement of properties ('the said lands') for a price of RM520,000 which were then resold through the latter agreement to the plaintiff for RM629,200. Both the agreements were signed comtemporaneously. On 8 May 1984, the plaintiff's attorney executed two charges of the said lands in favour of the defendant as securities for a loan of RM629,200, which loan was purportedly granted under the Islamic banking concept of Al Bai Bithaman Ajil.

• In this action, the plaintiff applied for an order that the charges dated 8 May 1984, the property purchase agreement and the property sale agreement be declared null and void and of no effect. It was contended by the plaintiff that the execution of the property purchase agreement, the property sale agreement and the charge documents would clearly tantamount to an exercise to defeat the very purpose and intention of the Kelantan Malay Reservations Enactment 1930 ('the Enactment') and the National Land Code 1965 ('the Code'). Counsel for the defendant raised various issues to resist the motion, inter alia, the indefeasibility of the charges under s 340 of the Code and the interpretation of the Enactment, vis-a-vis Al Bai Bithaman Ajil transactions.

• The motion was dismissed with costs and the appellant appealed.

Judgment The court dismissed the appeal.

(1) Section 7(i) of the Enactment prohibits any transfer or transmission or vesting of any right or interest of a Malay in reservation land to or in any person not being a Malay. However, when the property purchase agreement was signed the right that could be acquired

by the defendant under the agreement at that point of time, the agreement being still executory, was only a right to a registrable interest which right was yet to crystallize into a registrable interest. It was only upon registration that the title to the said lands would vest in the defendant and it was only when the defendant became the registered proprietor that its title would have the indefeasibility which the Code conferred. As there was no evidence to show a change in the registered proprietorship of the said lands pursuant to the execution of the property purchase agreement, the plaintiff was and is the registered proprietor of the said lands. That being the case, there was no transfer effected and the proprietorship still remained with the plaintiff. There was also no vesting of right or interest in the said lands in the defendant.

(2) The contemporaneous execution of the property purchase agreement and the property sale agreement constituted part of the process required by the Islamic banking procedure before the plaintiff could avail himelf of the financial facilities provided by the defendant under the Al Bai Bithaman Ajil concept. That was what both parties had bargained for. Therefore, the execution of the property purchase agreement had not transgressed the provisions of ss 7 and 12 of the Enactment since there was no dealing or attempt to deal in the said lands.

(3) In this case, indefeasibility could only be successfully attacked by evidence which manifested that registration was obtained by 'means of an insufficient or void instrument'. This meant the plaintiff could only successfully seek the aid of s 340(2)(b) of the Code if it could be shown that there existed a defect or illegality in the execution of the charge documents. A scrutiny of the charge documents here did not disclose any form of defect or illegality. The charge documents had been registered in accordance with the procedure laid down in the Code and such registration did not run counter to the Enactment either. Therefore, there was nothing in law and in fact that could deny the indefeasibility accorded by s 340 of the Code to the charges.

(4) On appeal, it is held that it is clear that s 7(i) of the Enactment prohibits any transfer or transmission or

vesting of any right or interest of a Malay in reservation land to any person not being a Malay. In this case, the trial judge had found that the appellant was all along the registered proprietor of the properties; in short, no transfer was being effected. Moreover, it was never the intention of the parties to involve any transfer of proprietorship. Accordingly, the execution of the property purchase agreement had not transgressed the provisions of ss 7 and 12 of the Enactment since there was no dealing or attempt to deal in the lands contrary to the provisions thereof. There was therefore no reason to disagree with the findings of the trial judge.

Note ISLAMIC CONTRACT OF BBA UPHELD

The court took the approach that the defendant when signing the agreements was fully aware of the nature and consequences, and he is now estopped from denying that the plaintiff has the right to claim from him the total sale price indicated in the property sale agreement. It will be inequitable to allow the defendant’s claim where he himself has willingly entered into the contract in the first place. Initially, there was no intention for real transfer of the property from the defendant to the plaintiff vice versa, as signing the PSA and the PPA are part of the whole process for the Islamic financing called BBA. Hence no issue arises as to the Malay reserved land, and whether the plaintiff is a Malay or not.

4. Case name Bank Islam Malaysia Bhd v Shamsuddin Bin Haji Ahmad

Citation [1999] 1 LNS 275 / [1999] MLJU 450


High Court, Alor Setar / 1 December 1999

Facts • The application by the plaintiff in the proceeding is made based on s. 265(3) of the National Land Code 1965. The section provides:- “(3) If at the subsequent sale no bid is received at or above the reserve price:-

(a) the land or lease shall be withdrawn from the sale; (b) the Land Administrator shall refer the mattter to the Court, and (c) the Court may substitute for the order of the Land Administrator an order for sale under section 256, or make such other order as it may think just.”

• The defendant objects to this application on the following grounds: (i) There is ‘causes to the contrary’ following the element of ‘interest’ in the charge which is prohibited by the religion of Islam and contravenes the Islamic Banking Act 1983. (ii) There is non-compliance with O.83 r.3(2) of the Rules of High Court in the plaintiff’s application.

Judgment The court allowed the application by the plaintiff and dismissed the defendant’s objections. (1) On the issue of ‘interest’ raised by the defendant is not

cause to the contrary, interest does not exist in this transaction because the amount being the subject of the financing is the re-purchase price by the defendant from the plaintiff of the property, which is fixed at RM217,500.00.

(2) The amount RM 217,500.00 is stated in the Property Sale Agreement which amount is the subject guaranteed under the property charge document. The

amount is stated in the relevant charge annexure. (3) The court saw no reason to deal with the second

objection as there is no issue of non-compliance by the plaintiff with the Rules of High Court.


The court took the approach that ‘interest’ as claimed by the defendant does not come into the picture in BBA contracts. This is because BBA involves purchase of the property by the plaintiff at purchase price and sale of the same property to the defendant at the sale price. The difference between the two prices is custom in a business, being the profit of the plaintiff.

5. Case name Bank Kerjasama Rakyat Malaysia Bhd v Nesaretnam Samyveloo

Citation [2002] 8 CLJ 95 / [2002] 7 MLJ 103


High Court, Ipoh / 31 October 2002

Facts • The plaintiff granted a banking facility under the Islamic contract of BBA to the defendant and as security, the defendant charged a piece of land (‘the said land’) in favour of the plaintiff. The defendant defaulted under the banking facility and consequently, the plaintiff issued a notice of default in Form 16D of the National Land Code 1965 (‘NLC’) to the defendant pursuant to s 254(1) thereof. In the Form 16D, the defendant was given 14 days to remedy the breach, failing which, the plaintiff would proceed to apply for an order for sale in court. The defendant did not remedy the breach and the plaintiff then proceeded to apply for an order for sale of the said land in encl 1.

• At the hearing of encl 1, the defendant’s counsel contended that the Form 16D was defective as it did not provide for a period of at least one month within which to remedy the breach as provided under s 254 of the NLC. The counsel relied on the High Court decision of Mohamad Khalid Rahaman & Anor v Citibank Bhd & Anor [2000] 5 MLJ 421.

Judgment The court allowed the plaintiff’s application for order for

sale under the NLC. (1) This court was very much persuaded by the High Court

decision of Mohamad Khalid Rahaman & Anor v Citibank Bhd & Anor in dismissing the plaintiff’s application. However, neither of the counsel drew to the court’s attention that the said High Court decision had been overruled by the Court of Appeal in Citibank Bhd v Mohamed Khalid bin Farzalur Rahaman & Anor Citibank Bhd v Mohamed Khalid bin Farzalur Rahaman & Anor [2000] 4 MLJ 96. Accordingly, based

on the principle of stare decisis, this court was clearly in error in dismissing the plaintiff’s application.

(2) As in the High Court cases of Mohamad Khalid Rahaman & Anor v Citibank Bhd & Anor and OCBC Bank (M) Bhd v Gunasegaran a/l Arunasalam [2000] 6 MLJ 859, the instant decision to dismiss the plaintiff’s application was based on the more restrictive interpretation of s 254 of the NLC, which had been ruled by the Court of Appeal to be erroneous. In the circumstances, the dismissal of the plaintiff’s application cannot be upheld.

Note ISLAMIC CONTRACT OF BBA UPHELD –

ADMINISTRATIVE ISSUES The issues in this case are very much administrative and do not involve the substance or working mechanism of BBA. Because all the requirements in the NLC and RHC are fulfilled, the court granted the application for order for sale by the plaintiff.

6. Case name Bank Kerjasama Rakyat Malaysia Bhd v Emcee Corporation Sdn Bhd

Citation [2003] 1 CLJ 625 / [2003] 2 MLJ 408


Court of Appeal, KL / 29 January 2003

Facts • The appellant granted the respondent a facility under the Islamic banking principle of BBA. Both parties executed two agreements on the same date. The first was the property purchase agreement (the first agreement). Under the first agreement, the respondent sold 22 pieces of land to the appellant for RM20 Million. The second agreement was the property sale agreement (the second agreement). By that agreement, the appellant sold to the respondent the same properties upon deferred payment terms for 36 monthly installments. As security for the repayment of the sale price under the second agreement, the respondent charged to the appellant 15 pieces of the land under the NLC.

• The respondent failed to pay the installments under the second agreement. The appellant issued a Form 16D notice under the National Land Code against the respondent. The respondent failed to comply with the Form 16D notice and the appellant filed an originating summons against the respondent for an order for sale under s 256 of the National Land Code. The High Court dismissed the application. The appellant appealed to the Court of Appeal.

Judgment The court allowed the appeal, granted the order for sale.

(1) Although the facility was an Islamic banking facility, that did not mean that the law applicable in this application was different from the law that was applicable if the facility was given under conventional banking. The charge was a charge under the National Land Code. The remedy available and sought was a remedy provided by the Code. The procedure was provided by the National Land Code and the Rules of the High Court 1980. The court adjudicating it was the

High Court. So, it was the same law that was applicable, the same order that would be, if made, and the same principles that should be applied in deciding the application.

(2) It was clear that the first installment should be paid after the appellant bank released the facility to the marginal deposit account. Clause 3.1 of the second agreement talked about the first release of the facility but nothing was mentioned about the amount of first release. ‘First release’ was not defined either, but it said that upon the first release being made the installment period began to run. That there was a ‘first release’ or ‘releases’ was beyond any doubt. The installments became payable and were paid partly. In the circumstances, the demand could not be said to be premature. There was nothing that brought it within the three categories of cause to the contrary established in Low Lee Lian v Ban Hin Lee Bank Bhd [1997] 1 MLJ 77. In the circumstances, the respondent failed to show a cause to the contrary that warranted the refusal of the order.



7. Case name Bank Islam Malaysia Berhad v Pasaraya Peladang Sdn Bhd

Citation [2004] 7 MLJ 355


High Court, Alor Setar / 7 April 2004

Facts • The plaintiff has granted an Islamic banking facility under the Islamic contract of BBA to the defendant to purchase property. As security for the repayment of the Facility, the defendant charged 10 bidang of land (‘the Land’) to the plaintiff. The charge is registered on 23 July 1997 via 2 Forms 16A of the National Land Code (‘NLC’).

• When the defendant failed to make repayment, the plaintiff issued claim notices. The defendant also failed to observe the notices. The plaintiff later issued statutory notice Form 16D of the NLC. Again the defendant failed to make the payment. The plaintiff applied for order for sale of the charged property as provided in s. 256 of the NLC.

Judgment The court allowed the application by the plaintiff.

(1) The Al-Bai Bithaman Ajil banking facility is a banking facility that usually requires land as its collateral. It involves 3 separate agreements. The bank will purchase the property from the charger in the first agreement. In the second agreement, the bank will sell the property to the charger and in the third agreement, the charger will charge the property to the bank to entitle the bank to sell the property in the event the charger fails to honour its obligations. Although the Facility is borrowed from Islamic teachings, the applicable law is the NLC and the Rules of High Court (‘RHC’).

(2) Form 16D issued by the plaintiff clearly shows that the debt payable by the defendant is RM8,117,601.43 on 21 February 2001. This amount if generated from the Property Sale Agreement and is the same amount stated in the claim notice.

(3) The form 16D can be used to enforce the payable amount when prayed for. Hence, the issuance of the statutory application by the plaintiff in Form 16D is valid.


ADMINSITRATIVE ISSUES The issues in this case are very much administrative and do not involve the substance or working mechanism of BBA. Because all the requirements in the NLC and RHC are fulfilled, the court granted the application for order for sale by the plaintiff.

8. Case name Tahan Steel Corporation Sdn Bhd v Bank Islam Malaysia Bhd

Citation [2004] 6 CLJ 25 / [2004] 6 MLJ 1


High Court, KL / 23 February 2004

Facts • The plaintiff had undertaken the development and construction of Steckel Hot Strip Mill Plant to produce Hot Rolled Coils (‘the said project’). The said project was to be carried out on a piece of land measuring approximately 119 acres in Klang. The land, a leasehold property, was purchased from the Selangor State Development Council, free from legal encumbrances, at RM128m. They had secured RM97m loan facility, from the defendant bank by using the Syariah principle of Al-Istisnaa’ facility.

• Under this concept, the defendant purchased the said project from the plaintiff for a purchase price of RM97m which was disbursed immediately into a financing payable account. From such account, the monies were paid out to the plaintiff upon the latter meeting all the conditions contained in the Al-Istisnaa’ purchase agreement.

• Concurrently, with the execution of the Al-Istisnaa’ purchase agreement, the defendant sold back the said project to the plaintiff by way of the Al-Istisnaa’ sale agreement for an agreed price comprising the purchase price together with an agreed profit margin. Two tranches of the facility amounting to a sum of RM58,215,984.84m had been released by the defendant bank to the plaintiff. The defendant has refused to release the balance of the facility amounting to RM38,784,015.16m from the financing payable account.

• The plaintiff had filed a writ together with the statement of claim against the defendant alleging breach of contract on the part of the defendant. The plaintiff also sought by way of an interim injunction to

prevent the defendant from exercising its lawful rights under the security documents executed by the plaintiff in favour of the defendant pending the outcome of the writ action.

• The defendant contended that the plaintiff had failed to met the condition precedents of the Al-Istisnaa’ purchase agreement, namely, to secure facilities totalling approximately USD80m or such other amount as the defendant reasonably determines from EXIM banks for the purpose of part financing of the said purchase. They also contended that the plaintiff had unilaterally decided to substitute the EXIM loan condition with a bond issue.

• Although not obliged with the above change, the defendant were very accommodative, by stating its agreement to accept the local bond issue provided that the plaintiff was willing to meet certain conditions, namely, that the local bond issue should be on a bought deal basis. But the plaintiff failed to meet the condition. Further the defendant argued that the plaintiff had defaulted in its agreed obligation to the defendant even before the defendant’s purported recession of the contract.

• The plaintiff’s default was related to the fact that the plaintiff had stopped making payment on the facility from as early as 31 January 2002 when the defendant had to liquidate a security cash deposit of RM1m to enable the plaintiff to settle the instalments that were due from the plaintiff.

• Judgment The court dismissed the application.

(1) The conditions precedent imposed on the plaintiff of obtaining the EXIM loan was neither whimsical nor belligerent, they were based on sound commercial basis. The plaintiff adopted a rather lackadaisical attitude towards the express term and essential condition, namely, securing the EXIM loan. The plaintiff was not entitled to depart from the requirement of the EXIM loan condition without the written and signed consent of the defendant. The defendant was within its rights to refuse to allow the disbursal of the third tranche of the facility to the plaintiff since the plaintiff has by their own admission failed to secure the

EXIM loan. (2) A party is not entitled to unilaterally vary a contract

and then found a cause of action for breach of contract against the other party based on that unilateral variation. This goes against the prevailing law in this country. It was the plaintiff that wished to change the terms of the pre-existing contractual relationship, the defendant was entitled to either accept such a change or reject such changes or to accept those changes subject to any new terms it might wish to add. The defendant was certainly entitled to insist on strict compliance with the Al-Istisnaa’ facility agreements.

(3) The defendant’s facility is only a small portion of the total financing required for the successful completion of the said project. If the plaintiff cannot even service the defendant’s facility, how could the plaintiff service any EXIM loan which it would have to have for the successful completion of the said project.

(4) The defendant is a licensed bank governed by the Islamic Banking Act 1983. It is not allowed to participate nor conduct any business that contravenes the Syariah. The defendant does not charge penalty interest by whatever name one wishes to call it for late payment. Even single instalment that is paid late to the defendant is a loss of use of money owed to the defendant for the period of delay. Viewed in this context, the grant of an injunction to the plaintiff would cause irreparable damage to the defendant.

(5) The defendant as the lender being an institution operating under the Islamic banking principles would be made to suffer loss of use of its money by the delay in recovering monies from the plaintiff in the event that the High Court ultimately decide that the injunction should not have been granted. The courts cannot compensate this loss since the defendant is prevented by its strict adherence to Islamic banking principles from taking any penalty interest which would be in the nature of usury.

Note ISLAMIC CONTRACT OF AL-ISTISNAA’ UPHELD

The court upheld the Syariah principles involved in the Istisnaa’ contract, and protected the rights of the defendant. The court seem to discuss more on justice and equity for possible losses or irreparable damage to the defendant in the event the plaintiff’s application for injunction is allowed.

9. Case name Arab-Malaysian Merchant Bank Bhd v Silver Concept Sdn Bhd

Citation [2008] 6 MLJ 295


High Court, Kuala Lumpur / 18 July 2008

Facts • The defendant acquired a large piece of land from Ng Eng Hiam Plantations Sdn Bhd, the vendor, at the price of RM125,000,000. To finance the said acquisition, the defendant had obtained a financing under the BBA facility from the plaintiff, a consortium of financial institutions, where the sale price was RM216,875,000 in aggregate made up of a purchase price and a profit element.

• In connection with the above, the parties had entered into a sale and purchase novation agreement. The plaintiff also entered into the instalment sale agreement, a component of the BBA facility. The defendant defaulted in the instalment payment and accordingly, the plaintiff claimed a sum of RM185,536,908.64, being the unpaid sale price pursuant to the default provisions in the instalment sale agreement.

• Judgment The court allowed the application for an order for sale by

public auction by the plaintiff. (1) While a question as to what was the amount due might

arise in the event of an early termination, it was plain in this case that the date of payment was well past due which meant the agreed profit for the time period agreed to had already been exhausted and there could be no question that any of the agreed profit had not been re-earned by the plaintiff.

(2) It was the defendant who sought financing. The BBA facility was offered and the defendant accepted it. The defendant signed the novation agreement so that the plaintiff was the legal purchaser. It then on the same day bought from the plaintiff under the instalment sale agreement, giving the plaintiff a profit. Under the terms

of the sale and purchase novation agreement and instalment sale agreement, the plaintiff had the right to cancel the ABBA facility upon default. It was not for the defendant now to say it was a loan with interest to seek to avoid paying back. The defendant was estopped from denying liability.


The court took the approach that the defendant when signing the agreements was fully aware of the nature and consequences, and he is now estopped from denying that the plaintiff has the right to claim from him the total sale price indicated in the property sale agreement. It will be inequitable to allow the defendant’s claim where he himself has willingly entered into the contract in the first place.

10. Case name Affin Bank Bhd v Zulkifli Abdullah

Citation [2006] 1 CLJ 438


High Court, KL / 29 December 2005

Facts • In 1997, and subsequently by a revised agreement in 1999, the defendant took a secured housing loan of RM394,172.06 from the plaintiff bank through the Islamic financing scheme of Al-Bai Bithaman Ajil ('the facility'). Inter alia, the facility specified that upon default, the defendant would repay not only the sum loaned 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 RM958,909.21 and applied for an order for sale of the charged property. The defendant was distraught that the facility, just 2 years and 8 months after it was given, had blossomed into a claim for debt amounting to RM958,909.21, and in the circumstances took umbrage at the inherent principles of the facility, and the bank's right to obtain an order for sale thereunder.

• Upon the facts as presented to the court, the learned judge, rather justifiably, examined the facility in its substance, particularly as to the defendant's rights vis-a-vis a borrower under a conventional loan _ and framed the following question for determination, namely: what was the amount that the defendant, after having paid RM33,454.19 in installments for the loan, had to pay the bank under thefacility on the date of the order for sale (if granted).

Judgment The court allowed claim albeit for a reduced sum and

granting order for sale. (1) Under a conventional loan, a defaulter need only to pay

the loan amount plus accrued interest and other charges and, upon a disposal of the property at market value, there is usually little that he has to add in order to be released from liability. Further, in the event of default before the end of tenure, the sum the borrower has to pay is limited to the period from the release of the loan until full settlement thereof. On the contrary, under the Al-Bai Bithaman Ajil scheme, the bank claims the loan amount as well as the profit margin thereon for the full tenure of the facility. Thus, while no interest is applied in a conventional loan upon the unexpired tenure, the bank here seeks to claim a profit on the unexpired tenure as well.

(2) The substance of the Property Sale Agreement in the facility is that, it is not a sale price paid by a single payment but by a series of equal monthly installments. It is also a substance of the transaction that profit margin is not a profit arising from a sale price arrived at in a bargain, but based upon the agreed amount and tenure of the facility and the profit rate of the provider. The sale price is then the sum of the provider's purchase price and the profit margin. Further, the profit rate is based on an agreed real or actual profit of the provider expressed as a percentage, and not an interest that is being charged regardless. The profit margin is thus a function of the bank purchase price, the agreed profit rate on a constant rate of return and monthly rests, and the agreed tenure of the facility, and calculated with the profit rate applied to the full tenure of the facility.

(3) Since the defendant is required to pay the profit for the full tenure, he must be entitled to have the benefit of the full tenure. It follows that, it would be inconsistent with his right to the full tenure if he could be denied the tenure and yet be required to pay the bank's profit margin for the full tenure. Furthermore, the sum that is recovered from the facility in the event of default before the end of tenure is applied to other facilities and the bank continues to earn its profit rate on the same sum. Hence, to allow the bank to also recover a profit

margin for the unexpired tenure of the facility means that the bank is able to earn a profit twice upon the same sum at the same time. Likewise, the profit margin that continues to be charged on the unexpired part of the tenure cannot be actual profit. It is clearly unearned profit and therefore contradicts the principle of Al-Bai Bithaman Ajil. Obviously, if the profit has not been earned, it is not a profit and cannot be claimed under the facility.

(4) The argument that the bank could give rebate, which is entirely discretionary, is irrelevant and not an answer to the question of whether in the event of early termination of the facility upon default, the bank is entitled to the unearned profit margin on the unexpired tenure.

(5) The profit margin of the facility is calculated from: (i) the agreed profit rate (at 9% per annum); (ii) the tenure of the facility (300 months); and (iii) the amount of the facility (the sale price). The profit margin could thus be derived with certainty. Even if the tenure is shortened, the profit margin could be recalculated with equal certainty.

(6) Upon the calculations placed before the court, the bank profit at the agreed profit rate of 9% per annum on RM394,172.06 would be RM35,475.49 per annum or RM2959.29 per month or RM98.54 per day. Between 1 November 1999 to the date of judgment on 29 December 2005 was a period of 74 months less 2 days, thereby earning a profit of RM218,767.49. As agreed, the bank is also entitled to a penalty of 3141.44 and, added to the bank purchase price of RM394,172.06, the total due on the date of judgment is RM616,080.99. However, after crediting the defendant with his payment of RM33,454.19, the balance due on the date of judgment is RM582,626.80. The bank is also entitled to profit per day hereafter until full payment at RM98.54 per day.

(7) The bank is entitled to rely upon the existing registered charge to recover the outstanding sum from the defendant arising from the terms of the facility as accepted by the defendant on 3 November 1999. The statutory procedural requirements had been complied with and there was nothing then to bring the application

before the court within the categories of 'cause to the contrary' to warrant the refusal of the order for sale. The court would therefore grant an order for sale by auction under the National Land Code to recover the sum of RM582,626.80 plus profit at RM98.54 per day until full settlement.

Note ISLAMIC CONTRACT OF BBA EQUATED WITH

CONVENTIONAL LOAN, HENCE CALCULATION OF INTEREST/PROFITS EQUATED, BANK CANNOT CLAIM UNEARNED PROFITS The court compared the BBA financing with the conventional loan, and dismissed the bank’s claim for unearned profits, and only granted the profits up to the date of judgment, plus penalty, and daily profit until the full settlement of the judgment sum.

11. Case name Malayan Banking Bhd v Marilyn Ho Siok Lin



High Court, Kuching / 8 June 2006

Facts • The defendant took out a BBA house financing facility with the plaintiff bank. Under this facility, the plaintiff bought the defendant's property at a purchase price of RM500,000 and then sold the property back to the defendant at a purchase price of RM995,205.64 that was to be paid in 240 monthly instalments at RM4,107 per month. As security for repayment, the defendant's property was charged to the plaintiff. However, the defendant defaulted in payments after 14 months. The plaintiff brought the present action against the defendant for sale of the defendant's property by public auction to satisfy the sum of RM928,589.12 being the balance of the sale price less the instalments paid by the defendant.

• The defendant contended that the plaintiff's claim was inequitable because the sale price included interest for a period of 240 months. The defendant also contended that the plaintiff failed to comply with O.83 r.3 of the Rules of High Court 1980 (‘RHC’) since the plaintiff failed to state the amount advanced and the relevant interests. Further, the defendant contended that she had no knowledge of the nature of the BBA banking facility, alleging a plea of non est factum.

Judgment The court granted order for sale of defendant's property for

a reduced sum. (1) The non-compliance of O.83 r.3(7) RHC was curable

by virtue of O.1A and O.2 r.3 RHC. The court shall have regard to the justice of the case rather than non-compliance of the rules. Further, the defendant was not prejudiced by the non-compliance thereof.

(2) The defendant had not shown to the court that she had satisfied the pre-conditions for the plea of non est

factum to apply. As such, that allegation should be dismissed.

(3) The case of Affin Bank Bhd v. Zulkifli Abdullah was an authority for the proposition that it would not be equitable to allow the bank to recover the sale price as defined when the tenure of the facility was terminated prematurely. Further, it was in the public interest that the Islamic Banking industry continued to flourish in this country and abroad. Adopting the interpretation given by the learned judge in the Affin case would enhance the process.


CONVENTIONAL LOAN, HENCE CALCULATION OF INTEREST/PROFITS EQUATED, BANK CANNOT CLAIM UNEARNED PROFITS The court compared the BBA financing with the conventional loan, and dismissed the bank’s claim for unearned profits, and only granted the profits up to the date of judgment, plus penalty, and daily profit until the full settlement of the judgment sum.

12. Case name Malayan Banking Bhd v Ya’kup Oje & Anor

Citation [2007] 5 CLJ 311 / [2007] 6 MLJ 389


High Court, Kuching / 30 August 2007

Facts • At the request of the defendants, the plaintiff had granted the defendants a financing facility amounting to RM80,094 under the Syariah principle of BBA to finance the purchase of a property (‘the property’). The facility was entered on 15 July 2003 and the defendants defaulted after paying the sum of RM16,947.62. The plaintiff sought for an order for sale under Section 148(2)(c) of Sarawak Land Code (‘the SLC’) in consequence of the defendants’ breach by non-payment of the sum of RM167,797.10 due and owing to the plaintiff as at 26 June 2006. The sum actually received by the defendants was only RM80,065, but the amount they had to repay was RM167,797.10 as at 26 June 2006, which sum on the face of it for the purpose of repayment only, would be seen to be excessive, abhorrent to the notion of justice and fair play when compared and contrasted with the secular banking facilities.

• In consequence of this glaring injustice, there were at least two High Court decisions (in Affin Bank Bhd v Zulkifli bin Abdullah [2006] 3 MLJ 67 and Malayan Banking Bhd v Marilyn Ho Siok Lin [2006] 7 MLJ 249) which had restricted the plaintiffs suing under BBA facility from recovering the full profits that they were entitled to under the agreement.

• The issue was whether the court should allow the order for sale for the repayment of the sum in the original form or restrict the order for sale as set out in the two High Court cases or make suitable orders or directions as the justice of the case requires and demands. The question to be decided was whether the plaintiff was entitled as of right to the full profits in the event the BBA was terminated very much earlier as in this

instance, taking into consideration s 148(2)(c) of SLC or for that matter 256 of NLC.

Judgment The court granted the order accordingly.

(1) Islamic contract relating to commercial transaction is not only subject to the terms of the contract but must be decided subject to the Quranic 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 Syariah Advisory Council for their views.

(2) Section 148(2)(c) of the SLC makes it mandatory to exercise equity and the court may not grant the order if it is going to be perverse to the defendants. When it comes to justice and equity, similar powers is also preserved under s 256 of the National Land Code 1965.

(3) As matter of practice, most of the Islamic banks do exercise their discretion and give a rebate, thereby keeping with the true spirit and intent of justice and equity under the Syariah law. Further, Islamic law of commercial transaction will not permit the bank to state the rebate for default under the BBA as Islamic law of contract, though it may appear to be similar to the secular law, is not the same. The Syariah law does not generally permit conditional contract, contract upon a contract, etc. However, this does not mean that Islamic bank cannot openly state their policy and rates of rebate without encapsulating in BBA agreements. This will promote transparency and equity. The fact that ‘ibrar’ is unilateral does not stop Islamic banks from voluntarily relinquishing part of their claim or the court upon default by the customer to demand that proper concessions be granted to the customer on equitable grounds when exercising its jurisdiction and powers for order for sale under s 148(2)(c) of SLC or that of s 256 of NLC.

(4) Equity in this case applied both to the plaintiff as well as to the defendants. To obtain a just result and without dismissing this originating summons, the court would give an opportunity to the plaintiff to demonstrate equitable conduct by filing an affidavit stating: (i) that

upon recovery of the proceeds of sale they will give a rebate; and (ii) specify the rebate. The amount specified must not be a nominal rebate but a substantial one taking into account the prevailing market force by banks generally, and the meaningful decision in the cases of Affin Bank Bhd and Malayan Banking Bhd. If the court is satisfied that the proposed rebate is just and equitable, it shall make an order in terms of the plaintiff’s application, subject to the terms set out in the proposed affidavit. Otherwise, the court may not make the order as prayed or may make some other order as the justice of the case requires.


CONVENTIONAL LOAN, COURT TOOK MIDDLE ROAD – TO UPHOLD BBA WITH CONDITION The court has the benefit to refer to earlier decisions (Zulkifli Abdullah and Marilyn Ho) that the bank is not allowed to claim full unearned profits. The court took the approach to do justice to both plaintiff and the defendant, allowing the full claim by the bank, on the condition that the bank will give rebate and to specify the rebate amount.

13. Case name Bank Kerjasama Rakyat Malaysia Bhd v PSC Naval Dockyard Sdn Bhd

Citation [2008] 1 CLJ 784 / [2007] MLJU 0722


High Court, KL / 14 December 2007

Facts • The plaintiff bank had granted an Islamic banking facility of Bai Al Inah to the defendant. By the facility, the plaintiff purchased certain quoted shares from the defendant for a cash consideration of RM15 million and sold the same to the defendant for a purchase price of RM23,437,500.

• It was a term of the facility that the defendant would repay the said sum of RM23,437,500 by way of 59 installments of RM140,625 each and one last installment of RM15,140,625. The defendant repaid the sum owed till August 2004 or thereat, but had since defaulted resulting in the termination of the facility. Having terminated the facility, the plaintiff sued the defendant for the whole sum due thereunder amounting to RM15,418,147.41, and applied for summary judgment of the claim pursuant to O. 14 Rules of the High Court 1980.

• Summary judgment was however refused by the Deputy Registrar, allegedly for reasons that: (i) the quantum claimed, being more exorbitant than even the ‘interest-ridden loan under the conventional facility’, ought to be litigated upon (following Affin Bank Bhd v. Zulkifli Abdullah); and (ii) there was uncertainty as to the assets used in the transaction and the alleged date of default.

• This was the plaintiff’s appeal against the decision.

Judgment The court allowed the appeal; granted the summary judgment. (1) The defendant did not make it clear what the basis of its

comparison is when comparing Islamic Banking facility to that of the conventional banking facility. If the

defendant is referring to the judgment sum of RM582,626.80 with a daily profit of RM98.54 allowed in the Affin Bank’s case, as compared to RM958,997.94 claimed by the bank therein, then its argument on this point is seriously flawed.

(2) It is to be noted that in Affin Bank, the sum of RM958,997.94 claimed by the bank and disallowed by the court was the final amount that the bank could obtain as a judgment sum under the relevant Islamic banking facility. Be that as it may, the judgment sum of RM582,626.80 with a daily profit of RM98.54 awarded to the bank by the court therein could run to a limitless figure, and could even exceed the total sale price of 958,997.94 stated in the agreement. In short, subject to the defendant therein realizing the amount quickly, the lesser sum awarded could exceed the amount claimed by the bank.

(3) In the present case, the amount claimed by the plaintiff has already reached its maturity and therefore no issue of unearned profit could arise. Consequently, the argument that the plaintiff had based its claim on the full purchase price so as to obtain unearned profit would not hold water. It follows further that the contention that Islamic banking is more burdensome than conventional banking remains a mere speculation.

(4) Certainty is a basic requirement in any contract whether under the Islamic law or under the Contracts Act 1950. However what is certain and what is uncertain is a question of fact. Therefore, the issue to be determined here is whether the assets sold in the form of quoted shares as enumerated in the first schedule to the agreement is uncertain.

(5) The quoted shares here are clearly stipulated and their lot numbers are also stated very clearly. At the point of entering into the agreement, the defendant was aware of what it has purchased and no issue of uncertainty was then raised. Consequently, both parties were ad idem as to the quoted shares and the particular shares and number of shares that formed the subject matter of sale. In any case, if the descriptions of the shares are not clear to the defendant, there is no reason why it should agree to the agreement and pay up part of the purchase price.

(6) The facts showed that when the bank terminated the facilities vide its letter of 7 February 2005, the defendant, far from challenging the amount claimed, had in fact requested for the period of payment to be extended for another 12 months. This very conduct of the defendant showed that it has full knowledge of what and when the breach took place.


ADMINISTRATIVE ISSUES The court considered the full facts of the case and distinguished with the case heavily relied upon by the defendant (Affin Bank), and found that the defendant had not raised any defence with merits to deserve a trial. This is therefore a plain and obvious case for summary judgment to be entered against the defendant under O. 14 of the RHC.

14. Case name Arab-Malaysian Finance Bhd v Taman Ihsan Jaya Sdn Bhd & Ors, Koperasi Seri Kota Bukit Cheraka Bhd (Third Party) and Other Cases

Citation [2009] 1 CLJ 419 / [2008] 5 MLJ 631


High Court, KL / 18 July 2008

Facts • This judgment, which had arisen from the introduction of Islamic financing into Malaysia, is a consideration of the basic principles governing Islamic financing and the jurisdictional limitations imposed upon the civil courts in dealing with these issues because of Malaysia’s constitutional arrangements.

• Bank Islam Malaysia Bhd and other financiers (‘the plaintiffs’) have been directed by the court to present their individual submissions, which involved foreclosure and other civil remedies against various individual debtors of the plaintiff bank, collectively so that the principles governing Islamic financing facilities could be considered more comprehensively, and with the aim of obtaining a more consistent result.

• Although common law sourced civil law and Islamic law are both protected and enabled by the Federal Constitution, limitations arise as to whether civil law and the remedies available therein could apply to an Islamic financing facility.

• Although cases involving Islamic financing are brought in the civil courts it is not for these courts to interpret which mazhab in Islam is to prevail and be applied.

• In addition, Islamic financing in Malaysia is governed by the Islamic Banking Act 1983 and the Banking and Financial Institutions Act 1989 for banks licensed under the respective legislation. However these Acts do not lay down specific provisions for Islamic banking and financing except to say that the aims and operations of the bank should not involve any element not approved by Islam.

• The primary element governing Islamic financing

facilities is the prohibition of riba or interest. • In the cases before the court the defendants had already

purchased a property from a third party and had paid for part of the price. They had then approached the plaintiffs for a facility to complete their purchase. The plaintiffs had required the respective defendant to sell the property he had bought to the plaintiff banks for that balance of the purchase price, according to the terms of bank’s property purchase agreement (‘PPA’).

• The plaintiffs then sold the property back to the respective defendants under the bank’s property sale agreement (‘PSA’), wherein the respective defendants agreed to pay an agreed number of monthly installments of specific sums. As security the defendants were required to execute charge or assignment of the property to the plaintiff.

• The total of the agreed installments added up to the bank’s ‘selling price’, under the transaction known as a Bai-Bithaman Ajil as practised by the plaintiffs.

• This gave rise to the issue as to the correct interpretation to be given to the agreed selling price under an Al-Bai’ Bithaman Ajil contract. It also became necessary to consider the function of the civil court when deciding on cases that involve Islamic financing.

Judgment The court ordered a sale by public auction of the charged

properties with costs to be taxed. (1) When dealing with cases involving Islamic financing

facilities, the civil court functions strictly as a civil court and does not become a Syariah Court. The civil court’s function, in this regard, is to render a judicially considered decision before it according to law and not apply Islamic law as if it were a Syariah Court. Its function is to examine the application of the Islamic concepts and to ensure that the transactions in the cases before it do not involve any element not approved in Islam.

(2) In Islamic financing there is nothing that prohibits the giving of a loan. It is only the riba element in the loan that is prohibited. Hence, loans without riba ie benevolent loans or qard al-Hasan are allowed.

(3) The term Al-Bai’ Bithaman Ajil is no more than a sale

and deferred payment of the price as agreed to between the parties. As such, the selling price is ordinarily paid upon delivery. However if the payment is to be made later, the seller is in effect extending a credit or a loan of that selling price. At the same time it must be remembered that the deferred payment of the selling price is a credit or a loan permissible only because no riba is charged. Furthermore, the key to the argument that the Al-Bai’ Bithaman Ajil scheme does not involve any element not approved by Islam is to read the PSA independently. Therefore it is essential to maintain a bona fide sale in order that the profit or selling price should not be an element disapproved by Islam. Even so, an interpretation of the selling price must not be such as to impose a heavier burden than on a loan with interest.

(4) The court has the authority to look beyond the words of the agreement to the actual facts of the case in order to determine the substance of the transaction between the plaintiffs and the defendants before it draw any conclusions on the nature of the Al-Bai’ Bithaman Ajil transactions. It is necessary to look beyond the labels used and look at the substance particularly in the light of the fact that the interpretation advanced by the plaintiffs resulted in the defendants being burdened with a debt far in excess of that if they had taken interest based on a conventional loan.

(5) Thus when the bank became the owner of the property by a direct purchase from the vendor or by a novation from its customer, as in the present cases, and then sold the property to the customer, the plaintiffs’ interpretation of the selling price ought to be rejected and the equitable interpretation applied. Where the bank purchased directly from its customer and sold back to the customer with deferred payment at a higher price in total, the sale was not a bona fide sale but a financing transaction and the profit portion of such an Al-Bai Bithaman Ajil transaction rendered the facility contrary to the Islamic Banking Act 1983 or the Banking and Financial Institutions Act 1989, as the case may be.

(6) Since the plaintiffs’ actions resulted most likely from a misapprehension rather than intent afterthought, the

plaintiffs were entitled under s 66 of the Contracts Act 1950 to a return of the original facility amount they had extended. It was equitable that the plaintiffs seek to obtain a price as close to, if not more than, the market price as possible, and account for the proceeds to the respective defendants.


CONVENTIONAL LOAN, HENCE CALCULATION OF INTEREST/PROFITS EQUATED, BBA NOT IN COMPLIANCE WITH LAW AND SYARIAH The court took the approach that BBA financing is no different from conventional loans, and as such showed calculations prevalent in conventional loans. It is at one point stated by the court that the BBA financing is not in compliance with the IBA, and has caused much distress amongst the Islamic finance industry players. Later at the appeal (BIMB v Lim Kok Hoe) did the Court of Appeal reversed the decision at the High Court level and upheld the operations of BBA as being in compliance with Shariah, should not be equated with conventional loan, and does not involve the element of riba.

15. Case name Majlis Amanah Rakyat v Bass Bin Lai



High Court, Sibu / 10 February 2009

Facts • By the Bay al Inah facility secured upon a third party charge herein ('the facility'), the plaintiff agreed to sell some assets to the customer for RM24,137.81 upon deferred payment and then repurchased same for cash payment of RM21,000. The customer defaulted in the repayment and following that the plaintiff applied to foreclose the property under s. 148 of the Sarawak Land Code ('SLC').

• Before the learned Judicial Commissioner, the defendant chargor objected to the application arguing, presumably, that the facility, having transgressed the riba rule, was prohibited in Islam. The plaintiff retorted that notwithstanding that the proceeding was predicated upon the provisions of the SLC and pertained to Islamic banking facilities, the court should apply the same principles as applicable in conventional banking facilities.

• Alternatively, it was argued that even upon the assumption that the facility was tainted with riba or contravened Islamic commercial or banking principles, the court could still follow Arab-Malaysia Finance Bhd v. Taman Ihsan Jaya Sdn Bhd ('Taman Ihsan's case), invoke s.66 of the Contracts Act 1950 and grant an order for sale for the sum of RM21,000.

Judgment The court allowed order for sale as prayed.

(1) The general complaint in respect of transactions such as Bay al Inah is that the sale is fictitious and that the whole purpose is to grant a loan with profits thereby breaching the riba rule. The riba rule does not permit one to earn a profit directly from cash transactions unless it is a trade-related transaction with the employment of capital, labour and risk.

(2) The proper procedure to challenge the legality of a contract is by filing an originating process and seeking relief as set out in the Specific Relief Act 1950. However, that does not mean that the court has no power or jurisdiction to consider such issues if properly raised or argued in a foreclosure proceeding. Only that in such proceeding, the court is focused on whether to allow the application for foreclosure as prayed or restrict the sum claimed according to the justice of the case and will not per se make any declaratory order if there is no counterclaim for declaratory relief to set aside, annul or declare the contract null and void.

(3) The challenge to the contract here was not taken according to law for curial scrutiny as to whether the contractual terms said to be pursuant to Bay al Inah was in fact shariah compliant, and there was thus no necessity for the court to deal with the issue. However, for the purpose of the relief, and bearing in mind Malayan Banking Bhd v. Ya'kup Oje & Anor, the court could still consider whether the sum claimed is equitable.

(4) The plaintiffs averred that the tenure of the facility had expired and in consequence there is no issue of rebate arising with the result that the sum prayed should be allowed. There was merit in this submission and the court would hence allow the plaintiff's originating summons as prayed.

Note ISLAMIC CONTRACT OF BAY AL-‘INAH UPHELD

The court upheld the Islamic contract of Bay’ al-Inah, accepted its operational mechanisms and allowed the plaintiff’s claim for order for sale.

16. Case name Bank Islam Malaysia Berhad v Lim Kok Hoe & Anor and other Appeals

Citation [2009] 6 CLJ 22 / [2009] 6 MLJ 839


Court of Appeal, Putrajaya / 26 August 2009

Facts • This judgment concerned an appeal by BIMB, the appellant, against a common judgment delivered by the High Court for 12 cases (‘the common judgment’), which involved Islamic financing. The respondents in all the 12 cases were BIMB’s customers who had entered into BBA with BIMB.

• In the common judgment the High Court judge (‘the trial judge’) questioned the validity and enforceability of the BBA contracts on two main grounds, namely that he found the BBA contracts to be more onerous than the conventional loan with riba which was prohibited in Islam; and that he found that the BBA contract practised in this country was not acceptable by all the four mazhabs in Islam. He thereby concluded that the BBA contracts were contrary to the basic principles of Islam. Based on such a conclusion the trial judge found that an Islamic bank could only recover the balance of the facility plus profit on the balance principal calculated at a daily rate until payment.

• The main issues for determination in this appeal (9 out of 12 appeals) were thus whether the BBA contract was more onerous than the conventional loan agreement with riba and also whether the BBA contract was prohibited in Islam.

Judgment The Court allowed the appeal with costs here and below.

(1) The trial judge’s comparison between a BBA contract and a conventional loan agreement was not appropriate. A BBA contract was a sale agreement whereas a conventional loan agreement was a money lending transaction. As such, the profit in a BBA contract is different from the interest arising in a conventional loan transaction. Thus, the trial judge was plainly wrong when he equated the profit earned by BIMB as being similar to riba or interest when the two types of transaction cannot be similar and when the BBA

contract is in fact a trade transaction. Further, the comparison between a BBA contract and the conventional loan agreement is of no relevance and serves no purpose as the law applicable in a BBA contract is no different from the law that is applicable in a conventional loan agreement. The law is the law of contract and if the contract is not vitiated by any vitiating factor such as fraud, coercion, undue influence, etc the court had a duty to protect the sanctity of the contract entered into between the parties.

(2) By replacing the sale price under the PPA with an equitable interpretation of the same and by substituting the obligation of the customer to pay the sale price with a loan amount and profit computed on a daily basis the trial judge was in fact rewriting the contract for the parties. It is trite law that the court should not rewrite the terms of the contract between the parties that it deems to be fair or equitable.

(3) The trial judge had misinterpreted the meaning of ‘Islamic banking business’ under s 2 of the Islamic Banking Act 1983 (‘the Act’). ‘Islamic banking business’ as defined in s 2 of the Act does not mean banking business whose aims and operations are approved by all the four mazhabs. Further, the judges in civil courts should not take it upon themselves to declare whether a matter is in accordance to the religion of Islam or otherwise as it needs consideration by eminent jurists who are properly qualified in the field of Islamic jurisprudence. Moreover, as we had the legal infrastructure to ensure that Islamic banking business as undertaken by the banks in this country did not involve any element not approved by Islam, the court had to assume that the Syariah Advisory Council under the aegis of Bank Negara Malaysia had discharged its statutory duty to ensure that the operation of the Islamic banks was within the ambit of Islam.

(4) In any event it was clear that the validity and enforceability of the BBA contract had been ruled upon by the superior courts. It is trite law that based on the doctrine of stare decisis a decision of the superior court is binding on all courts below it. In the light of this, the trial judge ought to have held himself bound by those decisions instead of ignoring or disregarding the

decisions of the Supreme Court or the Court of Appeal as that would create misapprehensions in the judicial system.


The court took the approach to uphold BBA, by stating that BBA is shariah compliant, should not be equated with conventional loans, hence the calculations of profit of BBA should not be compared to the calculations of interest under conventional loan, and the conventional loan should not at all be brought into the picture following the different laws governing the two. Earlier judgments have held that BBA is valid, lower courts are bound by it.

17. Case name Light Style Sdn Bhd v KFH Ijarah House (Malaysia) Sdn Bhd

Citation [2009] CLJ 370 / [2009] 1 LNS 193


High Court, KL / 6 March 2009

Facts • The defendant granted the plaintiff an Islamic revolving trade line facilities up to a sum of RM5,600,000, of which the plaintiff utilized on 17 occassions. For each of the occasions, the plaintiff undertakes to purchase the goods from the defendant. Based on this undertaking, the defendant purchases the goods and thereafter sells to the plaintiff, resulting in 17 Murabahah sale agreements. The plaintiff defaulted in 9 occassions, hence bringing to this action.

• This is an application by the plaintiff for an interim injunction to restrain the defendant and its servants or agents from filing, presenting, advertising and or prosecuting a winding up petition against the plaintiff.

• The plaintiff alleges illegality and invalidity of the agreements, being in contravention of BAFIA, IBA and Moneylenders Act.

Judgment The court dismissed the application by the plaintiff.

(1) On the contention that the agreements contravene BAFIA on the ground that it is financing, and the defendant is not authorized to provide financing pursuant to BAFIA, the court found that Section 125 of BAFIA would have saved the Murabahah sale agreements.

(2) On the contention that the agreements contravene IBA on the ground that the defendant held itself out as an Islamic bank but actually holds no license under IBA, the court held that provising financing under the name Islamic banking does not necessitate the definition of ‘Islamic banking business’ under IBA, as such there is no contravention with IBA.

(3) On the contention that the agreements contravene MLA

on the ground that it is in fact money lending, and the defendant is not licensed under the Act, the court held that the plaintiff accepted the facilities and signed the agreements in full knowledge of the mechanism of the financing facilities, to allow the claim would be inequitable because the plaintiff himself ought to have been aware of in the first place.

Note ISLAMIC CONTRACT OF MURABAHAH UPHELD

The court decided that the Islamic contract of Murabahah as practiced by the defendant does not contravene BAFIA, IBA and/or MLA.

18. Case name Arab-Malaysian Merchant Bank Berhad v Foreswood Industries Sdn Bhd & 4 Others

Citation [2007] MLJU 664 / [2007] 1 LNS 539


High Court, Kuching / 23 November 2007

Facts • The plaintiff and its sister-company (Arab-Malaysian Bank Bhd) besides this suit also filed four other separate suits against the five defendants: 1st defendant was the principal borrower and the other four defendants were director-guarantors. At the material time, the 2nd, 3rdand 5thdefendants were directors of the 1st defendant. The 4th and 5thdefendants have both been declared bankrupt by creditors in Sibu and the actions remain in respect of the 2ndand 3rddefendants. Plaintiff applied for summary judgment in all the suits and the affidavits filed are similar.

• By a letter of offer the plaintiff agreed to grant to the 1st defendant a BBA or (deferred payment sale) facility of RM5.0 million for financing the purchase of machinery and equipment for the 1st defendant. The transaction set out in the equipment sale/purchase agreements contain terms of a finance facility based on the Islamic banking concept of BBA. This finance facility involves two transactions between the plaintiff and the 1st defendant, namely: (1) the purchase of the equipment by the plaintiff from the 1st defendant at the purchase price of RM5 million. (2) the plaintiff reselling the same to the 1st defendant for RM5,925,910.00 on a deferred payment basis, payable in 36 monthly installments.

• The appellants say the equipment sale agreement was entered into before the equipment purchase agreement and this was in breach of BBA concepts. Further, the appellants say the equipment sale agreement and the equipment purchase agreement are bills of sale within the meaning of the Bills of Sale Ordinance (Sarawak Cap.68) and are therefore void for want of attestation and registration in accordance with the provisions of

the said Ordinance.

Judgment The court allowed the appellant’s appeal, and decided that this is a fit and proper case for full trial and cannot and should not be disposed off summarily. It is trite that the BBA concept is valid and is now widely used.

Note ISLAMIC CONTRACT OF BBA UPHELD – ADMINISTRATIVE ISSUES The issues in this case are very much administrative and do not involve the substance or working mechanism of BBA. The court ordered full trial as the case cannot and should not be disposed off summarily

19. Case name Fadzillah Ahmadi Bin Alii v Mayban Finance Berhad



High Court, Kuching / 23 November 2007

Facts • The facility agreement in this case was granted by the respondent under the principle of BBA. The plaintiff applied for summary judgment against the defendant for the sum of RM148,955.96 calculated as at 16-07-2003 and costs of the action. The said amount was the balance owing under a facility agreement to purchase 100,000 unit trusts from Abrar Investment fund, entered by the plaintiff as the financier and the defendant as the borrower.

• By way of security for the facility the defendant executed a memorandum of deposit wherein the said unit trusts were deposited with the plaintiff. That was in addition to a RM30,000 fixed deposit also placed with the plaintiff. Under the said agreement, the defendant was obliged to pay monthly installments towards the amount financed (ie the selling price of the unit trusts) but in breach of the same, the defendant defaulted in payment of the said monthly installments. Hence the facility was terminated by the plaintiff's letter dated 25-07-2003. In the same letter the plaintiff also demanded payment of the sum stated above.

• The defence of the defendant prima facie cannot be said to be a sham defence, the defendant raises a number of triable issues which are very much peculiar to issues related to validity of the facility agreement under BBA principle.

Judgment The court allowed the appellant’s appeal, and decided that

this is a fit and proper case for full trial and cannot and should not be disposed off summarily. It is trite that the BBA concept is valid and is now widely used.

Note ISLAMIC CONTRACT OF BBA UPHELD – ADMINISTRATIVE ISSUES

The issues in this case are very much administrative and do not involve the substance or working mechanism of BBA. The court ordered full trial as the case cannot and should not be disposed off summarily.

20. Case name Bank Muamalat Malaysia Bhd v Suhaimi Bin Md Hashim & Anor

Citation [2007] 1 MLJ 275 / [2006] 7 CLJ 321 Court / Date decided

High Court, KL / 24 May 2006

Facts • The claim is filed by the plaintiff for an order for sale under Section 254 of the NLC and an order for repayment of the total judgment sum of RM68,463.62 said to be outstanding under the BBA financing facility as of 12 May 2005 and to end the said financing facility.

• As required under Section 254 and the RHC, notice in Form 16D and originating summons was served on the defendants.

• The defendants entered defence claiming that the default was not until the expiry of the 180 months, whereas the plaintiff is claiming for the total 180 months. The defendant claimed that the plaintiff should not claim profits for the 134 months.

Judgment The court allowed the defendant’s contention, stating that

the defendant is charged on the plaintiff’s profits for the future 134 months. This is unfair and contradicts the Syariah principles for carrying a heavier duty to the customer compared to normal loan that does not follow Syariah principles. The court allowed the plaintiff’s claim from the date the loan was disbursed until the date of judgment (i.e. 46 months), and forbids any claims for the following months.

Note ISLAMIC CONTRACT OF BBA EQUATED WITH CONVENTIONAL LOAN, HENCE CALCULATION OF INTEREST/PROFITS EQUATED, BANK CANNOT CLAIM UNEARNED PROFITS The court compared the BBA financing with the conventional loan, and dismissed the bank’s claim for unearned profits, and only granted the profits up to the date of judgment, plus penalty, and daily profit until the full settlement of the judgment sum.

21. Case name Southern Bank Bhd v Ayer Keroh Park Sdn Bhd

Citation [2005] 6 CLJ 134 / [2005] 4 AMR 597


High Court, Melaka / 25 February 2005

Facts • This was an application by the plaintiff seeking an order pursuant to Section 256, NLC to sell certain land by means of a public auction. The plaintiff had given the defendant banking facilities and the defendant had created three registered charges over the land in favour of the plaintiff by way of security. Upon the defendant's default in complying with the terms of the charges, the plaintiff served the default notices in Form 16D ('the statutory notices').

• As a consequence of the defendant's failure to comply with the necessary payment pursuant to the statutory notices, the plaintiff applied to the land administrator ('the LA') for an order for sale, which was granted. Although two public auctions were conducted, there was no bidder, and the LA consequently issued a certificate and referred this matter to this court under Section 265(3)(b) of NLC.

• The issue that needed to be addressed herein was whether the plaintiff's prayer for an order for sale pursuant to Section 256 of NLC could appropriately be classified as a case falling within the ambit of Section 265(3A) of NLC.

• The defendant also contended that there was a cause to the contrary established ie, that the charge had failed to meet the conditions precedent for the making of an application for an order for sale on the basis that the latter statutory notice was defective and had contravened Section 254(1) of NLC.

Judgment The court allowed the application.

(1) In the light of the absence of a bidder, the reference by the LA to this court was clearly consistent with Section 265(3)(b) of NLC. Upon a true construction of the clear and unambiguous provision of Section 265(3A) of NLC, it was abundantly plain that the plaintiff's

application for an order for sale under Section 256 of NLC would appropriately be classified as a case falling within the ambit of Section 265(3A) of NLC. In the circumstances, the plaintiff's prayer as pleaded in the originating summons was proper and the plaintiff was able to legitimately rely on Section 265(3A) of NLC; hence, the contention of the defendant to the contrary did not appear to be of any merit.

(2) The two statutory notices in Form 16D had been served on the defendant for the purposes of obtaining the order for sale from the LA, which had already made an order in terms thereof and there was no appeal against the LA's order for sale. In this court's view, there could be no issue arising from there and there was no way the defendant could successfully mount the challenge in relation to the statutory notices. Thus, the defendant's case was devoid of merits.



22. Case name Malayan Banking Berhad v Zainal Abidin Abdullah & Anor

Citation [2008] MLJU 180


High Court, Shah Alam / 31 March 2008

Facts • The plaintiff instituted foreclosure proceedings against the defendant for defaulting under the BBA facility. The plaintiff issued Form 16D (notice to remedy default) for the full amount under the PSA.

• The defendant claimed that the Form 16D is defective in contravention of Section 254(1) of NLC, and that the plaintiff should not have claimed the full amount under the PPA for profits of the unexpired tenure of the BBA facility.

Judgment (1) The court dismissed the action by the plaintiff on

administrative grounds, the Form 16D was found to be defective, but the plaintiff is at liberty to issue a fresh Form 16D and if need, to institute a fresh foreclosure action.

(2) On the issue of the claim for full amount under the PPA, assuming the Form 16D is valid, the court held that it is unconscionable for the plaintiff to claim for the realization of the full balance sale price when the full tenure of the facility has not yet expired. In other words, the plaintiff should not claim for the unearned profits.

Note DESPITE BEING DISMISSED ON

ADMINISTRATIVE GROUNDS, THE COURT CONSIDERED TO UPHOLD THE BBA CONTRACT ONLY UP TO THE DATE OF JUDGMENT The court took the approach to follow the calculations mentioned in Affin Bank v Zulkifli Abdullah taking into account only profits up to the date of judgment, not taking into account unearned profits as mentioned in the PSA and the Charge documents.

23. Case name Bank Kerjasama Rakyat Malaysia v Sea Oil Mill Sdn Bhd & Anor



High Court, KL / 17 April 2003

Facts • The plaintiff granted a revolving credit facility to the defendant based on the contract of Bay’ al-Inah for an amount not exceeding RM20 million.

• The defendant defaulted repayments and the plaintiff applied for summary judgment to be entered on the defendant, but the application was rejected by the senior assistant registrar. This is an appeal against the decision by the senior assistant registrar.

• The defendant claimed that the buy and sale transactions under the Bay al’Inah concept are void, and it is mere lending transaction.

Judgment The court allowed the plaintiff’s appeal to enter summary

judgment on the defendant, and upheld that operations of financing facility under the contract of Bay al-‘Inah. The court held that the defendant willingly entered into the contracts, and knowingly agrees to the terms and conditions thereto. It is unfair for the defendant to deny liability therafter.

Note ISLAMIC CONTRACT OF BAY AL-‘INAH UPHELD Although the decision is purely administrative, the upholding of the Bay’ al-Inah concept is attributed to the court for taking into consideration of line of Islamic financing in Malaysia, and ordered accordingly for summary judgment be entered on the defendant.

24. Case name Oriental Bank Berhad v Gandingan Ilmu Sdn Bhd & Ors

Citation [2003] MLJU 485


High Court, KL / 4 May 2003

Facts • The respondent granted banking facilities to the appellant based on the contract of BBA for the amount of RM7.5 million.

• The appellant defaulted repayments and the respondent applied for summary judgment to be entered on the appellant. The application was granted by the senior assistant registrar. This is an appeal against the decision by the senior assistant registrar.

• The appellant claimed that the respondent failed to manage the loan in accordance with Islamic principles.

Judgment The court dismissed the appellant’s appeal, and upheld that

operations of financing facility under the contract of BBA. The court held that there are no triable issues to move a full trial.

Note ISLAMIC CONTRACT OF BBA UPHELD Although the decision is purely administrative, on whether tere are any triable issues which the court found to be not affirmative, the upholding of the BBA concept is attributed to the court for taking into consideration of line of Islamic financing in Malaysia, and upheld the earlier decision by the senior assistant registrar for summary judgment be entered on the appellant.

brief on islamic finance cases 1987-2009

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