ensuring shariah compliance at the courts and the role of the shariah advisory council in malaysia

JOBNAME: No Job Name PAGE: 1 SESS: 21 OUTPUT: Sat Jul 4 16:00:47 2015//mlja/2015/Vol3/mlja2015_3_00002

ENSURING SHARIAH COMPLIANCE AT THE COURTSAND THE ROLE OF THE SHARIAH ADVISORY

COUNCIL IN MALAYSIA*

DR. SHERIN KUNHIBAVA**

According to the Islamic Financial Services Act 2013, an Islamic financialinstitution must comply with Shariah, this includes Shariah compliance for all itsproducts and services. There are in place a number of mechanisms to ensure that theproducts and services of an Islamic financial institution are Shariah compliantespecially at the product development and application stage. However at the productenforcement and dispute resolution stage, Shariah compliance is an issue. Thisresearch investigates Shariah compliance at the dispute resolution stage by analysingpast case law in Malaysian courts where Shariah compliancy has been disputed.Thechanges in the laws and cases during each period are also discussed. This researchrecommends that the role of the Shariah Advisory Council of Bank Negara beextended to more than just ‘ascertaining Islamic law’. It also recommends allowingother parties to seek advice from the Shariah Advisory Council, that the resolutionsof the Shariah Advisory Council are updated regularly, and the questions referred toit 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, IslamicFinancial Services Act 2013, Practise of Islamic banking, Ascertainment of IslamicLaw.

INTRODUCTION

Shariah compliance is at the heart of Islamic finance; it is what distinguishesIslamic finance from conventional or commercial finance. Shariah complianceis also a head to toe requirement since all the ‘activities, operations, businessand 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 Shariahcompliance is required in three stages: at the product development stage,during the product application, and lastly at the enforcement, and possibledispute resolution of the product and transaction.

At the product development stage, Shariah compliance is achieved throughfirstly the consultation, vetting procedure and approval of the individual

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Role Of The Shariah Advisory Council In Malaysia


Shariah Committees1 of IFIs and then the vetting and final approval by theShariah Advisory Council (‘SAC’) and Bank Negara Malaysia (‘BNM’). At theproduct application stage, according to the Shariah Governance Framework,Shariah compliance is achieved through Shariah review, the Shariah riskmanagement mechanism, Shariah auditing and consultation with the Shariahcommittees of IFIs. At the enforcement and dispute resolution stage, Shariahcompliance 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 toensure that products comply with Shariah at the product development stageand application stage; it is however at the dispute resolution and enforcementstage that Shariah compliance may be left unchecked. As observed by AssocProf 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 bankingpractices in such countries. In short, although the transactions entered by theparties may be Shariah compliant in the first place, but upon enforcement of thecontracts, the court may make orders and decisions that may sideline the Islamiclegal principles.2

This article provides insight into this understudied area of Shariah complianceand its effectiveness at the enforcement stage at the courts by analysing past caselaw where Shariah compliance was one of the issues facing the court judge. Thisresearch will focus on whether Shariah compliance is achieved at the Malaysiancourts.

The methodology used in this research is case law and case judgmentanalysis. This consists of selecting and analysing cases from case law3 databasesin Malaysia where the parties in the cases have claimed Shariah non-compliance of Islamic financial products or services. Thus the inclusion criteriafor analysis of the cases in this study are: firstly Islamic banking and finance

1 For further information on the role of the Shariah advisory committee on Shariahcompliance see this article: Rusni Hassan, Agus Triyanta, and Adnan Yusoff, ‘ShariahCompliance Process in Malaysian Islamic Banking’ [2011] 5 MLJ lxxx.

2 See Engku Rabiah Adawiah Engku Ali, 'Constraints and Opportunities in Harmonizationof 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.

3 Such as LexisNexis, CLJ Law and West Law.

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products and services, and secondly a claim that there has been Shariahnon-compliance. Cases where Shariah non-compliance was impliedlycontested and not expressly contested were also included in the analysis. Inother words, not all past case laws on Islamic banking and finance products andservices have been included in this research, only those that fall within theinclusion criteria. In analysing the case law and Shariah compliance, the SAC’srole in jointly resolving issues of Shariah compliance at the dispute resolutionstage and how it has evolved is also explored.

This research is presented in the following way: the first section of thisarticle begins with an analysis of cases prior to the SAC and then discusses theevolution of the SAC. Thereafter, this research analyses the caseschronologically according to the amendments made to the relevant laws. Thisstudy ends with further thoughts and recommendations for better Shariahcompliance at the enforcement stage.

SHARIAH COMPLIANCE IN ISLAMIC BANKING IN MALAYSIANCOURTS BEFORE THE SAC

In Malaysia, Shariah compliance has been an issue in local cases possibly fromas early as 1987, before the SAC was set up, and before the SAC was given themandate to be the ultimate authority on Shariah matters in the industry. It is‘possibly’ the first case claiming Shariah non-compliance, because no mentionof Shariah or Shariah non-compliance is made in the case, however thedefaulting party claimed the transaction was actually a loan agreement and nota 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, therespondent, bought printing equipment from the appellant and leased theequipment back to them — thus providing financing.

There was a first agreement for a lease of seven years. The appellant had topay rentals and also two rental deposits. The appellant defaulted. The partiesentered into a second agreement whereby, while there were no rental deposits,there was a security deposit and rentals to be paid by the appellants. Theappellants again defaulted. Bank Islam Bhd took steps to take possession of theequipment but was prevented from doing so because the appellant shut downthe premises. Bank Islam Bhd applied ex parte for a mandatory injunctionwhich was granted. The appellants appealed.

One of the main issues raised by the appellant was that the lease agreementwas 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. Therelationship between the parties was that of a lessor and a lessee; therespondents were the legal owners of the equipment, thereby retainingownership of it while the appellant at whose request the equipment waspurchased had the possession and use of the equipment. The Supreme Courtdid not examine whether the transaction was really a lease according to Shariahprinciples or just a loan agreement. Islamic banking was at a very early stageduring the time the transaction was entered into; it was actually entered inDecember 1983, the very year Bank Islam Bhd was incorporated and theIslamic Banking Act 1983 was passed.

After Tinta Press, there were other cases which involved parties who hadengaged in Islamic banking but in none of these cases was the defence ofShariah non-compliance raised,4 until the unreported case of Bank IslamMalaysia Bhd v Shamsuddin Bin Haji Ahmad [1999] MLJU 450 in the HighCourt of Alor Setar. In this case, the defendant claimed that there was thepresence of ‘interest’ in the charge of the case and this was prohibited in Islamand was against the Islamic Banking Act 1983. The court held that thisargument was not raised by the defendant in his affidavit but only in hisdefence, thus thwarting the plaintiff ’s opportunity to defend and explain itselfthrough the affidavits. The court thus held that it did not have to consider thispoint. However, as the plaintiff had nevertheless given an explanation on thepoint of ‘interest’, the judge believed it to be the correct position. The judgestated that no interest existed in the transaction because the amount claimedwas the resale price to the defendant.

Both of the above cases reveal the judges’ literal approach in viewing thetransactions. The transactions were read at face value only with no questionsasked by the judges on the actual practise of Islamic banking. The judgesbelieved that the arguments made by the former customers of the IFI weremade to escape from paying the amount due. While in all honesty this wascorrect, one wonders what would have happened to the Malaysian Islamicfinancial industry if the judges at this stage of case development had taken amore purposive approach and searched deeper as to whether there was interestor whether the lease was actually a loan? Had the judges done so, would thebankers have taken more care when conducting Islamic business to ensureShariah 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 MalaysiaBhd [1996] 4 MLJ 295.

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the Islamic financial industry by ensuring its continued progress by upholdingthe transactions? These questions and many more will never be answered.

The defence that Islamic banking transactions did not comply with Shariahwas naturally raised in further cases. However these cases existed after thelegislative developments which led to the requirement of referring a Shariahmatter to the SAC. The next part of the article will explain the development ofthe legislation and the SAC.

EVOLUTION OF THE SAC’S ROLE IN SHARIAH COMPLIANCE ATTHE MALAYSIAN COURTS

Islamic banking was formally introduced in Malaysia through the enactment ofthe Islamic Banking Act 1983 and the establishment of Bank Islam Bhd in thesame year. Bank Islam Bhd was the first fully fledged Islamic bank that offeredIslamic banking products and services. This was to remain for ten years.5

During this time, the Shariah committee of Bank Islam Bhd ensured thatproducts 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 companieswere allowed to offer Islamic banking products and services under what wasknown as the Islamic banking scheme also known as ‘Islamic windows’.7 Thismove was to enable a larger proportion of the public whether Muslim ornon-Muslim to participate in Islamic banking.

In light of this, and the fact that each institution offering Islamic bankingproducts could have their own Shariah committee, it became essential to haveone ultimate authority to have the final say as to whether a product was Shariahcompliant to ensure consistency in the market, and prevent a situation wheredifferent financial institutions would be offering different Islamic bankingproducts based on the interpretation of their individual Shariah committee.

5 Nik Norzul Thani, Mohamed Ridza Abdullah, and Megat Hiziani Hassan, Law andPractice of Islamic Banking and Finance, 2nd Ed (Petaling Jaya: Sweet & Maxwell Asia,2010) p 103.

6 Abdul Hamid Mohamad and Adnan Trakic, 'The Shariah Advisory Council's Role inResolving Islamic Banking Disputes in Malaysia: A Model to Follow?' Isra Research Paper 47(2012): 3.

7 Thani, Abdullah, and Hassan p 245.

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Thus the SAC was established at Bank Negara in 1997 to be the ultimateauthority in Islamic banking and takaful on Shariah compliance for productsintroduced by IFIs. 8

However it was only in 2004 that the role of the SAC was extended throughs 16B(8) of the Central Bank of Malaysia (Amendment) Act 2003 (ActA1213),. The SAC was given the mandate to be the ultimate authority toascertain Islamic law for the purposes of dispute resolutions in Malaysia.Section 16(8)of the Central Bank Act 1958 set out that in any proceedingsinvolving Shariah issues the court or arbitrator may take into consideration anywritten directives issued by Bank Negara after consultation with the SAC orrefer the issue to the SAC for a ruling. The decision of the SAC was binding onan arbitrator but not on a court. However this discretion given to the court wasrevoked in 2009 with the coming into force of the Central Bank of MalaysiaAct 2009 (‘CBMA 2009’), where it is now mandatory for courts to refer to anypublished rulings and in the absence of published rulings, refer a question tothe SAC for a ruling on Shariah matters and the ruling ‘shall’ be followed by acourt of law: ss 56 & 57 of the CBMA 2009.

It would seem that the courts are required to refer to published rulings of theSAC first and if there is no rulings on that point, then the court can refer thematter to the SAC, this sequence of reference is suggested in the ManualRujukan Mahkamah dan Penimbang Tara kepada Majlis Penasihat SyariahBank Negara Malaysia (Manual for Reference by the Courts and Arbitrators tothe 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. Thelatest published rulings of the SAC known as the resolutions of the SAC aredownloadable from Bank Negara’s website and include all the rulings made bythe 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 ona 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 alsofound on BNM’s website in summarised form for the SAC meetings from 30April 2013 onwards (ie from the 134th meeting of the SAC onwards). Thismeans that when the SAC meets and discusses Shariah issues on a monthly or

8 Mohamad and Trakic: 3.9 BNM, Manual Rujukan Mahkamah Dan Penimbang Tara Kepada Majlis Penasihat

Syariah Bank Negara Malaysia Di Bawah Seksyen 51 Dan Seksyen 56 Akta Bank NegaraMalaysia 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 andmade accessible to the public. To access the ruling, one has to click on eachindividual meeting held by the SAC, for example ‘The Shariah AdvisoryCouncil 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 investmentcapital by the wakil.10

This is definitely a good move. However these rulings are brief and are notbacked 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 theruling has not been added. The most challenging part for a researcher or judgeseeking a recent ruling relevant to the case before it is the inability to easilysearch for the SAC rulings from the meetings on a particular Shariah point. Forexample, if the Shariah issue facing the court is on Musharakah mutanqisah, asimple search with these keywords would not be possible for contemporaryrulings. A judge would have to click open each and every separate meeting andread it before being able to find a ruling relevant to it. Even then if a ruling isfound, the summary provided may be too brief to answer the issue before thecourt.

It is suggested that the resolutions which was last updated in 2011 inEnglish and 2012 in Malay are updated frequently and all the latest rulings beadded so that judges, arbitrators, lawyers, bank officers and all members of theIslamic 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 11February 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 andnew SAC rulings could deprive the industry of much needed guidance onShariah.

Another point is when a Shariah issue is referred to the SAC by the courts orarbitrators, details of the question posed by the court or arbitrator and thesubsequent rulings on the Shariah matter need to be published for the use ofthe industry. In fact the court and the case name should also be made known sothat in the event research needs to be done on the Shariah issue and the facts ofthe case, the researcher who could be a judge, arbitrator, or lawyer could easilyfind the information. Currently the only information available on the websiteis 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 141stmeeting on 26 November 2013....

...

SAC has also deliberated issues related to the Islamic financial transactionreferred by the court.11

Thus greater emphasis on the accuracy and availability of rulings should bemade by BNM to help the courts, lawyers, bankers and even the customers inunderstanding the Shariah provision applicable to them.

Next this research moves on to analysing case law on how Shariahcompliancy was ensured during the period when it was at the court’s discretionwhether to refer a Shariah issue to the SAC.

THE ROLE OF THE SAC IN SHARIAH COMPLIANCY AT THECOURT AND THE CASES DURING SECTION 16B(8) OF THECENTRAL BANK ACT 1958

Prior to the CBMA 2009 during the period from 2004 to 2009, it was onlyoptional for the court to take into consideration any written directives issuedby BNM after consultation with the SAC or refer Shariah matters to the SAC.During this phase, a number of cases were decided where the Shariahcompliancy of the transaction was questioned by the defendants (formercustomers of the IFI).

11 Ibid.

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During this period, the fact that the courts were given an option to referShariah matters to the SAC was acknowledged, however none of the casesduring this period actually referred any Shariah matter to the SAC for anyruling.

A. Shariah Compliance Handled by the Courts Alone

The first case in which the court extensively discussed Shariah compliance of anIslamic banking product is Arab-Malaysian Merchant Bank Bhd v Silver ConceptSdn Bhd [2005] MLJU 201. This case is interesting because the parties to thiscase met three different times at three different courts under three differentjudges based on the same set of facts. In all three cases, the defendants claimedthat the Islamic banking facility was not Shariah compliant. The cases, courtsand 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 Alamheard 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 AbdulWahab 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 DatukRohana J (as she was then).

In addition to the above, foreclosure proceedings was also taken out againstSilver Concept Sdn Bhd as chargor at the land office in respect of the chargedproperties held under land office title.

The cases involved an Al Bai Bithamin Ajil (BBA) facility and a Al-Wujuhfacility which were secured by charges on a number of titles on a land. Tounderstand why there were three cases on the same set of facts the lawyer, MsFadzilah 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 actionagainst the property, the second case was a civil action on the BBA facility andthe 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 EngPlantations Sdn Bhd and to part finance the acquisition of the land, thedefendant had requested a consortium of financial institutions, with theplaintiff 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 defendantand the vendors to provide the defendant a revolving Al-Wujuh facility. TheAl-Wujuh agreement consisted of a BBA facility and revolving drawing rightson an account maintained by the plaintiff as part agent.

In executing the BBA facility the defendant, the plaintiff as agent and NgEng Plantations Sdn Bhd entered into a sale and purchase novation agreement(‘the novation agreement’). This novation agreement involved a tri-partiteagreement whereby certain rights and obligations between Ng Eng Hiamplantations Sdn Bhd and the defendant under the original sale and purchaseagreement were novated from the defendant to the plaintiff on behalf of theconsortium.

The BBA facility and the Al-Wujuh facility were secured by way of twocharges entered on the land. The defendant later defaulted in an instalmentpayment on both facilities. The plaintiff cancelled the facilities andcommenced foreclosure proceedings in respect of the land at the Shah AlamHigh Court for titles held under registry title and commenced foreclosureproceedings 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 Facilitywas a loan agreement and not a sale agreement with fixed interest rate payableby the defendant. Likewise the BBA Facility had the same flaws. The very factthat the properties were charged accentuated and confirmed the loan status.

On behalf of the plaintiff, it was contended that just because a charge wascreated and a debenture was issued, it did not mean that the transaction was aloan transaction. Further, the transaction was made with the full knowledge ofthe defendant that the transaction was created within the boundaries of Shariahcompliance. Also it was submitted that the profit element in the case was basedupon Islamic banking principles.

In all three cases the plaintiff ’s claim succeeded. The learned judges decidedthe issue of Shariah compliance without referral to the SAC.12 The first caseactually 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 Berhadv Lim Kok Hoe & Anor and Other Appeals [2009] 6 MLJ 839 which had upheld the Al-BaiBithamin Ajil contract, and thus the learned High Court Judge Rohana Yusoff followingprecedent upheld the agreement and held that the al-Wujuh revolving facility ‘is made onthe basis of a fluctuating facility on a short to medium term…method of financing via theprinciple of Bai Bithamin Ajil…It is wrong for the defendant to say it is interest when bothagreed them to be profit.’

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compliance during this era. That is - the courts recognised the role of the SACbut decided for themselves whether the agreements were Shariah compliant.

In the first case, learned Judge Suriyadi Halim Omar explained the role ofthe SAC and its importance of resolving Shariah issues, however went intogreat lengths explaining the intricacies of Islamic banking and its sources andthen decided on the Shariah compliance of the transaction without referringany 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 itsopinion. Under the above new section 16B of Act A1213, the Syariah AdvisoryBody appears to have a rather wide scope of referral, and not merely confined tothe issue of whether the matter at hand involves any element which is notapproved by the Religion of Islam. Needless to say the final say must rest with thepresiding judge (see s 16B(9)(a)).14

The judge deciding without reference to the SAC on the Shariah compliance ofthe transaction:

Notwithstanding the above, I reject any argument that injects the argument thatit 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 paidat a specific time, with his coat of mail as security. I am unable to acquiesce to anyargument too that, just because a larger sum is agreed to be paid back founded ona buy back concept, with the defendant openly having requested for deferredpayment, and with the differential sum resembling interest, the agreement mustbe void. I am unable to acquiesce to such a suggestion as there is no clear text thatprohibits such a transaction entrenched with all those ingredients. Even thefollowers of the Shafii and Hanafi schools and the majority of Muslim scholarsconsider it lawful, calling it 'Shifa al ilal fi hokum ziyadat al-thamam li mujarradal-ajal (translated: The reason for increasing the price due to lapse of time)' (TheLawful 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 theSAC for a ruling, the answer is provided in the second case by learned judgeAbdul 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 notmandatory by the courts and the SAC’s rulings are not binding thus referenceto the SAC was not made. Another pertinent point made by the learned judgeis that the issue faced by the court was not on the Shariah compliance of theBBA product, for this has already been vetted by the SAC, but the Shariahcompliance of how the BBA contract is being practised. This is a matter ofinterpretation 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 validas it involved the three parties --the original vendor, the purchaser and the new orsubstituting vendor, in other words it was not just an arrangement between the defendantand the plaintiff which resembled very much the conventional practice of a loan – this wasthe fatal flaw in the transaction arrangement in Arab-Malaysian Finance Bhd v Taman IhsanJaya 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 ofmoney became due, there was no issue of ‘unearned profit’ a term coined by the learnedjudge in Arab-Malaysian Finance Bhd v Taman Ihsan Jaya Sdn Bhd & Ors (Koperasi Seri KotaBukit Cheraka Bhd, third party), taken to mean the amount of profit claimed by thefinancial institute for the period not yet expired in the financing duration when thecustomer 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 Shariahcompliance of the product before it is offered to the public, and not Shariahcompliance of the transaction as it is being practised? To answer this lets have alook 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 Lumpurbefore Abdul Wahab Patail J. In this case, it was not stated in the judgment thatthe defendant claimed the facility was Shariah non-compliant however thecourt compared a conventional home loan to the BBA financing and decidedthe latter was more onerous than the former, thus bringing up issues of Shariahand compliance. The learned judge also highlighted the function of the SACand 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 defendanttook a secured house financing of RM394,172.06 from the plaintiff bankthrough the Islamic financing scheme of BBA (‘the facility’). The facilityspecified, inter alia, that upon default, the defendant would repay not only thesum financed but also the bank’s profit margin spanning through the 25-yeartenure of the facility (pre-quantified and known as the ‘bank selling price’).Thedefendant defaulted in 2002 after paying the bank RM33,454.19, and thebank, pursuant to the terms of the facility, claimed from the defendant thebank selling price of RM958,909.2118 and applied for an order for sale of thecharged property. The issue arose as to amount the defendant had to pay andwhether the whole amount of RM958,909.21 should be paid by thedefendant, notwithstanding the fact that he had only enjoyed a few years of thefacility.

The judge noted that in a conventional loan which procured interest, adebtor would be far better off by not having to pay more than the tenure forwhich he enjoyed the financing facility. The learned judge refused to allow theIslamic bank to claim the whole bank selling price and went on to calculate theamount 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 wasmuch lower as he had been an employee of the Islamic bank at that time, the amount wasrevised 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 whetherto give rebate or not.19

On the SAC, Abdul Wahab Patail J explained the reason for not referring aquestion 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 issuebefore it is not a question on Shariah law but one on interpretation andapplication of the terms of the contractual documents before it. This is thesame approach the same judge took later in the case of Arab MalaysianMerchant 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 ‘bankselling price’ – whether the bank selling price in cases of early termination dueto default means the bank is entitled to the whole bank sale price or only theamount for the tenure up to the default. Nevertheless, it is opined that tointerpret the issue, a clear understanding of Shariah is required especially thenature 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 CLJ796 in the High Court of Sabah & Sarawak, Kuching, JC David Wong Dak Wah, whichchronologically came after the Affin case followed the approach taken by J Abdul WahabPatail. The facts were similar to the Affin case. The defendant obtained an Al-Bai bithaminAjil financing from the plaintiff bank. The instalments were for 240 months but thedefendant defaulted after 14 months. The question arose as to whether the plaintiff couldclaim 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 teachingsof Islam and consistent with the approach of the Affin case it would not be equitable toallow the plaintiff bank to recover the sale price as defined when the tenure of the facility isterminated prematurely. The learned judge went on to calculate the amount due by thedefendant. No mention was made by the court on referring a question to the SAC. Thecourt 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 thehigh court has available to him many resources to refer to when making ajudgment. With all these resources at hand, it could be that in the case ofunderstanding 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 oneof 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 HamidSultan Abu Backer JC had to again decide whether the bank was entitled to thewhole bank selling price when the defendant defaulted on a BBA financingfacility. In this eloquently written judgment, the learned judge reviewedprevious authorities, reviewed in detail justice and equity in Islam, went intodetail about the need to avoid riba and gharar in Islamic transactions, andnoted that Islamic banks were actually trading houses rather than financialinstitutions because of the permissibility of trading and the prohibition of ribain Islam. The learned judge noted that the issue in the case was not about thevalidity of the BBA but on the interpretation of whether the Islamic bank couldclaim for the bank selling price.

He also ruled that justice means justice to the defendants and plaintiffs, andtook note of the fact that ibrar is normally exercised by the Islamic banks andthat Islamic law of commercial transactions will not permit the Islamic bank tostate the rebate for default in the BBA. However he also noted that in the nameof justice and equity and to ensure transparency there was nothing thatprevented the Islamic banks from openly stating their policy and rates of rebatewithout stating them in the BBA agreements.

The learned judge decided:21 as equity applied to the plaintiff and thedefendant, the plaintiff was to be given the opportunity to demonstrate equity,by filing an affidavit which stated the rebate, and the amount of rebate. Thelearned judge required the amount of rebate to be according to the prevailingmarket practises of Islamic banks taking into account the decision of the Affincase. The judge was to review the amount and if satisfied allow it, but if notsatisfied make such other order as the justice of the case required.

On matters of Islamic law, the learned judge believed that a judge has thechoice 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 oneof 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 questionsto the SAC for their views. 22

The next case that discussed the SAC was Arab-Malaysian Finance Bhd vTamanIhsan 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 CourtMalaya, Kuala Lumpur Abdul Wahab Patail J.

This infamous case literally changed the landscape of Islamic homefinancing. The case involved several cases which were bundled together anddecided jointly by the learned judge. All the defendants in the cases werecustomers who obtained the BBA facility to finance their home purchase. In allthe cases, the defendants had already purchased their property from a thirdparty and partly paid the price. They had then sought Islamic bankingfinancing from the plaintiff banks. The plaintiff banks entered into a directbilateral agreement which involved the selling of the property by thedefendants to the plaintiffs under a Property Purchase Agreement (PPA) andthen the plaintiffs selling it immediately back to the defendants under aProperty Sale Agreement (PSA); in other words a Bai-inah was executed, theoriginal vendor was not a party to the agreements and there was no novationagreement performed. The defendants defaulted, and the plaintiffs claimed forthe whole bank selling price. The defendants raised the issue of whether theagreements entered into involved elements not approved by the religion ofIslam, that is, whether the agreements were Shariah compliant.

The learned judge in delivering his judgment discussed, inter alia, themeaning of the term ‘religion of Islam’, ‘riba’ and the difference between profitin a sale and interest in a loan. He believed the difference between the two couldnot be in form alone but must be in substance as well. He stated it ‘is the realityand not the form and labels that matter.’23 The learned judge also noted thatthe SAC had already approved the BBA contract and Bai inah, and otherIslamic 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 atpara 12.

23 [2007] 5 CLJ 311at para 29.

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not approved by the religion of Islam. There was thus ‘neither necessity norreason 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 thecourt.’24 The learned judge concluded that it was the function of the court ‘toexamine the application of these Islamic concepts, as to whether asimplemented, and in the particular cases before it, the transactions do notinvolve any element not approved in the Religion of Islam. It is a question oflooking at the particular facts. That remains the judicial function of the courtwhich it cannot abdicate.’25

The learned judge believed that as the SAC had approved the Islamiccontracts it was not an issue of whether these contracts were Shariah compliantbut a question of how these contracts were applied in practise. In other words,whether the application of these Islamic contracts were Shariah compliant, andit was the function of the court to determine this. This approach taken by JAbdul Wahab Patail was consistent with his former rulings.

On the facts of the case, the learned judge concluded that where parties tothe contract entered into a novation agreement which involved the substitutionof 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 willcalculate the ibra to be given and not leave it to the discretion of the Islamicbank. On the other hand, in cases where there was no novation agreement andthe bank directly buys the property from the customer and sells it back to thecustomer, it is not a bona fide sale. In such cases, it is a financing transactionand contrary to the Islamic Banking Act 1983 and the Banking and FinancialInstitutions Act 1989. In such cases, as the present, the plaintiffs are entitledunder s 66 of the Contracts Act 1950, the return of the original facility amountthey had extended.

The learned judge thus concluded that when Islamic banks practise BBA, itmust 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 originalvendor 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 distinguishesbetween theory and practise. While the theory has been approved by the SACas Shariah compliant, it is the practise which has to be examined for Shariahcompliance. Whose function is this? Is this the job of the civil courts only ordoes the SAC have a role in this? The SAC’s role according to the Central Bankof Malaysia Act 1958 and the CBMA 2009 is to ascertain Islamic law, thequestion occurs whether this includes determining whether the practise ofIslamic banking and finance is Shariah compliant? More on this will beexamined below when discussing the next case which was the appeal of theTaman Ihsan Jaya. This issue was explored directly as we will see later in the caseof 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 otherAppeals [2009] 6 MLJ 839 (‘Lim Kok Hoe’) was the appeal case of Taman IhsanJaya and was heard at the Court of Appeal by Raus Sharif, Abdul HamidEmbong and Ahmad Maarop JJCA.

The Court of Appeal allowed the appeal and held that J Abdul Wahab Patailhad 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 toa conventional loan agreement which is a money lending transaction. Theprofit earned by the BBA transaction by the Islamic bank is not the same as theinterest of a conventional loan. However the laws that apply to both thetransactions are the same.

Secondly, J Abdul Wahab Patail had rewritten the contracts of the parties bystating that the profit should be calculated by the court as in Affin’s case whenthe BBA was conducted by novation and the term had not expired yet.This waswrong.

26 This judgment shook the Islamic banking industry and many Islamic finance experts wroteon the judgment of J Abdul Wahab Patail, some defending the BBA contract and its practiseothers not. See for example Fakihah Azahari, 'Islamic Banking: Perspectives on Recent CaseDevelopment' [2009] 1 MLJ xci. Ashgar Ali Ali Mohamed, 'Al-Bai' Bithaman Ajil - ItsConsistency with the Religion of Islam: With Special Reference to Arab-Malaysian Finance BhdV 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’sinterpretation of the term ‘religion of Islam’. The Court of appeal held that thereligion of Islam does not mean as approved by the four madzhab in Islam, andthat in actual fact there are more than four madzhabs anyway. Fourthly, thereexists a legal infrastructure for the courts to rely on the SAC on matters relatingto the religion of Islam; the Court of Appeal held that the court cannot take itupon itself to decide what the religion of Islam is when the Shariah board andthe SAC exist and have approved the products. Lastly, there existed case lawprecedent that the BBA was binding such as in the case of Bank Islam Malaysiav 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 hadactually acknowledged that the BBA was found to be Shariah compliant intheory, it was with the practise of the BBA that he was concerned with, and itis with practise that the J Abdul Wahab Patail opined should be within thepurview of the court’s jurisdiction. Instead, the Court of Appeal held that as theSAC had approved the instrument it should thus be valid.

It is opined that Shariah compliance should not be assumed in practise justbecause 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 HighCourt judge’s approach in examining the practise was correct. The questionremains however whether the role of the SAC includes practise and whether thecourts should refer it to the SAC to decide or whether it is within the purviewof the court’s jurisdiction. If J Abdul Wahab’s approach is taken and it is for thecourts to decide, then the role of the SAC is severely diminished.

The truth of the matter is that practise must be Shariah compliant and thisis a very important requirement. If the role of the SAC is only to explain andascertain the Islamic law on an issue and not decide on whether the practise ofthe industry is Shariah compliant, then the role of the SAC is narrow withregards to ensuring Shariah compliance when the product is at the enforcementstage. At the same time, it is the court’s jurisdiction to decide a case on the factsof the case and this should include whether a matter is practised in a Shariahcompliant manner.

However the question arises as to whether the courts are equipped to decideon 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 HighCourt 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 offact 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 BankIslam Malaysia Bhd and another suit [2009] 6 MLJ 416; [2010] 4 CLJ 388 (‘TanSri Khalid case’).27 This case is significant because it is the first case thatforwarded an enquiry to the SAC. The case involved the restructuring of twoMurabaha facilities offered by Bank Islam to Tan Sri Khalid to redeem andacquire more shares in a particular company. The restructuring of theMurabaha facilities was carried out because of the repeated breaches of theMurabaha facilities by Tan Sri Khalid. The two facilities were restructured intoa Revolving Al-Bai Bithaman Ajil Facility (BBA Facility Agreement) and wereconsented to by Tan Sri Khalid. Tan Sri Khalid defaulted on the first paymentof the BBA Facility Agreement, and Bank Islam applied to enter summaryjudgment; Tan Sri Khalid on the other hand, inter alia, challenged the validityof the BBA Facility Agreements due to Shariah non-compliance.

The learned judge in her judgment discussed at length the role andfunctions of the SAC vis-a-vis Bank Negara and the provisions of the CentralBank of Malaysia Act 1958, and decided to send an enquiry to the SAC as towhether a ruling had been made on the validity of the BBA. Datuk J Rohanastated the following in her judgment28 at pp 399–400 –

[16] Under s 16B(8), it is provided that in any proceedings before the courtwhen a question arises concerning a Syariah matter, the court or the arbitratormay 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 issueraised; I had caused an enquiry to be made to the SAC as to whether a ruling hasbeen made on the status of BBA Agreement. The secretariat to SAC respondedwith a written ruling from the SAC which states essentially, that BBA Agreementis acceptable and a recognised transaction in Islam. I have furnished the saidwritten ruling from the SAC to both counsels. Thereafter, counsel for Tan SriKhalid in a letter dated 5 May 2009 seeks leave for a further submission on theSyariah issue. In a further written submission, learned counsel contends that themode of execution of APA and ASA was improper because Tan Sri Khalid wasmade to sign both agreements first before they were passed back to be completedby the bank. There was therefore no separation of the APA with the ASA and nodistinction in term of time of execution as required under the said ruling of theSAC. 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 theplaintiff 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, thisissue is based on mere technicality and a trivial one. The consensus betweenparties has been arrived at the point the letter of offer was accepted by Tan SriKhalid. The agreement to be bound is subject to the formalities of the executionof various documents. Signing of the written agreements is to formalise and totranslate the consensus of parties in the terms clearly agreed upon. Besides, it hasalways been a practice, for the borrower to affix signatures on all bankingdocuments before the bank executes the same, and it is rather inconceivable tosuggest that it can affect the validity of the contract. Furthermore, a writtenconfirmation from the bank’s own Syariah Council in exh. GN4 confirmed thatthe mode employed for the execution of the documents in the present case is inorder and has no bearing from Syariah perspective. With seven sets of APA andASA documents signed in the same manner, the parties would have condonedand accepted such practice. As such, I fail to see how these agreements will not bebinding on parties merely because they are signed without following orders ofprecedent, when after entering into the seven sets of transaction the defendantnever protests or raises any issue.

Datuk J Rohana sent an enquiry to the SAC as to whether a ruling on thevalidity of the BBA had been made, it should be noted that this enquiry was nota question on a Shariah issue, and thus this is not exactly the first case to utilisethe SAC to give a ruling on a Shariah issue. The enquiry was answered by thesecretariat which confirmed that a ruling had been made and that the BBA wasa valid contract. Thereafter Tan Sri Khalid’s counsel requested that anotherShariah issue be decided by the SAC, this Shariah issue was actually on thepractise and execution of the BBA contract. They claimed that the sequence ofsigning the contracts was wrong and therefore the contract should be void.This, a question of whether the practise of executing the contract was Shariahcompliant, was not submitted to the SAC by Datuk J Rohana who decided onthe 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 thedichotomy between theory and practise of Shariah contracts the learned judgeherself decided on the matter rather than referring it to the SAC. It could bethat when it comes to practise of Shariah contracts it is the role of judges todecide on the matter.

The saga of the Shariah issues in this case and whether to refer a question tothe SAC did not end with this summary judgment. Dissatisfied with thedecision of Datuk J Rohana, Tan Sri Khalid appealed to the Court of Appealvide Civil Appeal W-02 (IM)-1828–09. The Court of Appeal allowed theappeal and stated in its brief grounds that in view of the conflict of views of theexperts, the matter ought to proceed to a full blown trial. The case proceeded tothe 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 bediscussed 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 onShariah. The general approach was that since referring a matter was at thediscretion of the court and the decision of the SAC was not binding, referral tothe SAC was unnecessary. J Abdul Wahab Patail believed that when it came tothe practise of Islamic banking it was within the sole jurisdiction of the court toresolve these issues without referring the matter to the SAC. Hamid Sultan AbuBacker JC noted that the SAC was only one of the sources for the courts to turnto when faced with an issue on Shariah. The one case that elevated the role ofthe SAC during this period was the last case during this period — the Tan SriKhalid case. J Datuk Rohana went into great detail in her judgment about therole of the SAC and even caused an enquiry to be referred to the SAC. Thedichotomy between theory and practise raised by J Abdul Wahab Patail wasunfortunately not addressed by the Court of Appeal in Lim Kok Hoe. We shallsee whether in the next section this was addressed and whether the courtschanged 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 theCBMA 2009 was passed. This case was the continuation of the Taman IhsanJaya saga. The Court of Appeal in Lim Kok Hoe had held that the BBA was avalid sale contract and then sent down these cases to the High Court to decideon the quantum of claim. The issue in this case was whether the bank couldclaim for the full sale price notwithstanding the fact the facility had beenprematurely 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 courtcould dictate that rebate should be given. Datuk Rohana Yusuf did not refer thematter to the SAC even though the CBMA 2009 was in effect, perhaps due tothe fact that the learned judge did not believe it was a Shariah issue but ratheran issue of interpretation of the documents.29 Instead the learned judgeimplied 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 inBank 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 groundsdecided that an Islamic bank could claim the whole sale price of the contractbecause it was a sale transaction, and further the quantum was at the discretionof an Islamic bank. In other words, ibra is given in early settlement cases but notfor early termination due to default.

It is opined that the Court of Appeal took a literal approach in interpretingthe BBA contract as a sale contract; in a way it is a harsh approach as Islamicbanking customers that default in their payment would be at the mercy ofIslamic banks as to whether they will get a rebate and if so, what the quantumwould be.

Be that as it may, it is heartening to note that through Bank NegaraGuidelines on Ibra’ (Rebate) for Sale-Based Financing in 2013, the ibra issue isnow settled. It is now a requirement that IFIs grant ibra to all customers whosettle their financing before the end of the financing tenure, and this includesdefault cases as well. Further to ensure legal certainty of providing ibra, IFIs arerequired to incorporate in their offer letter and other legal documentationrelated 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 Aliasbin 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 ofthe issues raised, the high court invited the Attorney General’s Chambers andBNM as amicus curiae to proffer their views on the matter.

The case was an application by the plaintiff to decide on, inter alia, threemain matters:

Firstly: by making the ruling of the SAC binding upon the court, whetherthe SAC is usurping the jurisdiction of the court in determining issues of lawwhich are properly within the jurisdiction of the court as provided by art121(1) of the Federal Constitution and the Courts of Judicature Act 1964; andwhether in the absence of an express provision allowing the judiciary todelegate its judicial powers to any other person or body, ss 56 and 57 of theCentral Bank of Malaysia Act 2009 are inconsistent with art 121(1) of theFederal Constitution .

Secondly: whether parties to the litigation are being deprived of their rightto 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 2009can have retrospective effect on transactions which occurred prior to the datethe said legislation came into effect.

On the first matter, the judge31 believed that because the SAC wereascertaining and not determining the Islamic law on an issue it was notperforming a judicial or quasi-judicial role,32 it was merely acting as an expertbody33 for Islamic law for the court. Thus the function and role of the SAC didnot 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 orarbitrator any question arises concerning a Shariah matter, the court or the arbitrator, asthe 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 rulingsAny ruling made by the Shariah Advisory Council pursuant to a reference made underthis Part shall be binding on the Islamic financial institutions under section 55 and thecourt or arbitrator making a reference under section 56.The new provisions of the CBMA 2009 now required the courts not only tomandatorily 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 68232 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 decisionof the matter remains with the court. The court still has to decide the ultimate issueswhich have been pleaded by the parties. After all, the issue whether the facility isShariah 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 thebest 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 theSAC is binding on the court.

The question that occurs is what about issues on the practise of the partiesand whether the practise of the parties are Shariah compliant – is thisconsidered 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 lawon the matter, but the final decision on whether the practise of the parties isShariah compliant would be within the role and function of the courts. It isopined 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 thecourt of law alone.

On the second matter on the right to be heard at the SAC, the court did notdecide on whether the parties have a right to be heard, because Bank Negara asamicus curiae pointed out that the SAC had not come out with a procedure yeton whether parties in a proceeding have a right to be heard. Therefore thismatter could not be decided. However since the decision of the court themanual has been published as highlighted above. More on the right of theparties to be heard will be discussed in the next section.

On the last issue of whether the CBMA applies retrospectively, the courtheld 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 ofenactment and believed that the CBMA 2009 itself did not state a cut-offpoint, further based on the facts of the case whether the CBMA 2009 appliesretrospectively 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 Courtof Appeal allowed the appeal contrary to J Datuk Rohana’s order for summaryjudgment 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 proceedwith 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 in2012,35 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 atp 611 para 35 ‘On hindsight, with all humility, the court agrees that the language used inAlias’s case has imported confusion on the true effect of the ruling on this issue. What thecourt intended to state was this: since there is no limitation imposed on SAC in theperformance 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 Shariahquestion to the SAC. The judge who referred the question was J Mohd ZawawiSalleh. The question that was asked was whether the rate of ta’widh could befixed or agreed upon (predetermined) by the parties to the agreement withoutany proof of loss suffered by the bank.37 The case in which the issue arose wasnot mentioned in the paper and a review of the judgments by J Mohd ZawawiSalleh during mid-2011 to mid-2012 did not reveal in any of the learnedjudge’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 thattime that a question was referred to the SAC because the Shariah question maynot have been requested by the parties to the case to be referred to the SAC, andrather it was the judge’s own initiative, or alternatively the issue asked of theSAC did not directly relate to the issues before the learned judge and thereforedid not require to be stated in the judgment. Whatever the reason, it is opinedwith respect, that for the sake of certainty for future cases, Shariah questionsraised to the SAC should be stated in the judgments of the judge so there willbe a precedent available on that Shariah question.

Cases Post the CBMA 2009 that referred to the Resolutions of the SAC or Referreda 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 ZawawiSalleh referred to the SAC’s resolutions in his judgment.38 The material facts ofthe case were as follows: the plaintiff had provided a First BBA facility to thedefendant to refinance a Short Term Advance Facility granted by CIMB BankBerhad. On application of the defendant, the plaintiff later granted anotherBBA 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 wasabout late payment charges and the questions raised to the SAC and the reply can be foundat p 30 in Ibid.

37 For the answer see ibid. p 3138 See Surianom Miskam, Noor Aimi Mohamad Puad, and Nurauliani Jamlus Rafdi,

'Reference to the Shari'ah Advisory Council in Islamic Finance: Preliminary Analysis on CivilCourt Decisions,' in Proceeding of the Social Sciences Research ICSSR 2014 (Kota KinanbaluSabah: http://WorldConferences.net, 2014) p 424.

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applied for a summary judgment for amounts owing and also for ta’widh.39 Thedefendant claimed, inter alia, that the BBA Facility should be null and voidbecause it was a disguise to reschedule repayments under the First Facility as theFirst Facility had not been terminated and the same asset was utilised in bothBBA transactions. The defendants also claimed that the amount claimed waswrong 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 forrefinancing the First Facility, there was no evidence to show the amountclaimed was wrong, and as for ibra, since this was a case of early terminationdue to default, the plaintiff was under no obligation neither duty to grant anibra’ to the defendants. As for ta’wid J Mohd Zawawi Salleh quoted the SACresolutions 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 theta’wid and granted the summary judgment.

In this case, the judge had actually at numerous times referred to theresolutions of the SAC in coming to a decision based on the facts of the case. Itis possible that it was in this case the J Mohd Zawawi Salleh referred the firstquestion on ta’wid to the SAC, however nothing was stated in his judgmentabout this fact. Whatever the case, it can be seen that post the CBMA 2009there is definitely a greater influence of the SAC in the Islamic banking casescoming 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 definedit as ‘payment of a financial compensation or counter-value, which is obligatory as a resultof loss caused to others.’ Majallah Majma’ al –Fiqh al-Islami, v 14, pt 4, p 510, as quoted inMuhamad Akram Laldin, 'The Principles of Compensation and Penalty Charges inDealing 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 ApnizanAbdullah and Hakimah Yaacob, 'The Trend of Legal Suits Involving Islamic FinancialTransactions 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’sresolution to enumerate the conditions for imposing ta’wid. Also in BankMuamalat 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 ofthe sources to conclude that the ijara contract is valid. In this case also the judgerejected that a lawyer can give expert opinion on Islamic banking and financeand added that the members of the SAC are those who are qualified to giveopinions on Islamic banking and finance.

The next case is also significant because J Mohd Zawawi Salleh had to againrule on the interpretation of ss 56 and 57 of the CBMA 2009 and referringShariah issues to the SAC. The case Tan Sri Abdul Khalid bin Ibrahim v BankIslam Malaysia Bhd [2012] 7 MLJ 597 was the product of the Court of Appealreversing the decision of J Datuk Rohana to grant summary judgment (seeabove). 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 thatthere 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 56and 57 contravened the Federal Constitution; that the Shariah issues were notappropriate for reference to the SAC, and the application of ss. 56 and s 57 ofthe CBMA 2009 would affect Tan Sri Khalid’s vested rights to lead expertevidence on matters of Islamic law.

J Mohd Zawawi Salleh held the following-

Firstly, there were Shariah issues to be decided in the case and reference tothe SAC should be allowed. The learned judge canvassed the Shariah questionsby 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 Shariahprinciples and the BNM SAC Resolution No 131. (‘Shariah issue’). 40

As can be seen from the questions, the questions posed are questions on thepractise of Islamic banking by the parties; in other words, whether the practiseof the parties were Shariah compliant in light of the facts of the case. Forexample question d(ii) requires the SAC to read and interpret the contract, andquestion (e) refers to ‘the circumstances of the case’ and whether the practise iscontrary to ‘Shariah principles’. It is opined that the questions posed are morethan just ‘ascertainment of Islamic law’ but includes the SAC’s input on thepractise of the parties and its Shariah compliance. If these questions are allowedthen the role of the SAC would be wider, and their determination of the issueat hand would be done with an in depth knowledge of Shariah and fiqh. Onecould argue that the SAC’s input on whether the practise of the parties areShariah compliant would improve the Islamic finance industry as Shariahcompliancy would be ensured at the enforcement stage of the transaction. Thiswould ensure Shariah compliance from the product development stage all theway to the practise and enforcement of the transaction.

However, the trial judge has more knowledge of the facts of the case and isin a better position to make a decision on the facts of the case, and it cannot bedenied that if the SAC were to decide on whether the party’s practise is Shariahcompliant, it would be more than ‘ascertainment’ of Islamic law.

It is opined that one way to solve this impasse is to make it compulsory torefer to the SAC questions of Shariah but the ruling of the SAC should not bebinding 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 referquestions to the SAC on whether the practise of the parties are Shariahcompliant.

Continuing with the judgment, the second point J Mohd Zawawi Sallehheld was that J Datuk Rohana’s inquiry was not ‘a reference to the SAC for anew ruling on Shariah issue.’41 It was just an inquiry whether there existed anyresolution passed by the SAC and thus did not ‘address any specific issue to bedecided by SAC.’42 Thus Tan Sri Khalid’s contention that there had been aprior reference to the SAC at the summary judgment stage could not stand.

Thirdly, on the issue of whether the CBMA 2009 applies retrospectively JMohd Zawawi Salleh held that ss 56 and 57 of the CBMA 2009 are proceduraland as such should apply retrospectively since there is a ‘presumption thatamendments to purely procedural statutes are to be given retrospective effectand amendments that change substantial rights be given prospective effects.’43

Further the learned judge added that there would be no adverse effect to anysubstantive right of Tan Sri Khalid, since the only difference introduced by theCBMA 2009 would be taking away the discretion of the court to refer a matterto 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 MohdZawawi 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 leadexpert evidence is untenable because SAC is a statute appointed expert. SAC hasbeen tasked with ascertaining Islamic law for the purpose of Islamic financialbusiness 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 witnessappointed 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 SACto refer to. This should be the case, however if one takes a look at the manualon 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 beheard at the SAC. The manual allows the parties the right to be heard onlythrough their experts on Shariah, the experts are allowed to submit a paper of

41 Ibid at 609 paras 28 and 29.42 Ibid.43 Ibid at 611 para 35.44 See above note 14.

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their arguments when a matter is referred to the SAC. The SAC may also invitethe experts to explain their point on the Shariah matter. Thus it would seemthat expert opinion would be crucial when matters of Shariah issues crop up inIslamic banking cases.

Lastly, on the constitutionality of ss 56 and 57 of the CBMA 2009, J MohdZawawi Salleh repeated his decision in the Alias case, and confirmed theconstitutionality of the sections.

The learned judge ended his judgment with a warning on the complexitiesof Islamic law and the incapability of Civil Court judges to resolve them evenwith the help of expert evidence, and the necessity of a special body like theSAC 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 bodylike the SAC to ascertain the Islamic law most applicable in Malaysia especiallyin this Islamic banking industry is undeniable. Difference of opinion on Shariahissues relating to Islamic banking should be resolved within SAC.

The judge thus allowed the Shariah questions to be referred to the SAC unders 56, however before this could be done, Tan Sri Khalid appealed against thedecision. The Court of Appeal case is Tan Sri Abdul Khalid Ibrahim v BankIslam (M) Bhd [2013] 3 MLJ 269 at p 277; [2012] 1 LNS 634. Afterconsidering the facts and arguments of the appellant, the Court of Appealdismissed the appeal and came to the following conclusions — the previousreference to the SAC by J Datuk Rohana was merely a request for informationthus J Mohd Zawawi Salleh could refer Shariah questions to the SAC. Sections56 and 57 are valid and constitutional. Justice Mohd Zawawi Salleh was correctin 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 IslamicLaw on financial matters or business. The judicial function is within the domainof 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 functionand confirmed that the function of the court was to apply the SAC ruling to theparticular facts. Thus whether the practise of the parties are Shariah compliantshould be within the purview of the court not the SAC. This is confirmed bythe manual on the procedure for courts and arbitrators to refer Shariah issues tothe SAC,46 where the manual strictly explains in paragraphs 5 and 6 and itsillustrations what type of questions are acceptable to be asked of the SAC.47

One then wonders about the Shariah questions canvassed by J MohdZawawi Salleh and agreed upon by the parties in the High Court – were theynot more than just questions on the Islamic law? The Shariah questions werenever officially sent to the SAC because Tan Sri Khalid appealed again and theFederal Court granted leave for an appeal to be brought to the apex court on theeffect of ss 56 and 57 of the CBMA 2009.48 However before the appeal couldbe heard the case was settled out of court by Bank Islam Bhd and Tan SriKhalid.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 BankNegara Malaysia 2009 (accessed).

48 Izahairani Izani, The Role of the Shariah Advisory Council in Islamic Banking Disputes inMalaysia, 13:1 (Shern Delamore & Co, 2014, accessed 18 January 2015); available athttp://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 BankBerhad v Maybank Trustees Bhd and other appeals [2014] 3 MLJ 169. One of the issues onappeal 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 theparties had agreed that no interest would be charged. The Court of Appeal had reversed thisdecision and allowed a 3% pre-judgment penalty. The respondent argued that to allow thepre-judgment penalty would amount to riba which is prohibited. The Federal Courtallowed the appeal on this point because of two reasons: firstly, according to the Trust Deedthe parties had agreed not to impose any interest between them and thus based on thiscontract no pre-judgment interest could be charged. Secondly, no evidence was adduced asto the applicable rate imposed by the SAC and thus the order of the Court of Appeal was setaside 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 theSAC have also taken place during this period however no records of it are foundin the judgments of the courts except for in Tan Sri Khalid’s case with J MohdZawawi Salleh. However in that case no answers to the questions were obtainedbecause the case was eventually settled out of court. Evidence that questions arebeing referred to the SAC can be found when mentioned in the briefexplanations of the SAC meetings found on BNM’s website. There is, it isopined, 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 recommendationsare 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 giveevidence in the courts if reference to the SAC is compulsory. Expert evidencewould be crucial for the parties to perhaps understand Islamic law and seekadvice on the consequences of the transaction, however when it comes toShariah questions that need to be resolved in court, should not the SAC beconsulted rather than expert witness from both parties? Each party will have anexpert that forms an opinion which supports their own case, so there would bea conflict of expert opinions which is allowed in Shariah, however how wouldthe trial judge make the right decision? The SAC was formed to stamp outpossible differences of Shariah opinions of the many Shariah committees onthe Shariah compliance of products to ensure certainty in the Islamic financialindustry in Malaysia. Sections 56 and 57 were enacted for the same reason —to ensure certainty in the outcome of disputes involving Islamic banking andfinance. If experts are allowed to give their opinion on Shariah matters andcontradict each other in court, would not the purpose of having the SAC toensure certainty be defeated?

Another take on this point is, if the SAC’s role is confined to matters ofascertainment of Islamic law alone then the courts may want to seek expertopinion on whether the practise of the parties were Shariah compliant. WithIslamic banking and finance matters becoming complex would it not be moreuseful for the SAC to have the role as the sole expert opinion in courts? It isopined 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 issuesto the SAC,50 allows the parties the right to be heard only through their expertson Shariah, the experts are allowed to submit a paper of their arguments whena matter is referred to the SAC. The SAC may also invite the experts to explaintheir point on the Shariah matter. The question arises on why only Shariahexperts are allowed to address the SAC. Why not the lawyers or even the partiesto the case? The simple answer would be that this is to ensure that the functionof the SAC is to ‘ascertain’ Islamic law only and not encroach into the functionsof 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 thathas to be answered is whether the parties conducted their affairs in a Shariahcompliant manner. This is the crucial question because prior to this, thecontracts around which the transaction revolves would have been vetted andapproved by the Shariah committee of the IFI and approved by the SAC. So thequestion that remains at the enforcement stage is not whether the BBA contractis valid and approved by the SAC, but in light of the practise of the parties wasthe transaction Shariah compliant? This crucial question it would seem iswithin the purview of the courts. However are the courts equipped with theright knowledge to come to the right decision? Are the courts qualified todecide whether a matter is in practise according to Shariah? Should not the roleof the SAC be extended to look into the practise of the parties? Would not suchrole extension benefit the Islamic financial industry by ensuring that at theenforcement stage, Shariah compliance is taken very seriously? It is opined thatthe role of the SAC should be extended to examining whether the practise ofthe parties are Shariah compliant.

The solution to allowing the SAC to decide on such matters withoutencroaching on the functions of the court is to have legislative changes to s 57of the CBMA 2009. It should be compulsory to refer to the SAC questions ofShariah and thus maintain s 56, however the ruling of the SAC should not bebinding on the trial judge. In other words, s 57 should be reverted to the oldprovision 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 constitutionalitywould 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 isexactly that — it should be at the end of the day up to the trial judge to take theruling made by the SAC into consideration or not to take it into considerationwhen 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 adviceor 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 toascertain that it does not involve any element which is inconsistent with theShariah.

The two sections when compared show that in the case of the SAC of theSecurities access is easier since 'any other person' can refer any matter relatingto the Islamic capital market to the SAC of the Securities Commission; whereasfor 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 arelawyers 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 becalled as expert witnesses to court see Ruzian Markom and others, 'Adjudication of IslamicBanking and Finance Cases in the Civil Courts of Malaysia,' European Journal of Law andEconomics 6, no 1 (2013) p 24.

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Shariah matters? Would it not be better if lawyers of customers were allowed toseek the advice of the SAC on Shariah matters without having to wait for thecourts to refer the matter?It is opined that the role of the SAC should beextended to not only BNM, IFIs, the court and arbitrators. They should bemore accessible to other persons who require their much needed guidance onShariah matters. If the SAC of the Securities Commission can open up theirdoors, why not the SAC of BNM? To assist the Islamic financial industry, it iscrucial for the SAC of BNM to be more accessible to other stakeholders in theindustry.

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 personswho require their much needed guidance on Shariah matters. If the SAC of theSecurities Commission can open up their doors, why not the SAC of BNM? Toassist the Islamic financial industry, it is crucial for the SAC of BNM to be moreaccessible 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 onShariah matters after the passing of the CBMA 2009, however the questionsasked and the answers received have not been recorded in the judgments. It isnecessary to record the questions and the answers provided for by the SACwhether it be in the judgment or elsewhere. The case which referred thequestions should also be recorded so that researchers can understand the factsof the case from which the questions arose. The importance of this cannot beemphasised enough. It is important for the sake of transparency, and as a recordfor future cases. It is also important for the development of fiqh in the area ofIslamic banking and finance.

F. Update the Resolutions of the SAC

The resolutions passed by the SAC should be readily available to the public, sothat lawyers, Shariah experts, Shariah advisors, the judges and even thecustomers have access to the latest resolutions to make informed decisions.Since it is now recommended in the manual on referring matters to the SAC bythe courts and arbitration that the court and arbitrator refer to the resolutionsof the SAC first, it is of utmost importance that the resolutions are released andupdated frequently.

CONCLUSION

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Shariah compliance is what distinguishes conventional banking and financepractises from Islamic banking and finance. It is thus crucial that Shariah iscomplied with at all stages of a transaction. At the enforcement stage, theevolution of cases in the courts reveal that judges have grappled with Shariahcompliance and have usually decided on their own whether the contract hasbreached Shariah, without reference to the resolutions or to the expert opinionof the SAC. This trend is slowly changing as more judges are referring to theresolutions of the SAC. Post the CBMA 2009, the courts have been referringquestions to the SAC as well, however the answers by the SAC have yet to berecorded in a standardised manner.

This research recommends that the role of the SAC should be extended intwo ways; firstly the SAC should have the mandate to go further than just‘ascertaining’ Islamic law. The SAC should also determine whether a contracthas been practised in a Shariah compliant manner, in this way Shariahcompliance will be ensured by those who have knowledge on how Shariahshould be applied in practise. Secondly, the SAC should not only be confinedto give advice to BNM and IFIs but should also be accessible to other personswho need clarification on Shariah matters such as lawyers, customers, andparties to a dispute. To extend the role of the SAC, ss 55(2) and 57 should beamended. Section 55(2) should be amended to include ‘other persons’ who canseek the advice of the SAC apart from IFIs. Section 57 should be amended totake away the binding effect of the advice of the SAC. In this way, the judgewould have a choice whether to follow the advice of the SAC and questions ofconstitutionality, or the court usurping the functions of the court, would notarise. This research also recommends that expert opinion should be confined tothe SAC only when disputes arise in the court and that the resolutions of theSAC are published regularly so that they can be a source of reference to thecourts, arbitrators, lawyers and parties to the dispute.

Reference

Abdullah, Apnizan, and Hakimah Yaacob 'The Trend of Legal Suits InvolvingIslamic Financial Transactions in Malaysia: Evidence from the ReportedCases.' In ISRA Research Paper, Research Paper No 48, 2013.

Ali, Engku Rabiah Adawiah Engku 'Constraints and Opportunities inHarmonization of Civil Law and Shariah in the Islamic Financial ServicesIndustry.' [2008] 4 MLJ i:

Azahari, Fakihah 'Islamic Banking: Perspectives on Recent CaseDevelopment.' [2009] 1 MLJ xci.

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BNM. Manual Rujukan Mahkamah Dan Penimbang Tara Kepada MajlisPenasihat Syariah Bank Negara Malaysia Di Bawah Seksyen 51 Dan Seksyen56 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.

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Markom, Ruzian, Sharina Ali Pitchay, Zinatul Ashiqin Zainol, Anita AbdulRahim, and Rooshida Merican Abdul Rahim Merican 'Adjudication of IslamicBanking and Finance Cases in the Civil Courts of Malaysia.' European Journalof Law and Economics 6, No 1 (2013).

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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 hiscomments on an earlier version of this paper, and Fadzilah Pilus for theinformation provided in the cases of Arab-Malaysian Merchant Bank Bhd v.Silver Concept Sdn Bhd.

** Consultant at Wisdom Management Consultancy Sdn Bhd. She can becontracted at [email protected] or [email protected].

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