law harmonisation committee report 2013 · enhancing malaysian law as the law of choice and...

LAW HARMONISATION COMMITTEE

REPORT 2013

Law Harmonisation Committee Report 2013

ii iii

CONTENTS

Governor’s Foreword iv

Chairman’s Statement vi

Introduction • OverviewOfTheLegalFrameworkInMalaysiaAndItsCompatibility

WithIslamicFinance 2• TheLawHarmonisationCommittee 6• ExecutiveSummary 13

Harmonisation Initiatives • IssuesRaisedWhereAmendmentsAreRecommended 17• IssuesRaisedWhichDoNotNecessitateAmendments41• IssuesForFurtherResearch50

Moving Forward: 67EnhancingMalaysianLawAsTheLawOfChoiceAndMalaysianDisputeResolutionInstitutionsAsTheForumForDisputeSettlementForInternationalIslamicFinanceTransactions

Annexures • AnnexureA:Sub-CommitteesAndFocusGroups 74• AnnexureB:TableOfStatutes,CaseLawAndResearch 75

Bibliography• AnnexureC:Glossary 78

LAW HARMONISATION COMMITTEE

REPORT 2013


iv v

FOREWORDBYGOVERNOROFBANKNEGARAMALAYSIA

The publication of this inaugural report by the Law HarmonisationCommitteeisaculminationoftheharmonisationinitiativesundertakenby theCommitteesince its inception in July2010 towardscreationofaconducivelegalsystemthatsupportsthedevelopmentoftheIslamicfinance industry. This report aims to serve as valuable reference oninitiatives in harmonisation of laws in Malaysia as it is applicable toIslamicfinancewiththeaimofenablingIslamicfinancialtransactionstobeconductedwithgreaterlegalefficiency.

TheprogressivedevelopmentoftheIslamicfinancialservicessectorinMalaysiainthisrecentdecadehasbeensupportedbytheformulationofasoundandeffectivelegalframeworkrootedinthetenetsoftheShariah.CertaintyandenforceabilityofShariahcontractswouldfurthercomplimenttheinternationaldimensionofIslamicfinancethatisexpectedtointensifyinthecomingyears.AscrossborderIslamicfinancetransactionsinthe

marketplacegainssignificance,thesefeatureswouldenableamyriadofIslamicfinancialtransactionswithgreaterinter-linkagesamongmultiplelegaljurisdictionsandmultinationalcontractingparties.

Malaysiaisamongtheprivilegedjurisdictionsthatareabletoleverageonacollaborativeapproachinaddressingthismatter.ThesuccessoftheLawHarmonisationCommitteeinitiativesisaprimeexamplewherethespiritofmutualcooperationhasledtothesuccessofacommongoal.

Onthisnote, Iwishto thankall thosewhohavebeen involved in thepublicationofthisreport,particularlytheCommitteemembers,whosewealthofexpertiseandunwaveringcommitmenthavecontributedtothedevelopmentoflegalframeworkforIslamicfinance.

Thankyou.


vi vii

CHAIRMAN’SSTATEMENT

Since the introduction of Islamic banking, takaful and Islamic capitalmarket, the focus in the legal framework has been to ensure laws ofMalaysiaareShariahcompatible. Idonotthinkanycountryhadmadeanyconcertedeffort tocreateShariah-compatible law tosupport theirimplementation,documentationandsettlementofdisputes.HenceweseejudgmentscomingfromtheCourtofchoiceofpartiesininternationalIslamicfinancialtransactionsrefusingtoapplytheShariaheventhoughthepartiesdidincludesuchaclauseinthecontract.

In Malaysia, we sought to solve that problem by the creation of theShariahAdvisoryCouncil(SAC)andrequiringtheCourtandArbitratorstoreferShariahissuestotheSACandabidebytherulings.ReferencesarebeingmadebytheCourtandtheArbitratorsnow.Thesystemisworking.

However,thereisanotherareathatneedstobetackled.ThelawthatwillbeappliedinthedocumentationandsettlementofdisputesmustalsobemadeShariah-compatible.Ivoicedtheneedforthattobedoneinmyfollowingpapers:

1. 28September2009–“Interlink/interfacebetweencivillawsystemandShariahrulesandprinciplesandeffectivedisputeresolutionmechanism”attheIslamicFinancialServicesIndustryLegalForum2009.#

2. 30July2010–“InterfacebetweenShariahandcivillawinIslamicfinance:currentproblemsandthewayforward”attheMalaysianLawConference2010.#

Coincidentally, the announcement for the establishment of LHC wasmade threedaysbeforemy last-mentioned speech.With that the LawHarmonisationCommittee(LHC)cameintothepicture.

Unfortunately,afterchairingthefirstmeetingtheworkoftheCommitteewasinterruptedforsixmonthsbymyhospitalisation.Withsupportfromofficers from other divisions of Bank Negara Malaysia, the SecuritiesCommission Malaysia, the Attorney General’s Chambers, AIBIM, ISRA,practisinglawyersandothers,westartedworkimmediatelyafterthat.Thisreportlists,amongstotherthings,whattheLHChadmanagedtododuringtheperiodofaboutoneandahalfyears.

IshallnotrepeatthecontentofthereportregardingwhatLHChasdoneor doing. Iwould only add that during the period I had alsowritten,deliveredand/orpublishedthefollowingspeeches,lecturesandarticlesinwhichIexplainedandpublicisedtheworksofLHCwhileseekingco-operationoftheacademia,lawyers,Shariahscholarsandindustryplayerstomaketheircontributions:

1. 2November2011–OpeningremarksatvisittoINCEIFandISRA.#

2. 3December2011–SpeechatUniversitiSainsIslamMalaysiawhenreceivingtheHon.DegreeofDoctorofPhilosophyinShariahandJudiciary.#

3. 7December2011-12thEmeritusProf.AhmadIbrahimMemorialLecturetitled“MalaysiaasthehubforIslamicfinance:Malaysianlawas the lawof choice andMalaysian courts as the forum forsettlement of disputes” at the International Islamic UniversityMalaysia.#

4. 9February2012–OpeningremarksatLuncheonwithLitigationlawyers.#

5. 6March2012-Papertitled“HarmonisationofShariahandcommonlawinMalaysia:thewayforward”atthe2ndInternationalSeminaronShariahandcommonlaw2012,UniversitiSainsIslamMalaysia.#


viii ix

6. 10April2012–Speechtitled“MakingourcontributiontoIslamicbanking and Shariah at Engagement With Officers of IslamicBankingandTakafulDivision,BankNegaraMalaysia.#

7. 17May 2012 – Opening speech at ameetingwith Directors ofLandsandMines,Malaysia.#

8. 21July2012–OpeningremarksatameetingwithrepresentativesoftheBarCouncil.#

9. ISRAResearchPaperNo.33/2012titled“EnforceabilityofIslamicfinancialcontracts in secular jurisdictions:Malaysian lawasthelawofchoiceandMalaysiancourtsastheforumforsettlementofdisputes”co-authoredwithAdnanTrakic.#

10. 20September2012–Papertitled“TheneedforShariah-compliantlawofchoiceforIslamicfinancetransactions”atGIFF2012.#(ThispaperwaspublishedinfullinBusinessTimes9October2012).

11. 17October2012–“EthicaldimensionsinIslamicfinance”atKLIFF2012.#

12. 1November2012–“IssuesandchallengespertainingtotheroleofShariahAdvisoryCouncilinupholdingShariahprinciplesinIslamicbanking and finance” at a Seminar organised by the AttorneyGeneral’sChambers.#

13. 31January2013“Pengharmonianundang-undangsivildanSyari’ahdalamperbankandankewanganIslamdiMalaysia”atUKM.#

14. 19 February 2013 “Islam dan tafsiran keperlembagaan olehmahkamahdiMalaysia”atIKIM.#

IamreallygratefultotheCommitteememberswhohadworkedasateam,looking at issues from their respective specialisation and experience.Discussionsweredeepandseriousyetalwaysinteresting.Attheendofit,withoutfail,aunanimousviewwasachieved.Toeveryone,itwasalearningandcontributingexperience.

Similarly, I must record my appreciation for the sacrifices made bymembersontheLandLawSub-Committee.Theyhadworkedtirelesslyoncomplicatedissuesthathadneverbeentackledbefore.

TheSecretariattoohadliveduptoexpectationwiththeirresearchandpresentationfortheCommittee’sconsideration.

I believe that this is the first time that we havemanaged to get thesupportfromvariousagenciessuchasBankNegaraMalaysia,SecuritiesCommission Malaysia, Attorney-General’s Chambers, AIBIM, ISRA andIslamicfinancelegalpractitionersthroughtheirrepresentationsinLHC.In addition, we have also initiate engagements with other relevantstakeholders such as the Ministry of Domestic Trade and ConsumerAffairs,Department ofDirectorGeneral of Land andMines, practisinglawyers andothers. I told them that they should consider themselvesluckytohavetheopportunitytocontributetothedevelopmentofIslamicbanking,takafulandIslamiccapitalmarketaswellastotheharmonisationoftheShariahandthelawontheland.Ialsotoldthemthatifwedon’tsucceed,nobodywill.

Tun Abdul Hamid Mohamad

#Allthesespeeches,lectures,papersandarticlescouldbefoundonmywebsite:www.tunabdulhamid.my


x 1

INTRODUCTION


2 3

OVERVIEW OF THE LEGAL FRAMEWORK IN MALAYSIA AND ITS COMPATIBILITY WITH ISLAMIC FINANCE

BackgroundOneofthekeypillarstotheprogressivedevelopmentofIslamicfinancein Malaysia is dedicated and enabling legislation that supports thecreationofShariahcompliantfinancialinstitutionsanddevelopmentofinnovative Islamic financial products and services offerings based ondistinct Shariah tenets. Islamic Banking Act 1983 provided the muchneeded legal platform for the establishment of the Islamic banks andsubsequent amendments led to the creation of international Islamicbanks,whichsignifiesaphasedapproach indeveloping the legal andinstitutionalinfrastructureforIslamicfinanceinMalaysia.Similarly,thebirthofthetakafulindustrywassupportedbytheenactmentofTakafulActin1984whichenabledthecreationoftakafuloperatorsandretakafuloperatorsaswellasothertakafulintermediariessuchastakafulbrokersandtakafuladjusters.

TheIslamicfinancialsystemiswitnessingrapidinnovationwithIslamicfinancial transactions increasing in complexity. Consumer awarenessisheightenedand legal certaintyon theenforceabilityof such Islamicfinancial transactions becomes critical. In 2009, the Central Bank ofMalaysiaAct2009andamendmentstotheCapitalMarketsandServicesAct2007gavestatutoryforcetotheroleoftherespectiveShariahAdvisoryCouncilsasthehighestauthoritytoascertainShariahmattersrelatingtoIslamicfinancialbusinesswithintheremitoftherespectivelegislation.This constitutionality ofmandatory referral on Shariahmattersby thecourtswasconfirmedindecidedcaseswhichwereescalatedtotheapexcourtinMalaysia,pavingthewaytowardsrobustjudicialprecedentsforIslamicfinancecases.

ApproachtolawharmonisationThe development of legal framework expands beyond regulatory law,where legalcertainty throughremovalof legal impediments to Islamic

financedevelopmentswaspursuedthroughtheLawReviewCommitteein2003.Legislationconcerningland,contracts,companies,taxationandcourtprocedureswerestudiedandreviewedindetailthroughfivesub-committees.Oneofthecriticalachievementsof thisCommitteewhichhassincebeenemulatedgloballyisinovercomingtaximpedimentsonIslamic finance transactions through the adoption of a “TaxNeutralityPolicy” by the government. Malaysia became a conducive jurisdictionto pioneer groundbreaking sukuk and Islamic financing transactionsas consequential amendmentsweremade to laws concerning incometax,stampdutyandrealpropertygainstaxtoreflectthispolicystanceandTaxNeutralityCommitteewassubsequentlyformedamongInlandRevenue Board, Ministry of Finance and Bank NegaraMalaysia as thedefinitiveplatformforexpeditioushandlingoftaxationmattersrelatingtoIslamicbankingandtakaful.

TheMalaysianIslamicfinanceindustryhaschartedremarkableprogresswherethesukukmarkethasovertakenthebondmarketintermsofsizeandvolume,Islamicbankingisnow24.7%ofthetotalbankingmarketsharecomparedtoamere8.9%ofthemarket in2001andthetakafulindustrycommands14.3%comparedto9.1%1in2001.Thiscommendablegrowth,uninterrupteddespitetheglobalfinancialcrisis,isreflectiveoftherobustnessoftheindustryasawhole.TofurthersharpenthestrategicfocustowardsinternationalizingIslamicfinanceinMalaysia,Malaysiaasan International IslamicFinancialCentre (MIFC) initiativewas launchedin2006.

Fromthelegalperspective,measurestocreateanenablingenvironmentfor international businesswere pursued including liberalisation of thelegalprofessiontoenabledomesticpresenceoflawfirmswithexpertiseinternationalIslamicfinance.Capacitytohandledisputeresolutionwasalso enhanced by elevating the capability of Kuala Lumpur RegionalCentreforArbitrationtohandleIslamicfinancearbitration.

___________________________1Source:BankNegaraMalaysia


4 5

The entire legal frameworkwas also not spared so as to ensure thatMalaysianlawcanbethelawofchoiceforinternationalIslamicfinancetransaction given its unique ability to address points of disputesconcerning Shariah in the courts of law and other alternative disputeresolution mechanism. To ensure a meaningful and holistic outcome,Bank Negara Malaysia formed this committee in 2010, headed by anestablishedauthorityinIslamicfinancecases,YABhg.TunAbdulHamidMohamad, the formerChief Justice ofMalaysia (fromNovember2007to October 2008), supported by accomplished member of the legalfraternity,theAttorneyGeneral’sChambers,theSecuritiesCommissionMalaysia and the International Shariah Research Academy, apart fromBankNegaraMalaysia.

THE LAW HARMONISATION COMMITTEE

The establishment of the Law Harmonisation Committee and theappointmentofformerChiefJusticeofMalaysia,YABhg.TunAbdulHamidbinMohamad,whoisalsoamemberoftheShariahAdvisoryCouncil,astheChairmanwasannouncedbyDeputyGovernoroftheCentralBankof Malaysia, Dato’ Muhammad bin Ibrahim, at the 21st Conference ofPresidentsofLawAssociations inAsia: “IslamicFinanceandMalaysia’sRole”,on27July2010inKualaLumpur.

OBJECTIVES OF ESTABLISHMENT

The underlying objectives in establishing the Law HarmonisationCommitteeareasfollows:

• TopositionMalaysiaasthereferencelawforinternationalIslamicfinancetransactions;

• To achieve certainty and enforceability in the Malaysian law inregardtoIslamicfinancecontracts;and

• ForMalaysianlawstobethelawofchoiceandMalaysiandisputeresolutioninstitutionsastheforumforsettlementofdisputesforcross border Islamic financial transactions as part of creating aconducivelegalsystemforIslamicfinanceindustry.

MEMBERS OF THE LAW HARMONISATION COMMITTEE

TheCommitteecomprisesmembersamongkeygovernmentstakeholdersincluding theAttorney-General’s Chambers, the SecuritiesCommissionMalaysiaaswell as industryplayersandexperiencedShariahscholarsandIslamicfinancelegalpractitioners.TheCommitteeissupportedbyafull-timesecretariatatBankNegaraMalaysiaincollaborationwiththeSecuritiesCommissionMalaysia.


6 7

MEMBERS OF THE LAW HARMONISATION COMMITTEE

YABhg. Tun Abdul Hamid bin MohamadChairmanofLawHarmonisationCommittee

FormerChiefJusticeofMalaysiaMemberofShariahAdvisoryCouncilofBankNegaraMalaysiaMemberofShariahAdvisoryCouncilofSecuritiesCommissionMalaysia

Dato’ Nik Norzrul ThaniDeputyChairmanofLawHarmonisationCommittee

Chairman,ZaidIbrahim&Co,AdvocatesandSolicitors,KualaLumpur

En. Bakarudin IshakMember

AssistantGovernor,BankNegaraMalaysia

En. Mohd Radzuan Ahmad TajuddinMember

DeputyGeneralManagerandHead,DevelopmentIslamicCapitalMarket,SecuritiesCommissionMalaysia

Datuk Siti Zainab binti OmarMember

Director,MonitoringandSupervisionAdvisorySectorAttorneyGeneral’sChambers(SinceJuly2013)

En. Kamarolzaman AbideenMember

DeputyCommissionerofLawRevisionandReform(Revision)Attorney-General’sChambers(UntilJune2013)

Assoc. Prof. Dr. Mohamad Akram LaldinMember

ExecutiveDirectorInternationalShariahResearchAcademyforIslamicFinance(ISRA)


8 9

Prof. Mohamed Ismail ShariffMember

MohamedIsmail&Co.,AdvocatesandSolicitors,KualaLumpur

En. Badlisyah Abdul GhaniRotatingMember

RepresentativefromIslamicFinanceindustry(SinceOct2012)

En. Rafe HaneefRotatingMember

RepresentativefromIslamicFinanceindustry(Sept2010-Sept2011)

IntheharmonisationinitiativesundertakenbytheCommittee,itadoptsaninclusive,consultativeandfocusedapproachinengagingallrelevantstakeholdersincludingIslamicfinancepractitioners,legalpractitioners,researchers and academicians in identifying issues which requirelegislativeamendments.

Law Harmonisation Committee : Consultative Approach


10 11

EXECUTIVE SUMMARY

SincetheinceptionoftheCommittee,nine(9)issueshavebeenidentified,wherefour(4)havebeenrecommendedasrequiringamendments,four(4) have been found to not require any amendments and one (1) ishighlightedforfurtherresearch.Foreasyreference,thisreportissetoutinthree(3)partsasfollows:

Part A – Issues raised where amendments are recommended

Harmonisation initiatives

Outcomes Relevant laws Status

1 Legal recognition to Shariah permissibility of imposing late payment charge on judgment debts in Islamic financial cases

ProposalincorporatedinOrder42Rule12AoftheRulesofCourt2012

Procedurallaws- RulesofHigh

Court1980- RulesofCourt

2012

Completed

2 Improving access to financing (especially Islamic financing) involving reserve lands

Proposaltoamendrelevantlawsthateffectivelyextendssimilarprotectionoffinancialinstitutions’rightstorealiseitssecurityinvolvingreservationlandswasaccepted-in-principlebyLandAdministratorsMeetingonthebasisthatsuchproposaldoesnotcompromisetheunderlyingpolicyrationaleofreservationlands.

TheproposalisalsosubjecttofurthertechnicaldeliberationsatstatelevelandAttorney-General’sChambers

Landlaws- States’Malay

ReservationEnactments

- SabahLandOrdinance

- SarawakLandCode

Inprogress


Outcomes Relevant laws Status

3 Recognition of Islamic finance transactions under the National Land Code 1965: Legal recognition of Shariah principles to facilitate provision of Islamic finance under the National Land Code 1965

JKPTGisinthemidstofreviewingNationalLandCode1965.

DetailedproposalsarecurrentlybeingdeliberatedatanindustryTaskForceinconsultationwithBNMandtheCommittee

Landlaws-NationalLand

Code1965

Inprogress

4 Facilitating use of collateralised commodity murabahah in short-termIslamic financial market instruments: Clarifyingrequirements for registration of collateral under Companies Act 1965

SyarikatSuruhanjayaMalaysiaisinthemidstofpublicconsultationoftheproposedamendmentstoCompaniesAct1965wherethisprovisionisincludedinsection353(5)&(6)

CompaniesAct1965

Inprogress


12 13

Part B – Issues raised which do not necessitate amendments


Outcomes Relevant laws

5 Certainty of legal definition of sukuk

InrelationtoCapitalMarketsandServicesAct2007,existinglegalrecognitionandstatutoryframeworkforsukukissufficientlysupportedbysubsidiarylegislativeinstruments

CapitalMarketsandServicesAct2007

6 Implications of Sale of Goods Act 1957 on sale-based Shariah contracts

Thereisnohindrancenorlegalimplication

SaleofGoodsAct1957

7 Implications of Partnership Act 1961 on profit-sharing Shariah contracts

PartnershipAct1961posesnohindrance

PartnershipAct1961

8 Shariah compliance of current legislation on enforcement of guarantees against gratuitous guarantors

Correlationof“socialguarantor”conceptunderBankruptcyAct1967whereelementsofenforcementofkafalahhavebeenadopted

BankruptcyAct1967

Part C – Issues for further research


Outcomes Relevant laws

9 Implications of Contracts Act 1950, Civil Law Act 1956 and Specific Relief Act 1950 on Shariah contracts

• ProvisionsofContractsAct1950,CivilLawAct1956andSpecificReliefAct1950donotimpedeIslamicfinance

• However,clarifyingthelegalpositionof“wa’ad”andtheShariahpositionofmaking“wa’ad”legallybindingispendingfurtherShariahresearch

ContractsAct1950,CivilLawAct1956andSpecificReliefAct1950

Harmonisation Initiatives


14 15

HARMONISATION INITIATIVES

PARTA

ISSUESRAISEDWHEREAMENDMENTS

ARERECOMMENDED


16 17

1. Legal recognition to Shariah permissibility of imposing late payment charge on judgment debts in Islamic financial cases

Introduction

Undertherelevantcourtrules2,partiesareallowedtoclaiminterestonlate payment of judgment sum. Judgment creditors who are Shariahcompliant institutionshad refrained fromclaiming such interestgiventhatitmaybeseenasriba’,thatisagainstShariah.

Atthetimeofreview,impositionofinterestondelayinsettlingjudgmentdebtswascoveredunderOrder42Rule12ofRulesoftheHighCourt1980andOrder29Rule12ofSubordinateCourtRules1980.TheOrdersreadasfollows:

Interest on judgment debtsEvery judgment debt shall carry interest at the rate of 4 per centum per annum or at such other rate not exceeding the rate aforesaid as the Court directs* (unless the rate has been otherwise agreed upon between the parties), such interest to be calculated from the date of judgment until the judgment is satisfied.

*in Subordinate Courts Act, the Rule reads ‘…as the Court shall direct…’

This has caused a perverse incentive for judgment creditors to delaysettlementofjudgmentsumastheywillnotbesubjecttoanyinterestonlatepayment.

___________________________2 Order42Rule12RulesoftheHighCourt1980andOrder29Rule12SubordinateCourts

Rules1980

Considerations

Recognisingthissituation,theShariahAdvisoryCouncilofBankNegaraMalaysiahaddeliberatedon thismatter in2005,2006and2010andruledthatShariahcompliantfinancialinstitutionsmayclaimsuchsumasitisdeemedasalatepaymentpenaltychargeonjudgmentdebtsbasedon the combination of principles of gharamah (penalty) and ta’widh (compensation) in Islamic banking and takaful cases3. The ShariahAdvisoryCouncilof theSecuritiesCommissionMalaysia4hadsimilarlyresolved the permissibility of claiming such sums as it is deemed asta’widhonthelaterepaymentofIslamicfinancing.

ThedecisionoftheShariahAdvisoryCouncilofBankNegaraMalaysia5 wascommunicatedtotheIslamicbankingandtakafulfraternitythroughaBankNegaraMalaysiaguidelines6whilstthedecisionoftheSecuritiesCommissionMalaysia’s ShariahAdvisoryCouncilwaspublishedon11September20067.

Recommendation

TheCommitteereviewedtherelevantprovisionstostudytheneedfortheShariahrulingsonlatepaymenttobereflected.

___________________________3 Resolvedatits50thmeetingdated26May2005,61stmeetingdated24August2006and

100thmeetingdated30April–1May2010asperShariah Resolutions in Islamic finance (2ndEdition),BankNegaraMalaysia,2010

4 Resolvedinits12thmeetingon14July1999and30thmeetingon8November2000asperResolutions of the Securities Commission Shariah Advisory Council(2ndEdition),SecuritiesCommissionMalaysia,2006

5 Resolvedatits50thmeetingdated26May2005,61stmeetingdated24August2006and100thmeetingdated30April–1May2010asperShariah Resolutions in Islamic finance (2ndEdition),BankNegaraMalaysia,2010

6 GuidelinesonLatePaymentChargesforIslamicFinancialInstitutions,effective1stJanuary2012forIslamicfinancialinstitutionsotherthanTakafulOperators

7 Resolutions of the Securities Commission Shariah Advisory Council(2ndEdition),SecuritiesCommissionMalaysia,2006


18 19

Inthemeantime,bothShariahAdvisoryCouncilsofBankNegaraMalaysiaandtheSecuritiesCommissionMalaysiajointlyreaffirmedandresolvedalatepaymentchargemechanismbasedonta’widhandgharamahcanbeclaimedonjudgmentsumsinvolvingIslamicbankingandcapitalmarketcases8.

Giventheprevailingcircumstanceswherenotalljudgmentsumsarisingfrom Islamic finance related cases carry late payment penalty, theCommitteerecommendedforthistobemadetransparentintherelevantrulesasanewOrder42Rule1AoftheRulesofCourt2012:

i. Late payment charge for judgment debt may be imposed by the court from the date of the judgment until the date of settlement of the judgment debt at a rate provided by the procedures of court. The Shariah Advisory Councils (SACs) have resolved that the rate shall be determined based on the principles of ta`widh and gharamah;

ii. Ta`widh refers to the compensation on the actual loss. In considering the difficulty to determine the amount of actual loss and the need for standardisation in the industry, the SACs resolved that the rate of actual loss shall be determined by a third party. In the context of Islamic banking, the SACs have mandated the determination of rate of actual loss to BNM as the authority. As an applicable rate to determine actual loss, the SACs agreed to adopt the “daily overnight Islamic interbank rate” as published on the website of Islamic Inter Money Market (bnm.iimm.gov.my) fixed on the date of the judgment and calculated monthly based on daily rest basis;

iii. Gharamah refers to a penalty imposed as a preventive measure for late payment by debtor. In this context, gharamah refers to

___________________________8 Ajointresolutionachievedonthe13thspecialmeetingon25July2011.Thisresolution

supersedestheresolutionmadebytheSACofBNMinits50thmeetingdated26May2005,61stmeetingdated24August2006and100thmeetingdated30April–1May2010

the difference between the amount of late payment charge and ta`widh i.e. the excess, if the amount of ta`widh is less than the amount of late payment charge. The late payment charge is as determined by the procedures of court;

iv. Late payment charge on judgment debt shall not be compounded;

v. Judgment creditor is only entitled to receive the amount of ta`widh. If the amount of ta`widh is equivalent to or more than the amount of late payment charge, then the judgment creditor may take the whole amount of the late payment charge. However, should the amount of late payment charge is more than the amount of ta`widh, the excess must be channeled to charitable body;

vi. The amount of late payment charge shall not exceed the outstanding principal amount9;

vii. The calculation of late payment charge for judgment debt is imposed on the basic judgment sum. Basic judgment sum is the outstanding principal amount subject to ibra’, if applicable and shall not include late payment charge before judgment and other related costs;

viii. With regard to the management of gharamah, the SACs have given the mandate to the Shariah Committee/Shariah Advisor to determine the eligible charitable bodies to receive gharamah including baitul mal. Gharamah should be channeled by the judgment creditor. Judgment creditor shall ensure that any gharamah channelled to the charitable bodies does not result in gain of any benefit howsoever and whatsoever to the judgment creditor itself; and

___________________________9 ThistermisreferredtoinBankNegaraGuidelinesonLatePaymentChargesforIslamic

FinancialInstitutionsas“outstandingbalance”


20 21

ix. There is no restriction in Shariah for arbitrator to impose late payment charge as provided in the arbitration procedures or as applicable to court, subject to provisions of relevant law.

TheCommitteefurtherrecommendsforthenewsub-ruletoincludethefollowing:

I. Exclusion of application of existing imposition of interestmechanisminOrder42Rule12onIslamicfinancingcases;

II. Imposition of ta’widh and gharamah as components of latepaymentchargeforIslamicfinancingcases,inwhichthejudgmentcreditorwillonlybeentitledtota’widh.Intheeventtheamountoflatepaymentchargeexceedstherateofta’widh,thebalance,orgharamah,whichservesasadeterrentfromdelayofpayment,willbechanneledtocharitableorganizationsapprovedbytheSAC;

III. TherateoflatepaymentchargewouldfollowtherateimposedbyChiefJudgesimilartotheexistingmechanism.Thelatepaymentcharge will be calculated from the date of judgment until thejudgmentisfullysatisfied;and

IV. Theamountof latepaymentchargecannotbecompoundedandcannotexceedtheoutstandingprincipalamount.

Accomplishments

TheproposalwasapprovedbytheRulesCommitteeandwentinforcetogetherwiththenewRulesofCourton1stAugust2012.TherevisedOrder42Rule12and thenewOrder42Rule12Aspecific for Islamicfinancingcasesreadsasfollows:

Order 42 Rule 12 Interest on judgment debts

Subject to rule 12A, except when it has been otherwise agreed between the parties, every judgment debt shall carry interest at such rate as the Chief Justice may from time to time determine or at such other rate not exceeding the rate aforesaid as the Court determines, such interest to be calculated from the date of judgment until the judgment is satisfied.

Order 42 Rule 12A Late payment charge on judgment debts arising from financial

transactions in accordance with Shariah

(1) Every judgment debt arising from financial transactions in accordance with Shariah shall carry a late payment charge calculated from the date of judgment until the judgment debt is fully satisfied at the rate provided under Order 42, rule 12 and subject to the following conditions:

(a) the Judgment creditor shall only be entitled to ta’widh as a result of late payment;

(b) the amount of late payment charge shall not exceed the outstanding principal amount; and

(c) if the amount of ta’widh is less than the amount of late payment charge, the balance shall be channelled to any charitable organisations as determined by the Shariah Advisory Council.


22 23

(2) For the purpose of this rule –

(a) “Shariah Advisory Council” means the Shariah Advisory Council established under the Central Bank of Malaysia Act 2009 [Act 701] and the Capital Markets and Services Act 2007 [Act 671]; and

(b) “ta’widh” means compensation for actual loss and shall be calculated at the rate determined by the Shariah Advisory Council.”

Further refinements

GiventhedynamismoftheIslamicfinanceindustry,itwasobservedthatthereisaneedtofurtherrefinethelatepaymentchargesarisingfromtakaful-relatedcasesasthecalculationofta’widh(compensationforactualloss) applicable for banking-related cases is not suitable to determineactuallossbornebythetakafulparticipantsasitwillvaryaccordingtorespectiveparticipant’sconditionandtakafulproductinvolved.

This was highlighted to the Shariah Advisory Committee at the 121st meetingon29February2012whereitwasresolvedthatlatepaymentcharge may be imposed by authority for delay in settling claims fortakafulbenefits.Thelatepaymentchargewillconsistof:

i. Claimants’entitlementtoreceiveanamountatarateequivalentto the rate of investment yield of Participant’s Risk Fund (PRF)[applicableonlyonthetakafulbenefitpayablefromthePRF],and

ii. Imposition of penalty charge on takaful operator which is paidfromtheShareholder’sFund,wherethepenaltychargecanbepaidtotheclaimantorPRF.Inthisregard,BankNegaraMalaysiaastheregulatorhasdecidedforthe1%penaltyamounttobepaidtotheclaimant.

Togiveeffecttothisnewrulingthatspecificallycatersfortakafulcases,theCommitteeiscurrentlyfinalisingthefollowingnewdraftprovisionintheRulesofCourt2012forRulesCommittee’sconsideration:

Order 42 Rule 12b Late payment charge on judgment debt arising from a claim for

takaful benefits

(1) Every judgment debt arising from a claim for takaful benefits under a takaful certificate issued by a takaful operator licensed under the Islamic Financial Services Act 2013 [Act 759] shall carry a late payment charge comprising of –

a) an amount at a rate which is equivalent to the published rate of investment yield of participants’ risk fund managed by such takaful operator; and

b) an amount of one percentum per annum of the judgment debt or such other rate as may be specified under subparagraph 12(1) of Schedule 10 of the Islamic Financial Services Act 2013 [Act 759] to be paid from shareholder’s fund of the takaful operator; and such amount and rates to be calculated from the date of judgment until the judgment sum is fully satisfied.


24 25

2. Improving access to financing (especially Islamic financing) involving reserve lands

IntroductionLegislationconcerningreservationlandofallstateshasbeenreviewed10 withtheintentiontoenabledealingsofsuchlandsforIslamicfinancialtransactions.

AsShariahcontractsemployedtoenablesuchtransactionaretrade-basedactivitywhichrequiresomeformofownershipoftheunderlyingasset,thereviewwasintendedtoascertaintheextentofwhichsuchownershipislimitedbytheseEnactmentsandwhetherthelimitationscanberefinedtofacilitatefinancinginvolvingMalayReserve/Native/Customarylands[“Reserve Lands”] without compromising the Enactments’ objective tocontrol alienation of the lands to non-Malays and non-Natives, whereapplicable.

WhenfeedbackonthelimitationsfoundinthelawwasreceivedfromtheIslamicbankingindustry11,threeareasoflimitationswerehighlighted:

I. Limitationoneffectingfinancier’slegalinterest;

II. LimitationintransferofownershipundertakeninaccordancewithShariahrequirement;and

III. Limitationinenforcement.

___________________________10StateenactmentsforPahang,Perak,NegeriSembilan,Selangor,Kelantan,Kedah,Perlis,

Johor,FederalTerritoriesandTerengganu,NationalLandCode(PenangandMalaccaTitles)Act1963,SabahLandOrdinance(Cap.68)andSarawakLandCode(Chapter81)

11 Feedback received fromAssociation of Islamic BanksMalaysia (AIBIM) on 10 February2012andsubsequentconsultationwithindustrywasheldon24February2012

Identified Limitations

I. Limitation on effecting financiers’ legal interest Legalinterestsintheformofcharges,caveatsandliensareusually

createdbythefinanciertosecureitsinterestsinprovidingfinance.Achargeiscreatedoverlandtosecurerepaymentofanydebt,andlieniscreatedoverlandbythedepositofissuedocumentoftitlewiththelender.Caveat,ontheotherhand,isaunilateralactwhichservesasanoticetotheworldthatthepersonenteringcaveathasaclaimtoanallegedinterest inthe land. InthecaseofReserveLands,onlypersonsspecifiedbytheEnactmentswouldgaintherighttocreatesuchlegalinterests.

Creationof charges, for example, is restricted in all EnactmentsunlesssuchpersonisgazettedbyRuler’sCouncilorStateCouncilinitsschedule.EnactmentsinthestatesofTerengganu,Melaka,Johor,Perak, Selangor, Negeri Sembilan and Federal Territories restrictcreationofcaveatunless it isbyMalay,MalayholdingcompanyorMalay corporate holder12. Lien by deposit of issue documentoftitle,ontheotherhand,canonlybecreatedinSelangor,Perak,Negeri Sembilan and Pahangonbehalf of any local cooperationregisteredunderLocalCooperationAct194813.

BanksareconstrainedwiththeserestrictionsasnotallbanksaregazettedintheEnactments.Banksneedtoobtainapprovalfromeach individualstateandcriteria for thesebankstobegazettedvaryfromstatetostate.

___________________________12Section14ofMalayReservationEnactmentTerengganu1941,Section108(1)(c)ofNational

LandCode(PenangandMalaccaTitles)Act1963,Section12MalayReservationEnactmentJohore 1936, Section 11Malay Reservation Enactment (FMSCap 142) as applicable toPahang,Perak,Selangor,NegeriSembilanandFederalTerritories

13Section17MalayReservationEnactment(FMSCap142


26 27

Theunclearpositionofthelawinrecognisingtheselegalinterestsby way of judicial precedent further contributes to limitingfinancier’sinteresttobeeffectivelyprotected.In Badiaddin v Arab Malaysian Finance [1998] 1 MLJ 393, the Federal Court deniedthebank’sstatusandrightasachargeeinenforcingtheirrighttoobtainanorderforsaleofreservelanduponcustomer’sdefaultinthefinancingeventhoughthefinancierisascheduledchargee.

Asaresult,financierswouldtendtoimposestricterconditionsinprovidingfinancinginvolvingReserveLands.

II. Limitation in transfer of ownership undertaken in accordance with Shariah requirement

All Enactments restricts transfer of ownership to non-Malays ornon-Natives.ThisisreinforcedbytheFederalCourtinRobert Lee v Wong Ah Yap [2007] 4 CLJ 1whereitwasheldthattheintentionofthelegislaturetoprotectidentifiedareasofthereservelandmustbeobservedandthis includestoprotectthe landfrombeingan‘emptyshell’inwhichitscontentsmaybeenjoyedbypersonnotintendedbythelegislaturetodoso.EquitycannotbeappliedtodefeatspecificobjectiveofMalayReserveEnactments.

Ontheotherhand,inordertoextendIslamicfinancing,therearethosewhichemployShariahcontractsthatrequirethefinanciertofirstown thesubjectmatterof the transaction.Thismeans thatsuchtypesoffinancingwillnotbeavailabletoreservelandsandassuch,reservelandswillbemarginalised.

III. Limitation in enforcement

EightstateEnactments14restrictattachmentinexecutionofanorderbyanycourt15.Executioncarriesthebroadmeaningof“enforcingorgivingeffecttothejudgmentofthecourt”16.Asanorderforsalehastheeffectofanattachmentinexecutionofajudgment(asperBadiaddin v. Arab Malaysian Finance [1998] 1 MLJ 393),anorderforsaleinaforeclosureproceedingwouldthereforebeinbreachoftherelevantstateenactments.

Due to the difficulty in enforcing its rights in the court of law,theimpactissuchthatfinancierwouldbemorelikelytoimposestricterconditionsinprovidingfinancinginvolvingreservelands.

Recommendation

GiventheforegoinglimitationsandtheundesirableimpactontheuseofreservelandsforIslamicfinancing,theCommitteerecommendsallowingforinstitutionslicensedorwithinthepurviewofBankNegaraMalaysia,the SecuritiesCommissionMalaysia and the Labuan Financial ServicesAuthorityandthoseusingfinancialproductsundertheaboveregulators’purviewtoprotecttheirrightsthroughtheabilitytorealiseitssecuritysothatfinancingcanbeextendedtothosehavingorintendtohavereservelandswithoutcompromisingtheoriginalobjectiveofcreationofreservelands.

To this end, the Committee proposes the following provision to beinsertedinthe‘definition’sectionoftherelevantEnactments:

___________________________14FederalTerritories,Selangor,NegeriSembilan,Pahang,Perak,Johor,TerengganuandPerlis15Section13MalayReservation Enactment (FMSCap142), Section14MalayReservation

Enactment Johore1936,Section16ofMalayReservationEnactmentTerengganu1941,Section12MalayReservationEnactmentPerlis1935

16 ReOverseas[1962]3AllER122


28 29

(1) Notwithstanding any provision in this Enactment [or Code] or any other written law but subject to subsection (2), the restrictions of land dealings in this Enactment [or Code] shall not apply to a person carrying out a scheme of financing who is licensed or approved as the case may be by the Central Bank of Malaysia, the Securities Commission Malaysia or the Labuan Financial Services Authority.

(2) Provided always the non-application shall cease to apply upon termination of such scheme of financing referred to in subsection (1).

Accomplishments

TherecommendationoftheCommitteewasaccepted-in-principleattheNo.1/2012 Land Administrators’ Meeting on 17 May 2012 at JabatanKetua Pengarah Tanah dan Galian, Kuala Lumpur. This is subject tofurthertechnicaldeliberationatstatelevelanddraftingrefinementsbytheAttorney-General’sChambers.

Status

Follow-up meetings were held with the Attorney-General’s ChambersandPejabatTimbalanKetuaPengarahTanahdanGaliantoexpeditethismatter. Itwasproposed thatgiven the timeneeded for the respectiveamendmentstoStateEnactmentsasdiscussedduringtheabovemeetings,the Committee recommends as an interim measure, standardizationof administrative policy at States’ level to enable all Islamic financialinstitutionstoberecognisedasscheduledchargee.ThisrecommendationwastabledandagreedattheNo.2/2013meetingon22May2013intheFederalTerritoryLabuan.

3. Recognition of Islamic finance transactions under the National Land Code 1965: Legal recognition of Shariah principles to facilitate provision of Islamic finance under the National Land Code 1965

Introduction

The review arose from the Consultation Paper (CP) issued by JabatanKetuaPengarahTanahandGalian(JKPTG)onReviewoftheNationalLandCode1965- In Transforming the Legal, Administrative and Procedural Framework for Enhancement of Land Administration Delivery System in Peninsular Malaysia17.

Itwasnotedthattheobjectivesofthereviewaretoenhanceefficiencyoflandadministrationdeliverysystem,achieveatrustedandpro-enterprisebusinessenvironmentandtoserveasabuildingblockforimplementingan Electronic Land Administration System. The CP consists of four(4)partswith21 issuesand31questions. Part1 coversproposals tocreateuserfriendlyandelectronicallycompatiblestatutoryforms,Part2focusedonreviewofregulatoryframeworkfordevelopingelectroniclandtransactionswhilstPart3istoreviewconceptual,proceduralandtechnicalissuesinlandadministration,andthefinalpartlooksatcapacitybuildingincoordinatingtheefficiencyoflandadministrationsystem.

___________________________17 TheCPwas issued on 1 February 2012 and is available at http://www.kptg.gov.my/

en/jkptg-online/laman-berita-terkini/540-kertas-perundingan-kajian-kanun-tanah-negara-1965.html


30 31

Discussions with JKPTG confirmed that they would considerrecommendationstoenhanceefficiencyofNLCintheconductofIslamicfinance-relatedlanddealingsandassuch,theCommitteeconductedtwoindustry consultations18 and formed the Land Laws Sub-committee19,whichroleisdedicatedtotheidentificationofimpedimentswhichmayexist in current land laws for the conduct of Islamic finance-relatedtransactions. The entire CP was reviewed and the Committee made the followingrecommendationswhichcoverIslamicfinancespecificareasaswellasotherareasthathaveanimpactonIslamicfinance:

Issues specific to Islamic finance

Thefollowing5ofthe21issuesraisedbyJKPTGintheCPwereidentifiedasrelevanttoIslamicfinance:

i. Modeof effectingchanges to recognizeandharmoniseNationalLandCode(NLC)forthepurposeofIslamicfinance

ii. Harmonisationofformsandterminology

iii. Recognitionofbeneficialownership

iv. Facilitationoffinancialintermediationbyforeignbanks

v. Determination of amount under Order for Sale: Calculation ofRebate(Ibra’)

___________________________18PreliminaryfeedbackwasobtainedfromIslamicbankingindustryon9November2011

andfurtherconsultationwasmadeon30April201219 TheLandLawSub-CommitteeisheadedbyY.MTengkuDato’SeriHasmuddinbinTengku

Othmanandcomprisesof7othermembers,namelyMs.SallyChee(representativefromBarCouncil),Assoc.ProfessorDr.AinulJariaMaidin(IIUM),ProfessorDr.AshrafMd.Hashim(representativefromISRA),En.MohdShuhaimiIsmail(Islamicfinancelegalpractictioner),Pn.FadzilahPilus(Islamicfinancelegalpractitioner),En.JasaniAbdullah(representativefromAIBIM)andEn.MohdShukriHjIsmail(formerofficerinJKPTG)

i. ModeofeffectingchangestorecognizeandharmoniseNLCforthepurposeofIslamicfinance

Issue20oftheCPproposedforanamendmenttotheNLCby inserting a new Section 5E which will be procedurallyreflectedinSeventeenthSchedule.

Recommendation

TheCommitteesupportstheproposalandproposetoreflectthe following three modes of harmonising the NLC forpurposesofIslamicfinanceinSection5E:

(i) Address the incompatible terminologies through theinterpretation section and making statutory formsmoregeneric;

(ii) Address provisions which impede the provision ofIslamicfinancialservicesvianon-applicationofsuchprovisions subject to certain safeguards e.g. non-applicationofs.433BtoIslamicfinancingtransactions;and

(iii) Address any specificities of Islamic finance whichcannotbeaccommodatedviamodes(i)and(ii)throughmodificationsreflectedintheSeventeenthSchedule.

ii. HarmonisationofFormsandTerminology

Issue 1 of the CP highlighted statutory forms prescribedintheSchedulestotheNLCmaynotbeuser-friendly,maybeout-datedormaynotbeabletomeettherequirementsfor electronic environment of land administration system.Inthisregard,JKPTGinvitedsuggestionsonspecificformsthatmayrequireamendmentsandnewformsthatshouldbeintroduced.


32 33

Issue 20 stated how Islamic financial transactions canbe accommodated in current land law structure throughharmonising terminologies that are incompatible withShariahandperfectingsecurityoverlandpursuanttoIslamicfinancetransactions.

Recommendations

Insteadofidentifyingspecificforms20andintroducingnewones to accommodate Islamic financial transactions, theCommitteerecommendstwospecificmeasures:

(i) Terminologies which are incompatible with Shariahsuch as “interest” and “interest on loans” should beharmonisedthroughtheintroductionofaprovisionintheinterpretationsectionsimilartoapproachtakeninsection2(7)oftheIncomeTaxAct1967asfollows:

“Any reference in this Act to interest shall apply, mutatis mutandis, to gains or profits received and expenses incurred, in lieu of interest, in transactions conducted in accordance with the Shariah”

(ii) Insertion of a new Seventeenth Schedule to explain

how Shariah compliant products and transactionsinvolvinglanddealingscanbesafeguardedbysomekind of registration on the document of title of therelevantland.

___________________________20Amongstatutory forms identifiedby Islamicbanking industryas requiringreformsare

Forms14A,15A,15B,16A,16Dand19D

iii. Recognitionofbeneficialownership

Issue20oftheCPincludedaproposaltoexpresslyrecogniseShariahprinciplessuchasMurabahah,Musyarakah, Ijarah andIstisna’inlanddealingswhichincludetransfers,leasesandchargesofland.Inaddition,anewprovisionisproposedtocaterforabeneficialownerundertheShariahcompliantfinancingproductknownasBai’ Bithamin AjiltotakeachargeonlandastheNLCdoesnothaveanyexpressedprovisionstocoversuchbeneficialownership.Theinstitutionprovidingfinancingwouldnormallyrequireachargetobecreatedinitsfavourtosecureitspositionasfinancierofthecustomer’sproperty.

Recommendation

AlthoughcurrentpracticesofcreatingchargesispermissiblefromShariahperspectives,theCommitteeisoftheviewthattrust caveatswouldbemore suitable and recommendsasfollows:

a. Expandtheconceptoftrustcaveatundersection332and 333NLC as an alternative instrument to reflectbeneficialownershipasitisabletoserveasanoticetotheworldthatthecaveatorhasaninterestintheland.

b. Include the right of the caveator under such

circumstances to apply for order for sale similar tos.281(2)NLCtoenforceitsrightsupondefaultofthecustomer.


34 35

iv. Facilitationoffinancialintermediationbyforeignbanks

Issue 20 also proposed allowing licensed foreign-ownedIslamicbankstobeallowedtoacquirelandforthepurposesofextendingIslamicfinance.ThisisbecausesomeShariahprinciples21 require ownership of the subject matter ofthe transaction before Islamic financing can be extended.Thus,sections433A,433Band433EoftheNLChavetobereviewedtoexpandthelistofexemptionstoeitherallowforIslamicfinancingtransactionsorexcludeapplicationoftherestrictionstoIslamicfinanceinstitutions.

If this is not addressed, foreign-owned Islamic banks willcontinue to face challenges in extending such Islamicfinancingandthiscouldbeafactorwhysuchforeign-ownedIslamicbanksofferamorelimitedrangeofproducts.

Recommendation

Having regard to the underlying policy objectives behindsuchrestrictions,theCommitteerecommendsdisapplicationof sections 433A, 433B and 433E to Islamic financingtransactions on the premise that the restrictionwill applyuponcompletionofthefinancing.

v. Calculation of Rebate (Ibra’) in determination of amountunderOrderforSale

Issue20proposedforsubsection257(1)tohaveanexpressedrecognitionofhowtheamountdueunderanOrderforSalefor Islamic financing cases using the sale-based Shariahprinciples should be calculated and it was proposed that

___________________________21ThisincludestheShariahprinciplesofMurabahahandproductsknownasBai Bithamman

Ajil

such amount would need to have already factored in theibra’(rebate).

Recommendation

For purposes of section 257(1) of NLC, the Committeerecommends the approach to be consistent with theGuidelinesonIbra’forSale-basedFinancingbyBankNegaraMalaysia22.

Issues that has an impact on Islamic finance

Apartfromtheabove,thereareissuesthatrelatetointernalproceduresandadministrativemattersofLandAdministratorswhichtheCommitteewillnotprovideanyrecommendations.Nevertheless,theCommitteehasthefollowingcommentsandrecommendationsonthefollowingissuesgivenitsimpactonIslamicfinance:

(a) Enhancing efficiency in land administration

TheCommitteesupportsthefollowingproposals:

i. Issue 3 – Implementation of Single Title System The proposed insertion of a new provision in the NLC to

facilitatethecreationandintroductionofasinglelandtitlesystem to be used in the electronic land administrationsystemtoaddressbacklogofforeclosurecases.

ii. Issue 5: One Day Title Delivery TheproposalmadebyJKPTGtoimprovespeedinessin

issuingdulyregisteredtitlebyspecifyingthetimelinefor delivery, on the understanding that a phasedapproachisadoptedtoensurethatJKPTG’stargetcanbeeffectivelymet.

___________________________22IslamicBankingInstitutionsarerequiredtogrant ibra’toallcustomerswhosettletheir

financing before the end of the financing tenure. Under the aboveGuidelines, ibra’ iscalculateduponsettlementofthefinancingbasedonthestipulatedformula.


36 37

iii. Issue 6: Renewal Of Leasehold Tenure The proposed insertion of a new NLC provision to

facilitaterenewalofleaseholdlandtenureinordertoenablemoreefficientrenewalofleaseholdlandtenure,whichwouldinturnenhancetheeffectivenessoflandusageasunderlyingsecurityforfinancingtransactions

ThefollowingproposalisnotsupportedbytheCommittee:

iv. Issue 10 : Establishment of a Land Court TheestablishmentofaLandCourtundertheNLCas

aspecialisedforumformanagingalldisputesarisinginthelandadministrationanddevelopmentregimeisnot necessarybecause theCommittee feels that thecurrentcourtsystemissufficient.

(b) Enhancements to procedures to prevent fraud and forgery

i. Issues 11 and 13 : Registrar’s Power to Correct Errors and Power of Registrar in Making Inquiries

TheCommitteehasnoobjectiontotheproposedenhancedpowers of the Registrar to correct errors and to makeinquiries on incidents of fraud and forgery on the basisthat suchpowerswillbecomplimentedwithstrongerandmore transparent governance arrangements, in line withinternationalbestpractices.This includesprovidingnoticepriortotheexercisingtheRegistrar’spowertocorrecterrors.

ii. Issue 12: Introduce Certificate of Correctness to Curb FraudandForgery

The Committee supports the proposed introduction ofCertificate of Correctness as it is has been proven usefulincurbingfraudandforgeryinotherTorrensjurisdictions.Furthermore, it is to impose an obligation on the legal

professionaltobejointlyresponsibleinverifyingtheidentityofthepersonsexecutinginstrumentsofdealing.

(c) Enhanced accessibility to NLC

i. Issue 7: Position Of Overriding Statutes The Committee is of the view that JKPTG should consult

with theAttorney-General’sChambersontheproposedforinsertion of a new provision into the NLC to provide forresolvingthepositionofoverridingstatutesasthematteriswithintheirpurview.

ii. Issue 9: Defining exceptions to indefeasibility of title Proposals to define the terms ‘fraud’, ‘misrepresentation’,

‘forgery’and‘insufficientinstrument’insection5oftheNLCmaynotbenecessaryintheCommittee’sviewastherearesufficient sourceswhich the courts can resort toon theseterms.

iii. Issue 15: Reversion of Provisions Prescribing for Application and issuance of strata titles from the Strata Titles Act 1985 into the Restructured NLC

Provided the efficiency level is not adversely affected, theCommitteehasnoobjectionstotheproposedrestructuringoftheStrataTitlesAct1985andareversionoftheprovisionsprescribingforapplicationandissuanceofstratatitlesfromthe Strata Titles Act 1985 into the proposed restructuredNLC.

ii. Issue 17: Streamlining the multiple options of applications for land development

TheCommitteesupportstheproposalbyJKPTGtocreateasinglepointofcontactforapplicationsforlanddevelopmentthrough the repeal of sections 204A to sections 204H;


38 39

sections200,202,203,204,124Aandtheprovisionsrelatingto subdivision, partition and amalgamation inChapters 1,2, and3 of PartNine tomakeway for theproposednewapproach, namely ‘Re-establishment Of Land Boundaries-SpecialProvisions’.

HowevertheCommitteebelievesthatthisshouldbemadetogetherwithnecessaryclarificationsonconsequentialissuesonthestatusofexistingchargesmadeuponcompletionofre-alienation(specifically,whetherfreshchargesneedtobecreatedandregisteredonnewtitleorexistingchargewillbe endorsed. If it is the former, then dispensation on theapplicablefeesshouldadditionallybemade).

(d) Enhanced consumer protection

Issue 8: Creation of Torrens Insurance Principle for Compensation of LossforInnocentProprietors

InlightofrisingnumberoffraudandforgerycasesinMalaysia,theCommitteebelievesthatthemovetohavetheTorrensInsurancePrinciple in Malaysia is timely as the principle provides basisfor creation of an assurance fund and provisions in the NLC tocompensateinnocentvictimsforthelosssufferedduetolandscamsor administrative errors. Furthermore, the Committee observedfromcountrieswithTorrenssystem likeAustraliaandSingaporehasadoptedthisprincipleasawaytoprovideprotectiontovictimsof administrative errors, land fraud or forgery. The Committeefurtherrecommendsfortheassurancefundtohave inplacethenecessarygovernanceandtransparencyandforittobeproperlyandprofessionallymanaged.

(e) Promote financial inclusion

Issue 19: Partitioning of Agriculture land measuring less than 2/5 hectare is Permitted But Dealing with the Partitioned portions is Restricted

TheCommitteesupportstheproposalbyJKPTGtorepealsubsection205(3)and(4)oftheNLCsothatagriculturelandmeasuringlessthan 2/5 hectare can be partitioned and dealt with as it wouldunlock the commercial value of such lands including for thepurposeofobtainingfinancing.

4. Facilitating use of collateralised commodity murabahah

in short-term Islamic financial market instruments:

Clarifying requirements for registration of collateral

under Companies Act 1965

Introduction

TheIslamicmoneymarketisanessentialfeatureoftheIslamicfinancialsystemas it provides Shariah compliant liquiditymanagement for theIslamic financial institutions. The products normally have maturitiesrangingfromovernighttoupto12months.Repurchasearrangementsare currently being done through the sale and buy-back arrangement(SBBA) which is not widely accepted. In linewith product innovation,BankNegaraMalaysia has introduced collateralisedMurabahah whichessentially isasale-basedShariahcompliantproduct that requires theunderlyingcommoditytobecollateralised.“TheMurabahahpurchaser”willchargeitssecuritiesto“theMurabahahseller”inordertosecurethefuturepaymentofthepurchasepriceoftheunderlyingassets.


40 41

AsIslamicfinancialinstitutionsarecompanies,Section108istechnicallyapplicableiftheinstitutionactsastheMurabahahpurchaserandachargeneedstobecreatedandregisteredwiththeCompaniesCommissionofMalaysia(CCM).OncetheMurabahahiscompleted,adischargeofchargewillbeneeded.

Areas of Limitation

Although, in substance, the relevant provisions do not impede theconduct of collateralizedMurabahah, the application of the provisionposes several challenges and discussions with CCM indicate that,although technicallyapplicable, theprovisionsarenotmeant tocoversuchIslamicfinancingproducts.

TheCommitteeidentifiedthree(3)specificchallenges:

i. Practical impossibility of registering the creation and

discharge of charge over the securities

Section108(1)23oftheCompaniesActrequiresthatanycreationof registrable charges must be registered with the Registrar ofCompaniesforthecreditortohaveitsdebtsecuredforpurposesof liquidationwithin30daysanda registration feeofRM300 ispayable. CCMwill then issue a Certificate of Charge (Form 40)withinfivedaysorreceiptoftheregistration.UnderSection113(1),cancellationofchargeswillneedtoberegisteredwithin14daysof thesatisfactionofdebtandadischargeofcharge (Forms41,42B, 43, 43B)will be issuedwithin fivedays of receipt of suchregistration.ThiswillentailafeeofRM50.

___________________________23Section108(1)CompaniesAct1965-RegistrationofCharges Subject to this Division where a charge to which this section applies is created by a

company,thereshallbelodgedwiththeRegistrarforregistrationwithinthirtydaysafterthecreationofthechargeastatementoftheprescribedparticulars,andifthissectionisnotcompliedwithinrelationtothecharge,thechargeshall,sofarasanysecurityonthecompany’spropertyorundertaking is therebyconferred,bevoidagainst the liquidatorandanycreditorofthecompany.

Thismeansthatregistrationofchargedsecuritiestosecureshort-termcollateralisedMurabahahispracticallyimpossibletoregisterespeciallythosewithtenorsofonemonthorless.

ii. Administrative costs of registration and de-registration

Asstatedabove, theaggregateCCM fees foreachcollateralisedmurabahah areRM350and such feeswouldnot apply if it is aconventionalmoneymarketinstrument.

This is inconsistent with the principle of neutrality that thegovernment adopts with regard to Islamic finance as Islamicfinancetransactionsshouldnotattractmorefeesortaxcomparedtoconventionalfinance.

iii. Criminalisation of failure to register charges in Section

10924 of Companies Act

Islamic financial institutions pledging eligible securities undershort-term Collateralised Murabahah are under a legal dutyto register charges within 30 days of its creation failing whichRM1,000penalty imposedunderSection109CompaniesAct foranyfailuretoregister.

Recommendations

TheCommitteerecommendstheinclusionofaprovisiontoexcludesuchtransactionsasfollows:

___________________________24Section109(1)–Dutytoregistercharges(1)Documentsandparticulars required tobe lodged for registration inaccordancewith

section108maybelodgedforregistrationbythecompanyconcernedorbyanypersoninterestedinthedocuments,butifdefaultismadeincomplyingwiththatsectionthecompanyandeveryofficerofthecompanywhoisindefaultshallbeguiltyofanoffenceagainstthisAct.

Penalty:Onethousandringgit.Defaultpenalty.


42 43

“108. (1A) Subsection (1) shall not apply:

(a) to a charge created to secure payment or performance of a financial obligation arising from any instruments or transactions effected in the money market in such manner and to such extent as may be specified by Bank Negara Malaysia pursuant to the Financial Services Act 2013 or the Islamic Financial Services Act 2013; or

(b) if the person interested in the charge is Bank Negara Malaysia.

108. (1B) The charges under subsection 108(1A) shall be treated as if it were a charge registered under subsection (1) and shall be valid against the liquidator and any creditor of the company”

Accomplishments

CCMhasagreedtotherecommendationandtheproposedamendmenthas been reflected in the exposure draft of Companies Billwhich hasbeen released for consultation on 2 July 2013. The Companies Bill isexpectedtobetabledinParliamentsometimethisyear.


44 45


PARTB

ISSUESRAISEDWHICHDO

NOTNECESSITATEAMENDMENTS


46 47

1. Certainty of legal definition of sukuk

Introduction

Thereviewfocusedonlackofsufficientrecognitionaccordedtosukukinthecurrentlegislativeframework.Initsreview,theCommitteelookedatthedefinitionprovidedintheSecuritiesCommissionAct1993(SCA)andCapitalMarketsandServicesAct2007(CMSA).

Assessment

Capital Markets and Services Act 2007Currently,“securities”undertheCMSAisdefinedasfollow-

“securities” means—(a) debentures, stocks or bonds issued or proposed to be issued

by any government;(b) shares in or debentures of, a body corporate or an

unincorporated body; or(c) units in a unit trust scheme or prescribed investments; and includes any right, option or interest in respect thereof.

Section5of theCMSAempowers theMinisterof Finance toprescribebyorder,anyinstrumentorproductorclassofinstrumentsorproductstobesecurities. Inaddition,section316ofCMSAalsoempowerstheMinistertomakeaprescriptioninrespectofIslamicsecuritiesasfollows:

316. Prescription by Minister in respect of Islamic securities, etc

(1) This Division applies to a person who proposes to make available, offer for subscription or purchase, or issue an invitation to subscribe for or purchase, Islamic securities.

(2) Where the Minister has made a prescription under section 5 in respect of Islamic securities, the Minister may make such modifications in the prescription on the usage of expressions in the securities laws as may be necessary to give full effect to the principles of Shariah in respect of such Islamic securities.

(3) The Commission may specify in guidelines made under section 377 on the following:(a) any model agreement or documentation relating to

a transaction or arrangement in respect of Islamic securities;

(b) the duties and responsibilities of the different parties involved in a transaction or arrangement in respect of Islamic securities; and

(c) any other matter as may be deemed appropriate, in giving full effect to the principles of Shariah in relation to a transaction in respect of Islamic securities.

Setagainstthisbackdrop,theMinisterofFinanceexercisedthepowersasmentionedabovebyprescribingIslamicsecuritiestobe“securities”forpurposesofthesecuritieslawsthroughtheissuanceoftheSecuritiesCommission(PrescriptionofIslamicSecurities)Order2004(“theOrder”).TheOrderhaddefined“Islamicsecurities”as-

(a) any product or instrument made available, offered for subscription or purchase, or issued pursuant to the Shariah principles of Mudharabah or Musyarakah; or

(b) any sukuk issued pursuant to any Shariah concept or principle; and

which are specified as Islamic securities under the Guidelines on the Offering of Islamic Securities (“the Guidelines”) issued by the Commission.


48 49

However, the Securities Commission Malaysia has in 2012 providedfurtherclaritybyintroducinganewprescriptionorder(the2004orderhasnowbeenrepealed)relatingtodefinitionofIslamicsecuritiesknownasCapitalMarketsandServices(PrescriptionofIslamicSecurities)Order2012andcreatednewprescriptionorderrelatingtodefinitionofIslamiccapitalmarketproducts, thereby furtherstrengthening the recognitionaccordedtosukukinthecurrentlegislativeframework.‘Islamicsecurities’isdefinedthereintoinclude‘sukukstructuredincompliancewithShariahprinciples’.Assuch,withtheintroductionoftheseorders,sukukisclearlyprescribedasatypeofsecuritieswhichisdifferentfrom‘debenture’.

Conclusion

In relation to theCapitalMarketandServicesAct2007, theSecuritiesCommissionMalaysia isoftheviewthattheexisting legalrecognitionandstatutoryframeworkforsukukissufficientlysupportedbysubsidiarylegislativeinstrumentswhichcaterforthedistinctfeaturesofsukuk.

2. Implications of Sale of Goods Act 1957 on sale-based

Shariah contracts

Introduction

ThereviewfocusedonascertainingtheeffectofapplicationoftheSaleofGoodsAct 1957 (‘SOGA’) provisions to sale-based Islamic financingtransactions.SOGAgovernssupplyofgoodsinPeninsularMalaysiaandisreadtogetherwiththeContractsAct1950andtheConsumerProtectionAct 1999. SOGAmay be applicable to an Islamic financial transactionwhenthetransactioninvolvesrealtradeactivities.

Assessment

TherearetwoprovisionsinSOGAwhichmaynotbefullycompatiblewithprinciplesofShariah:

I. Section 61 ‘Interest byway of damages and special damages’ -Referencetotherighttorecoverinterestandcourt’sdiscretiontoawardinterest.

Section61readsasfollows:

61. Interest by way of damages and special damages.

(1) Nothing in this Act shall affect the right of the seller or the buyer to recover interest or special damages in any case where by law interest or special damages may be recoverable, or to recover the money paid where the consideration for the payment of it has failed.

(2) In the absence of a contract to the contrary, the court may award interest at such rate as it thinks fit on the amount of the price -

(a) to the seller in a suit by him for the amount of the price, from the date of the tender of the goods or from the date on which the price was payable;

(b) to the buyer in a suit by him for the refund of the price in a case of breach of the contract on the part of the seller, from the date on which the payment was made.


50 51

II. Sections16‘Impliedconditionastoqualityorfitness’;i.eprincipleof‘caveatemptor’(buyerbeware)inwhichriskscanbetransferredtounsuspectingbuyersofproductsandservices.

Section16readsasfollows:

16. Implied condition as to quality or fitness.

(1) Subject to this Act and of any other law for the time being in force, there is no implied warranty or condition as to the quality or fitness for any particular purpose of goods supplied under a contract of sale, except as follows -

(a) Where the buyer, expressly or by implication makes known to the seller the particular purpose for which the goods are required, so as to show that the buyer relies on the seller’s skill or judgment, and the goods are of a description which it is in the course of the seller’s business to supply (whether he is the manufacturer or producer or not) there is an implied condition that the goods shall be reasonably fit for such purpose:

Provided that, in the case of a contract for the sale of a specified article under its patent or other trade name there is no implied condition as to its fitness for any particular purpose.

(b) Where goods are bought by description from a seller who deals in goods of that description (whether he is the manufacturer or producer or not) there is an implied condition that the goods shall be of merchantable quality:

Provided that if the buyer has examined the goods, there shall be no implied condition as regards defects which such examined ought to have revealed.

(2) An implied warranty or condition as to quality or fitness for a particular purpose may be annexed by the usage of trade.

(3) An express warranty or condition does not negative a warranty or condition implied by this Act unless inconsistent therewith.

However,given thatSection62allowsparties to the transactiontooptout fromthe inherentprovisions inSOGA, theabove twoprovisions do not impede Islamic financial business. Section 62readsasfollows:

62. Exclusion of implied terms and conditions.

Where any right, duty or liability would arise under a contract of sale by implication of law, it may be negatived or varied by express agreement or by the course of dealing between the parties, or by usage, if the usage is such as to bind both parties to the contract.

Conclusion

SOGA does not impede Islamic financial business as it is possible toexclude the application of non-Shariah compatible provisions in anIslamicfinancialtransaction.


52 53

3. Implications of Partnership Act 1961 on profit- sharing Shariah contracts

Introduction

The Partnership Act 1961 governs rights and duties of partners in apartnershiparrangement.PartnershiprelationshipasperthePartnershipAct1961referstorelationssubsistingbetween2to20persons25carryingon business in common with a view of profit26. As the PartnershipAct 1961 may trigger applicability of certain Islamic finance productwith equity-based structure such asMudarabah andMusyarakah, thereviewisintendedtoascertaintheAct’sapplicabilitytoIslamicFinancetransaction.

Assessment

ThePartnershipAct1961isdesignedasafallbackforarangeofdifferenttypesofpartnerships.Thus,therulesitimposesmaynotbehelpfulinapartnership specific circumstances andhence, section21of theActallowspartiestostipulatetheirtermsofagreement.Section21statesasfollows:

21. Variation by consent of terms of partnership.

The mutual rights and duties of partners, whether ascertained by agreement or defined by this Act, may be varied by the consent of all the partners, and such consent may be either express or inferred from a course of dealing.

___________________________25Section47(2)ofPartnershipAct26Section3ofPartnershipAct

It is common to find Islamic financing facility documents such asMusharakah mutanaqisah to state that the relationship between thepartiesshouldnotbedeemedtoconstituteapartnershippursuanttothePartnershipAct1961.

Conclusion

ThePartnershipAct1961doesnotimpedeIslamicfinancetransactionsas it ispossible tovaryapplicationofcertainprovisions in theActbyagreementorconsentoftheparties.

4. Shariah compliance of current legislation on enforcement of guarantees against gratuitous guarantors

Introduction27

ThereviewconsiderstwodifferingviewsofIslamicjuristsontherecourseelementinkafalahi.etheIslamiclawofguarantee.ThemajorityviewofIslamic jurists (Hanbalis,HanafisandShafi’is)holds that the judgmentcreditorisallowedtotakerecourseafterjudgmentdebtorandguarantorsimultaneouslywhilsttheminorityviewofMalikisholdsthatjudgmentcreditorhastofirstclaimfromthejudgmentdebtorbeforeattemptingtoobtainrecoursefromtheguarantor.Thepresenterisproposingthatthe minority view of Malikis should be adopted in Malaysian law toalleviateunnecessaryhardshipplacedontheguarantorinhavingtobesimultaneouslyaccountabletothedebtlikethejudgmentdebtor.

___________________________27The research entitled “Classical Islamic Guarantees (Al-Kafalah) in Modern Banking

Practices”preparedbyDr. SuhaimibinAbRahman,Headof LaboratoryofHalal PolicyandManagement,UniversitiPutraMalaysiawaspresentedatthe10thLawHarmonisationCommitteemeetingon15December2011.Thepresenterhasalsoproducedtwopapersonthetopic:(i) TheinfluenceofclassicalinterpretationontheLawofGuaranteesintheUnitedArab

Emirates(publishedinArabLawQuarterly22(2008)335-358;and(ii) IslamicLawandModernGuaranteesinMalaysia(publishedinInternationalJournalof

EconomicsandManagement1(3):477-501(2007)


54 55

Assessment

The recourse element in the modern Malaysian law of guarantee isprovided for in Section 81 of the Contracts Act 1950. Similar to themajorityviewofIslamicjuristsofHanbalis,HanafisandShafi’is,Section81allowsthejudgmentcreditortotakerecourseforthedebtduefromboth judgmentdebtorandguarantorsimultaneously.Section81readsasfollows:

81. Surety's liability.

The liability of the surety is co-extensive with that of the principal debtor, unless it is otherwise provided by the contract.

Althoughtheprincipleofkafalahiscomparabletotheprincipleofmodernlawofguarantee,differencesexist in thatkafalah isonly confined tocontracts gratuitous in nature. Malikis view in holding that judgmentcreditorhastofirstclaimfromthejudgmentdebtorbeforeattemptingtoobtainrecoursefromtheguarantorinkafalahisalreadyrecognisedinMalaysianlawcontextbywayofreferenceto‘socialguarantor’insection2theBankruptcyAct1967andtheprotectionprovidedinsection5(3).Insection2, ‘socialguarantor’ isdefinedasapersonwho,notforthepurposeofmakingprofit,providesguaranteesonthefollowing:

(i) a guarantee for a loan, scholarship or grant for educational or research purposes;

(ii) a guarantee for a hire-purchase transaction of a vehicle for personal or non-business use;

(iii) a guarantee for a housing loan transaction solely for personal dwelling.

Section5(3)preventsapetitioningcreditortocommenceanybankruptcyactionagainstasocialguarantorunlessheprovestothesatisfactionofthecourtthathehasexhaustedallavenuestorecoverdebtsowedtohimbythedebtor.

The Committee further considers the possible extension of similartreatmentbeyondsocialguarantorsandagreedthatisnotpreferredasitwouldincreasethecostoffinancingsincetheprincipaldebtorswillberequired to furnishadditionalsecuritywhenbanksarenotable togetdirectrecoursefromguarantors.

Conclusion

As the current Bankruptcy Act 1967 has sufficiently addressed theconcernonadoptingjurists’minorityviewsonIslamiclawofguarantee,nofurtherenhancementtothelawisneeded.


56 57


PARTC

ISSUESFORFURTHERRESEARCH


58 59

1. Implications of Contracts Act 1950, Civil Law Act 1956 and Specific Relief Act 1950 on Shariah contracts

Introduction

Like most laws of general application in Malaysia, the Contracts Act1950,theSpecificReliefAct1950andtheCivilLawAct1956(“theActs”)cameintoforceinMalaysiapriortotheintroductionofIslamicfinance.Thus, the review undertaken by the Law Harmonisation CommitteefirstlyseekstoascertainthecompatibilityofthelegislationwithIslamicfinancial transactions. Secondly, it seeks to identify and address legalaspectsofShariahcontractsinIslamicfinancialtransactionswhichwerenotaddressedintheActsoranyotherActs.

Forpurposesofthereview,theCommitteeconsultedthebanking,takafulaswellascapitalmarketsectortoobtaintheirfeedback28.Tothisend,theCommitteeissuedaseriesofquestionstoassisttheCommitteeinitsreviewoftheActs.Fromtheresponsereceivedfromtheindustry,seven(7)keyissueshadbeenidentifiedbytheCommitteeforitsdiscussion.

Assessment

Contracts Act 1950

(i) Recognition of Shariah contracts made without consideration

TheapplicationofShariahconceptsinIslamicfinancialtransactionswhich on its face, do not meet the essential ingredients of acontractraisesthequestionwhetherthereisaneedtoaccordlegalrecognitiontosuchconceptsundertheContractsAct1950.Thisissueisparticularlyrelevantgiventheprevalentuseofinstrumentssuch as purchase undertaking in Islamic financial transactions

___________________________28Industryfeedbackwasobtainedby13June2012

usingtheconceptofaunilateralpromise(wa’d).Theabsenceofa requirement for consideration in such purchase undertakingcauseslegaluncertaintyastowhethersuchinstrumentsarelegallybindingonpartiestoatransaction.However,aShariahassessmenton the enforceability and binding nature of such instruments isrequiredbeforealegalassessmentofsuchShariahcontractscantakeplace.Inthis,theCommitteeacceptedtherecommendationbytheSecretariatfortheShariahassessmentonwa’d,wa’danandmuwa’adahtotakeplacepriorbeforeanysubstantiveamendmentstotheActismade.

(ii) Obligation of person receiving advantage under void agreement

Section66oftheContractsAct1950isarestitutionaryprovisionwhich requires a person who has received an advantage underavoidagreementoracontractthatbecomesvoidtorestoretheoriginalamountreceivedtotheotherperson.Ithasbeenarguedin the case ofArab Malaysian Finance v Taman Ihsan Jaya and Ors (Koperasi Seri Kota Bukit Cherakah Sdn Bhd) [2008] 5 MLJ 681thatintheeventofadispute,financierscarryingoutIslamicfinancial transactionsareonlyentitled to theprincipalfinancingamount and are not entitled to any of the profitmargin agreedwith customers. This decision inevitably left financiers carryingout Islamic finance transactions in aworse off position than itsconventionalcounterparts.WhilethedecisionintheabovecasehasbeenoverruledbyalaterCourtofAppeal29decision,thepositionunderShariahhastobeclarifiedtoascertaintheconsequencesofavoidorimperfectIslamicfinancialtransaction.

___________________________29BankIslamMalaysiaBerhadvLimKokHoeandAnor[2009]6MLJ839


60 61

(iii) Consistency of provisions on bailment of pledges with Shariah concept of Ar-Rahn

SpecificprovisionsintheContractsAct1950codifythecommonlawpositiononpledges.AstheconceptofpledgeintheActhasbeen equated to the English definition thereof30, this raises theconcernonthecompatibilityofsuchprovisionswiththeconceptofAr-Rahn.Whiletherehavebeennoinstancesinwhichthisissuehasbeentestedinthecourtsoflaw,thereisaneedtoascertainthepositioninthismattervis-à-visIslamicfinancialtransactionsusingthe Shariah concept ofAr-Rahn. The Committeewas guided bytheresponseprovidedbytheSecretariattotheShariahAdvisoryCouncilwhichexpressedtheviewthattheprovisiononbailmentofpledgesisgenerallyconsistentwiththeShariahconceptofAr-Rahn.

Civil Law Act 1956

(i) Inconsistency of common law and equity principles in English law with Shariah principles

Section 3 of the Act provides for the application of the Englishcommonlawandrulesofequitywhilesection5ofActstipulatesthat intheabsenceofanywritten law,commercialmattersshallbegovernedbyEnglishlaw.Ithasbeenhighlightedthatthebroadscopeoftheseprovisionscouldleadtoapotentialconflictinrespectoftheapplicationoftheprovisionstofinancialtransactionswhichuse Shariah principles as its basis. This issue reflects a similarconflictfacedbytheEnglishcourtinacasewhereShariahlawandthelawsofEnglandareusedtogetherasthegoverninglawinanIslamicfinancialtransaction31.Inthedomesticarena,theabsence

___________________________30 JinSengHongSdnBhdvKhiingSieKhuo[1988]3MLJ10131BeximcoPharmaceuticalsLtdandOrsvShamilBankofBahrain[2004]EWCACiv19

ofjudicialprecedentwhichspecificallyaddressesthismattermaycauselegaluncertaintyastotheapplicationofShariahprinciplesin relation to commercial transactions such as Islamic financialtransactions.

However,criticalanalysesofjudicialprecedent32dealingwiththeinterpretation of the provisions reveal that they are not appliedautomaticallybutaresubjecttospecificrequirements.InNepline Sdn Bhd. v Jones Lang Wooton [1995] 1 CLJ 865, Abdul Hamid bin Mohamed J (as he then was), in referring to section 3 of the Act held that:

“In my view, the approach that the Court should take is first to

determine whethere there is any written law in force in Malaysia. If there is, the Court need not look anywhere else. If there is none, then the Court should determine what is the common law of, and the rules of equity as administered in, England on 7 April 1956. Having done that the Court should consider whether ‘local circumstances’ and ‘local inhabitants’ permit its application, as such. If it is ‘permissible’ the Court should apply it. If not, I am of the view that, the Court is free to reject it totally or adopt any part which is ‘permissible’, with or without qualification. Where the Court rejects it totally or in part, then there being no written law in force in Malaysia, the Court is free to formulate Malaysia’s own common law. In so doing, the Court is at liberty to look at any source of law, local or otherwise, be it common law of, or the rules of equity as administered in England after 7 April 1956, principles of common law in other countries, Islamic law of common application or common customs of the people of Malaysia. Under the provision of s. 3 of the Act, I think, that it is the way the Malaysian common law should develop”.

___________________________32 NeplineSdnBhdvJonesLangWooton[1995]1CLJ865;JasaKeramatSdnBhdvMonatech

(M)SdnBhd[2001]4CLJ549


62 63

ThisviewwasreaffirmedinthelaterCourtofAppealdecisionofJasa Keramat Sdn Bhd v Monatech (M) Sdn Bhd [2001] 4 CLJ 549.

TheguidingprincipletobedrawnfromthecourtdecisionsthusappearstobethattheprovisionsofthisActareapplicableonlyinsofarasthecircumstancesoftheStateofMalaysiaanditsrespectiveinhabitantspermit.Furthermore,evenifitis‘permissible’toapplysuch principles they may still be subject to such qualificationsaslocalcircumstancesrendernecessary.Moreimportantly, iftheEnglish common law or rules of equity are not permissible, thecourtshouldrefertoothersourcesoflaw,includingprinciplesofIslamiclaw.

Inresolvingthisissue,theCommitteewaspresentedwithtwo(2)recommendations: firstly to recognize the application of Islamiclaw in section 3 and 5 of the Act. It was envisaged that suchrecognition would provide greater clarity to the application ofIslamiclawincommercialtransactionsandcomplementtheroleoftheShariahAdvisoryCouncilsestablishedundertheCentralBankofMalaysiaAct2009andthetheCapitalMarketsandServicesAct2007.

Asecondrecommendationwastomaintaintheexistingprovisionswith no amendments as the issue at hand could be resolvedby leveraging on available judicial precedent. The Committeeexpressed a preference for the second recommendation as theexistingcaselawalreadyprovidedclearguidanceintheapplicationoftheprovisionsinthecontextofIslamicfinance

(ii) Discretion of court to award pre-judgment interest

UnlikeOrder42Rules12and12AoftheRulesofCourt2012whichonly govern post-judgment interest and late payment chargesrespectively,section11oftheActgrantsthecourtsdiscretionary

powers to award pre-judgment interest in disputes. Case law33

suggests that the court’s discretion in granting pre-judgmentinterestistobeexercisedonlywhereapartyhasbeenkeptoutofthemoneywhichoughttohavebeenpaidtohim.Incognizanceofthisgeneralrule,ithasbeenarguedthatsuchdiscretioncouldalsobeexercisedindisputesrelatingtoIslamicfinancialtransactionswithorwithouttherelevantpartyclaimingforsuch.Asamatterofpractice,theindustryhasincluded“waiverofinterest”clausesinitsfinancingagreementstoobservetheShariahrequirementonprohibitionofriba.Inthese,theprovisionoftheActraisestwosubissues:-

(a) Whetherthepowersofthecourtislimitedtograntingpre-judgmentinterestonlyorwhetheritisextendedtogranting“pre-judgmentcompensation”;

(b) Whethertheexistingpracticebytheindustryofincludingawaiverof interestclause infinancingagreementscouldbechallenged.

ThequestiononwhetherpartiestoanIslamicfinancialtransactionareentitledtotheequivalentofpre-judgmentinteresti.e.moneyapartyhasbeenkeptoutfromthedateheoughttohavebeenpaidisaShariahissuetobedetermined.Inthis,therecommendationmade to the Committee was to table the issue to the ShariahAdvisory Council of Bank Negara Malaysia and the SecuritiesCommissionMalaysiaforitsrulingonpre-judgmentinterest.

Initsdeliberations,theCommitteenotedthatthecourts’discretionundersection11of theAct is rarelyexercised in thecontextoffinancialtransactionsastheconsequencesforbreachofobligationsunderafinancialtransaction(e.g.delayedrepayment)aregenerally

___________________________33LeeGuanParvHotelUniversalSdnBhd[2005]4MLJ589


64 65

provided for in the agreements entered into by parties. It wasalsoobservedbytheCommitteethattheprovisionwasgenerallyexercised in disputes relating to personal injury cases. Uponfurtherconsultationwiththe industry, itwasfoundthat there isno current practical example of circumstances under which thecourtsdiscretionundersection11oftheActhasbeenexercisedinrelationtoIslamicfinancialtransactions.

(iii) Assignment of rights by a takaful participant and purpose of

assignment

AnotherprovisionintheActwhichrequiresclarityinitsapplicationtoIslamicfinancialproductsissection4(3)oftheActwhichdealswith the effect of assigning debt or legal chose in action. Theissuepresented to theCommitteewas twofold fromtheShariahperspective:

(a) Canatakafulparticipantinvokeanassignmentpursuanttosection4 (3)of theAct to transfer the rightsandbenefitsunderatakafulcertificatefromaparticipanttoanassignee?

(b) MustthepurposeoftheassignmentbeShariahcompliant?

Inmakingitsdecision,theCommitteewasguidedbytheresponsebytheSecretariatoftheShariahAdvisoryCouncilofBankNegaraMalaysiaasfollows:

(a) In accordancewith the SAC decision at its 114thmeeting,a takaful participant may assign the takaful certificate toanotherpersonwithouthavingtoobtaintheconsentofthenomineeorbeneficiaryasthetakafulcertificateisconsideredastheparticipant’sassetduringhislifetime.

(b) TherearenoSACdecisionsonwhether thepurposeofanassignment must be Shariah compliant. The Secretariatwas of the view that since the takaful certificate is theparticipant’sasset,thereshouldnotbeanyimpedimentforhimtotransactinaccordancewithhispreference.

TheCommitteewasalsoinformedthattheissuehasalsobeenaddressedintheIslamicFinancialServicesActtabledinend2012.Havingconsideredtheanalysis,theCommitteeacceptedtherecommendationnottoamendsection4(3)oftheAct. (iv) Effect of nomination on hibah

Initsconsultationwiththeindustry,itwashighlightedthatthereisa lackofclarityonwhethersection23oftheActwhichdealswith moneys under a policy of assurance is equally applicableto takaful participants. Section 23 (1) of the Act stipulates thatmoniespayabletoabeneficiaryunderapolicyofassuranceshallcreateatrustinfavourofthebeneficiaryandshallnotformpartoftheestateoftheinsured.Inthis,theShariahissueraisedwaswhetherthesameprinciplewasapplicabletotakafulparticipant.Itisobservedthatthiswasunlikelygiventhatthelanguageoftheprovisionwasspecifictotheinsurancepolicyholder.Furthermore,theActitselfwaspassedpriortotheintroductionoftheTakafulAct1984.

Indeterminingtheappropriate legal treatment for the issue, theCommittee took note that the issue has also been addressedthrough the Islamic Financial Services Act and decided that noamendmentstotheActitselfwasnecessary.


66 67

Specific Relief Act 1950

Initsconsultationwiththeindustry,therewasnosubstantiveissueraisedinrelationtotheSpecificReliefAct1950.

Conclusion

In cognizance of the issues and recommendations made to it, theCommitteedecidedthatnoamendmentswererequiredtobemadetotheaboveActsastheissuesrelatedtheretowereeithersufficientlyaddressedthroughjudicialprecedentorwillotherwisebeaddressedinotherActs.


68 69

Moving Forward :

ENHANCINGMALAYSIANLAWASTHELAWOFCHOICE

ANDMALAYSIANDISPUTERESOLUTIONINSTITUTIONSASTHEFORUM

FORDISPUTESETTLEMENTFORINTERNATIONALISLAMIC

FINANCETRANSACTIONS


70 71

Enhancing Malaysian law as the law of choice and Malaysian dispute resolution institutions as the forum for dispute settlement for international Islamic finance transactions

In fostering a credible, efficient and conducive legal framework tosupportacompetitive,dynamicandevolvingIslamicfinancialsystem,itisimperativethatreferencesonevolutionoftheMalaysianlegalsystemis developed. This inaugural Law Harmonisation Committee Reportpresents the first in upcoming series of references on initiatives toenhanceexistingMalaysianlawandlegalframework.

ThecurrentphaseoftheLawHarmonisationCommittee’sinitiativesandefforts are focused on recommendations to overcome remaining legalimpediments whichmay still exist to the efficient conduct of IslamicfinanceinMalaysiaaswellascreatingtheawarenessoftheworkoftheCommittee.

OneoftheCommittee’srecommendationstoamendthecourtsruleswithregardto interestonjudgmentdebt in Islamicfinancecaseshassincebeenimplemented34.Otherrecommendationsarecurrentlybeingstudiedbyrelevantstakeholdergovernmentdepartment,ministriesandagencieswhereimplementationisexpectedtofollowsuit35.

The Chairman of the Committee has been instrumental in generatinginterest of the legal fraternity and legal academicians, particularly inclarifyingtherationalebehindcompulsoryreferencebythecourtstotheShariahAdvisoryCommitteeatBankNegaraMalaysiaandtheSecuritiesCommissionMalaysiaaswellastheuseofthecivilinsteadoftheShariahcourtstohearIslamicfinancedisputes.Therelevantspeech36wascitedverbatimas the ratiodecidendi inan IslamicbankingCourtofAppealjudgment37.___________________________34 Order42Rule12A,RulesofCourt2012whichcameintoforceon1August201235 Pleaserefertopages8and9ondetailedrecommendationsthatarecurrentlyunderreview36 Chairman’sspeechdeliveredatthe12thEmeritusProf.AhmadIbrahimMemorialLectureon

7thDecember2011(seeAnnexureB)37 RHBBankBhdvMohdAliasIbrahim(unreported)

TheLawHarmonisationCommitteerecommendsthefollowingfivekeydevelopingfactors:

Firstly,Malaysian lawshouldevolvetowardsproviding for legal

certainty of Shariah contracts enforcementasthefutureofIslamicfinancedependsonitsagilityandinnovativenessindevelopingnewproducts.

Integraltotheabove,theCommittee’ssecond recommendationisfortheMalaysian legal system to be responsive to implement

legislative changes to allow for consistent and continuousenforcementofShariahcontracts.

AstheregulatoryinfrastructureforIslamicfinanceinMalaysiacutacrossvarious agencies-jurisdictional spheres, the third recommendationis for inter-agency collaborations similar to that of the LawHarmonisation Committee be encouraged to enable sustainableintegrationandnaturalprogressionofMalaysia’sleadershipindrivinggrowthandinnovationintheindustry.

Fourthly, true to reflect Malaysia’s long-held conviction thatsustainablegrowthofIslamicfinancecouldnotbeachievedwithoutadequateattentiontothedevelopmentofintellectualresources,theexistingintellectualdevelopmentatthisendshouldemphasisetowardsproducing highly qualified legal talent and commercially

experienced judiciary.

Undeniably, as Islamic finance activities venture beyond domesticboundaries,thedevelopmentoffacilitativelegalframeworkforcross-border transactions is of great importance. As part of the supporttowardspositioningMalaysianlegalsystemintheeyesoftheworld,theCommittee’sfinal recommendation is tocreateasupportive

and reputable dispute resolution environment to instillpublicand international community’s confidence to demonstrate that


72 73

Malaysia could be the best available platform for adjudication anddisputesettlement.

Next phase

In the next phase and concomitantwith the recommendations above,theLawHarmonisationCommitteewillintensifyeffortsonthefollowingaspects:

First, the Committee will participate in an initiative to enhance

legal certainty of Shariah contracts enforcement

WiththecomingintoforceoftheIslamicFinancialServicesAct2013,Shariahcomplianceandgovernancewillbegivenmoreprominenceand emphasis. Standards on commonly used Shariah contracts inIslamicfinancewillbe issuedwheresuchstandardswillhave legalforce38.Tocomplementthesestandards,clearandpracticalguidancewill be provided through operational standards that will includeappropriatelegaltreatmentforthefeaturesofeachShariahcontract.ThisinitiativemayentailfurtherreviewbytheCommitteeofrelevantlaws in Malaysia, including laws covered in this Report, to ensureeffectiveenforceabilityoftheShariahcontracts

TheLawHarmonisationCommitteewillformpartoftheecosystemtovalidateappropriatenessofthelegaltreatment.

Secondly, in producing highly qualified legal talent and

commercially experienced judiciary and thirdly, in creating

a supportive and reputable dispute resolution environment

equipped to handle cross-border disputes,theLawHarmonisationCommitteewillbeassessingsufficiencyofavailablemechanismstoresolveIslamicfinance-relateddisputes,thepreparednessofthelegal

___________________________38 Section29ofIslamicFinancialServicesAct2013

fraternity in handling Islamic financematters and the adequacy ofappropriatelegaltrainingandeducation.

Towards ensuring a meaningful and holistic outcome of positioningMalaysian law as the law of choice for international Islamic financetransactions andMalaysian legal system as the choice jurisdiction forIslamicfinancedisputeresolution,theCommitteecontinuestowelcomecontributionofviewsandopinionsbysubmissiontothefollowing:

SecretariatLawHarmonisationCommitteec/oFinancialInfrastructureDevelopmentIslamicBankingandTakafulDepartment6B,BankNegaraMalaysiaJalanDato’Onn,50480KualaLumpur

[email protected]

Tel : 03-26988044ext8915or7694Fax : 03-26903724


74 75

ANNEXURES

Law Harmonisation Committee Report 2013ANNEXURES

76 77

ANNEXURE A : Sub-Committees,FocusGroups,ResearchSupportAndSecretariat

The Committee appreciates the dedication and expertise of the sub-committee, focus groups and secretariat for their contribution to theCommittee’swork.

ANNEXURE B : TableOfStatutes,CaseLawAndResearchBibliography

PART (A) : ISSUES RAISED WHERE AMENDMENTS ARE RECOMMENDED

1 LegalrecognitiontoShariahpermissibilityofimposinglatepaymentchargeonjudgmentdebtsinIslamicfinancialcases

Statutesa) RulesoftheHighCourt1980b) RulesofCourt2012

ShariahResolutionsa) BankNegaraMalaysia’sShariahResolutionsinIslamic

Finance(2ndEdition)b) ResolutionsoftheSecuritiesCommissionShariahAdvisory

Council(2ndEdition)

2 Improvingaccesstofinancing(especiallyIslamicfinancing)involvingreservelands

Statutesa) MalayReservationEnactmentKelantan1930b) MalayReservationEnactmentKedah1931c) MalayReservationEnactmentPerlis1935d) MalayReservationEnactmentJohor1936e) MalayReservationEnactmentTerengganu1941f) MalayReservationEnactment(FMSCap142)(asapplicable

toPahang,Perak,Selangor,NegeriSembilan,FederalTerritories)

g) NationalLandCode(PenangandMalaccaTitles)Act1963h) SabahLandOrdinance(Cap.68)i) SarawakLandCode(Chapter81)

CaseLawa) BadiaddinvArabMalaysianFinance[1998]1MLJ393b) RobertLeevWongAhYap[2007]4CLJ1


78 79

3 RecognitionofIslamicfinancetransactionundertheNationalLandCode1965:LegalrecognitionofShariahprinciplestofacilitateprovisionofIslamicfinanceundertheNationalLandCode1965

Statutesa) NationalLandCode1965b) StrataTitlesAct1985

4 FacilitatinguseofcollateralisedcommodityMurabahahinshort-termIslamicfinancialmarketinstruments:ClarifyingrequirementsforregistrationofcollateralunderCompaniesAct1965

Statutesa) CompaniesAct1965

PART (B) : ISSUES RAISED WHICH DO NOT NECESSITATE AMENDMENTS

1 Certaintyoflegaldefinitionofsukuk

Statutesa) CompaniesAct1965b) SecuritiesCommissionAct1993c) CapitalMarketsandServicesAct2007

Guidelinesa) IslamicSecuritiesGuidelines(SukukGuidelines)2011

2 ImplicationofSaleofGoodsAct1957onsale-basedShariahcontracts

Statutesa) SaleofGoodsAct1957b) ContractsAct1950c) ConsumerProtectionAct1999

3 Implications of Partnership Act 1961 on profit-sharing Shariahcontracts

Statutea) PartnershipAct1961

4 Shariah compliance of current legislation on enforcement ofguaranteesagainstgratuitousguarantors

Statutea) BankruptcyAct1967

Articlesa) SuhaimiAbRahman,The influence of classical

interpretation on the Law of Guarantees in the United Arab Emirates,ArabLawQuarterly22(2008)335-358

b) SuhaimiAbRahman,Islamic Law and Modern Guarantees in Malaysia,InternationalJournalofEconomicsandManagement1(3):477-501(2007)

PART (C) : ISSUES FOR FURTHER RESEARCH

1 ImplicationofContractsAct1950,CivilLawAct1956andSpecificReliefAct1950onShariahcontracts

Statutesa) ContractsAct1950b) SpecificReliefAct1950c) CivilLawAct1956d) RulesofCourt2012e) TakafulAct1984f) IslamicFinancialServicesAct2013

CaseLawa) ArabMalaysianFinancevTamanIhsanJayaandOrs

(KoperasiSeriKotaBukitCherakahSdnBhd)[2008]5MLJ681

b) BankIslamMalaysiaBerhadvLimKokHoeandAnor[2009]6MLJ839

c) JinSengHongSdnBhdvKhiingSieKhuo[1988]3MLJ101d) BeximcoPharmaceuticalsLtdandOrsvShamilBankof

Bahrain[2004]EWCACiv19e) NeplineSdnBhdvJonesLongWooton[1995]1CLJ865f) JasaKeramatSdnBhdvMonatech(M)SdnBhd[2001]4CLJ

549


80 81

SPEECH / LECTURE

1 ‘Malaysia as an Islamic finance hub: Malaysian law as the lawof reference andMalaysian courts as the forum for settlement ofdisputes’ by Tun Abdul HamidMohamad (Former Chief Justice ofMalaysia))

- deliveredat12thEmeritusProf.AhmadIbrahimMemorialLectureon7thDecember2011

12TH EMERITUS PROF. AHMAD IBRAHIM MEMORIAL LECTURE Wednesday7thDecember2011

MALAYSIA AS AN ISLAMIC FINANCE HUB:

MALAYSIAN LAW AS THE LAW OF REFERENCE AND MALAYSIAN

COURTS AS THE FORUM FOR SETTLEMENT OF DISPUTES

ByTunAbdulHamidMohamad

(FormerChiefJusticeofMalaysia)

I thank the International IslamicUniversityMalaysia for invitingme todeliverthislecture.

Lookingback, lastyear,today, Iwas lyingonmybackonthehospitalbed,unabletoturntotheleftorright,beingfedthroughthenose,hadtobeliftedinordertosit,unabletospeakbecauseoflossofvoiceandsoon.Today,oneyearlater,Iamstandinghereanddeliveringthislecture.WhatcanIsay,exceptAlhamdulillahandthankyouforyourprayers?

IhavechosenthistopicbecausethisiswhatIhavebeenentrustedtodotwomonthsbeforemyhospitalisation,thisiswhatIamdoingnowandthisiswhatIwouldliketospendmy“injurytime”doingandIhopetoscorethewinninggoalbeforethefinalwhistleblows.

I know that this lecture is in memory of Emeritus Professor AhmadIbrahimandnotabouthim.However,letmesharewithyouanincidentthathadhappenedbetweenthetwoofus.

When I was in my third year at the Law Faculty of the University ofSingapore, Ahmad Ibrahim, then the Attorney General of Singapore,becamemylecturer,teachingrevenuelaw.Youknowthattaxlawisaverytechnicalandboringsubject.The judgments,especiallyof theEnglishCourts,werelengthy.Tomakeitworse,ateverylecture,hewouldgiveusatleasttwentyjudgmentstoread.


82 83

Aboutfifteenyears later, Imethimata function inKualaLumpur.Heaskedme, “Whereareyounow?” I replied, “IamnowaSeniorFederalCounselattheDepartmentofInlandRevenue.”“Good,”hesaid.ThenIsaid,“ButProf,Iamsorrythat,inspiteofyou,Istilldon’tunderstandtaxlaw.”Hesmiledandreplied,“Don’tworry.Idon’tunderstanditmyself”.Thatstatementsaysalotabouttheman,especiallyhowhumblehewas.

Forthesakeofbrevity,inthislectureIamusingtheterm“Islamicfinance”tocoverIslamicbanking,Islamiccapitalmarketandtakaful.

Beforeproceedinganyfurther,Iwouldliketomakeonepoint.Iamnotanacademician.So,thisisnotgoingtobeanacademiclecture.Itisaboutwork,theworkthatshouldbedonebyallofus.Afterall,EmeritusProf.AhmadIbrahimisrememberednotsomuchforwhathetaughtbutforwhathedid.Whathetaughtcouldbefoundinthebooksbutwhathedidinspear-headingthedraftingoftheEnactmentsandLawsnowusedintheShari’ahCourtsinthiscountry,ishislegacy.

Thebirthof Islamicfinance in itsmodern form isassociatedwith theneed of pious Muslims who want to avoid committing a sin in theirfinancialtransactions.However,overthelastfewdecadesithasgrownbeyond anybody’s imagination. Today, the industry, with over 600financialinstitutionsin75countries,isworthapproximatelyUSD1trillionworldwideandisexpectedtogrowtoUSD1.6trillionin2012.1

In Malaysia, Islamic finance began as an industry in 1983 with theenactmentofIslamicBankingAct1983andfollowedoneyearlaterbytheTakafulAct1984,bothofwhichformthefoundationsofIslamicfinanceindustryinMalaysiathatweseeittoday.TheseActspavedthewayforthelicensingofthefirstIslamicbankandtakafuloperator.Subsequently,in 1993, the Securities Commission Malaysia was established. Thedevelopment of Islamic capital market was one of the Commission’sdevelopmentalagenda.

___________________________1“JEF2011DebatesTheFutureNeedsofIslamicFinance”,GlobalIslamicFinanceMagazine

(2011).

Fromjustonebankandonetakafuloperatorbackthen,Malaysianowhas16Islamicbanks,five(5)InternationalIslamicbanksand11takaful operatorswithanothertakafuloperatorunderway.Inaddition,thereare16 licensed Islamic fund management companies licensed under theCapitalMarketandServicesAct2007.

AsatJune2011,theIslamicbankingassetshavegrowntoalmostRM393billionaccountingfor21.6%ofthetotalbankingassetsofthecountry.DepositsstandatRM296.8billionor22.79%ofthetotaldepositsinthecountry.IslamicfinancingamountstoRM240.6billionor23.8%oftotalfinancinginMalaysia.2

Asfortakaful,theindustryassetsamountstoRM16.3billionor8.66%oftakafulandinsurancetotalassets.Marketpenetrationhasincreasedto12.1%.

IntheareaofIslamiccapitalmarket,MalaysiaisthelargestsukukmarketintheworldwithUSD112.3billionor62%ofoutstandingglobalsukukasofthesecondquarterof2011.3

As of June 2011, 89% of the securities listed on BursaMalaysiawereShari’ahcompliantandthereare160approvedIslamicunittrustfundscurrentlyinthemarket.4

In terms of product offerings,Malaysia offers a comprehensive rangeof Islamicfinancialproducts, fromaplainwadiahsavingsaccount forthemanonthestreet,tomorecomplexfinancingstructuresformulti-national companies such as Islamic structured products and sukuk.TherearealsorangesoffamilyandgeneraltakafulproductsaswellasinvestmentproductssuchasIslamicrealestateinvestmenttrust.

___________________________2BankNegaraMalaysia.3Totaloutstandingglobalsukukasof2ndquarterof2011wasUSD179billion–Bloomberg/

MIFCPromotionsUnit,BankNegaraMalaysia.4MalaysianICM,2ndQuarter2011,Vol6No.2(QuarterlyBulletinofMalaysiaIslamicCapital

MarketbySecuritiesCommissionMalaysia.)


84 85

Malaysiahasattractedinternationalinstitutionstoset-uptheiroperationshere.Al-Rajhi,KuwaitFinanceHouse,QatarIslamicBank,HSBCAmanah,StandardCharteredSaadiqandDeutscheBankareamongthewell-knowninternationalinstitutionsthathaveset-uptheirIslamicbankingbusinessin Malaysia. Renowned international fund managers like FranklinTempleton,Amundi,NomuraandBNPParibashavealsoestablishedtheirIslamicfundmanagementcompaniesinKualaLumpur.

Inthetakafulindustry,leadinginternationalcompaniessuchasPrudential,AmericanInternationalAssurance,FriendsProvidentGroupUKandGreatEasternLifeAssuranceLimitedhavetakenstepsbypartneringwithlocalinstitutionstoestablishtheirtakafuloperationsinMalaysia.

The Government, together with Bank Negara Malaysia and SecuritiesCommission Malaysia are also facilitating the development of Islamicfinance. One of PEMANDU’s Entry Point Project under the FinancialServicesisto“position Malaysia as the indisputable global hub for Islamic finance” andtocreateapproximately12,000jobsunderthesector.

Malaysia currently hosts two leading international Islamic financialorganisations, namely the Islamic Financial Services Board (IFSB), astandard setting organisation, and the International Islamic LiquidityManagementCorporation(IILMC),acorporationestablishedtofacilitateglobalIslamicfinancialinstitutionsinmanagingitsfinancialliquidity.

To support the growth of the industry, it is essential to have humancapitaldevelopment.Towardsthisend,substantialresourceshavebeenspentbyMalaysia todevelop talents for the Islamicfinancial industry.ThebiggestcommitmentbyBankNegaraMalaysiaistheestablishmentof the International Center for Education in Islamic Finance (INCEIF).INCEIF,auniversityrecognisedbytheMinistryofHigherLearning,hastheobjectiveofdevelopingtalentnotonlyforMalaysia’sIslamicfinanceindustry but also globally. It now has “approximately 2,000 students from over 75 countries.”5

___________________________5HandbookonthevisitbyTunAbdulHamidMohamadtoINCEIFon2November2011.

Inaddition,InternationalShari’ahResearchAcademyforIslamicFinance(ISRA)isspearheadingtheglobalresearchinitiativesforIslamicfinance.TheeffortbyBankNegaraMalaysiaiscomplementedbytheeffortoftheSecuritiesCommissionofMalaysiathroughitstrainingarm,theSecuritiesIndustryDevelopmentCorporation,toundertakeprogramscateringforthedevelopmentoftalentfortheIslamiccapitalmarket.Theseinitiativesare to complement the already existing effortsby leadinguniversitiessuch as International Islamic University Malaysia in developing themuchneededtalentsfortheindustry.Malaysia’sfocusisnotlimitedtodeveloping the business aspect of the industry but its human capitaldevelopmentsaswell.

InthewordsofTanSriZetiAkhtarAziz,theGovernorofBankNegara,Malaysia“is currently supplying world class talent for the fast-growing Islamic finance”. 6

Inaddition,toborrowthewordsofDato’MuhammadIbrahim,theDeputyGovernorof BankNegara. “........ the market has been supported by a robust regulatory and supervisory framework, reinforced by the legal and Shari’ah framework.” 7

TheGlobal Islamic FinanceReport (GIFR2011), in the chapter onTheMalaysian Model under the heading “Strength and Advantages of the Malaysian Model”atpage165to166hasthistosay:

“The strength and advantages of the Malaysian model are numerous and deserve an analysis on their own. However, in summary, amongst the obvious advantages of the Malaysian model are the following:

(i) Sound and clear Sharia-compliance and governance framework;

___________________________6 MalaysianNationalNewsAgency(BERNAMA),15October2011–3rdConvocationofINCEIF.7 Dato’Muhammad Ibrahim,DeputyGovernor, BankNegaraMalaysia, LuncheonAddress

21stConferenceofPresidentsofLawAssociationsinAsia:”IslamicFinanceandMalaysia’sRole”27July2010.KualaLumpurConventionCentre


86 87

(ii) Tax accommodations;

(iii) Certainly and predictability of dispute resolution outcomes;

(iv) Talent enrichment and thought leadership infrastructures;

(v) Depth and width of its capital market;

(vi) Deposit insurance protection.”

Wehavealsotakenmeasurestoensurethatourproductscomplystrictlywith Shari’ah requirements. New products are only issued with theapprovalofeithertheShari’ahAdvisoryCouncil(SAC)ofBankNegaraorof theSecuritiesCommission, respectively, the twohighestauthoritiesonShari’ahissuesinIslamicfinanceinthecountry.Besides,everyIslamicfinancial institution and takaful company is required to have its ownShari’ahcommitteewhosemembershavetobeapprovedbytheSACoftheCentralBank.

SinceNovember2009,wehavegonefurtherbymakingitcompulsoryfor thecourtandthearbitrators toreferShari’ah issuesarisingbeforethemtotherespectiveSACsandthattherulingsoftheSACsarebindingonthem.

Whydowedothat?

HavingbeenaJudgeinallthecourtsinthecountry,fromtheMagistrate’sCourttotheFederalCourtandtheSpecialCourtaswellasintheShari’ahCourtofAppeal,overaperiodofnearlyfortyyearsandalsosittingintheShari’ahAdvisoryCouncilofBankNegarasince2004andoftheSecuritiesCommissionsince2006,IcanseeclearlytheadvantagesofgivingtheSACs the power to decide on Shari’ah issues in lslamic finance. So,whateverhappenstothefateofSACs,IamnotrepentantforsuggestingthatShari’ahissuesonIslamicfinancearisingincourtbereferredtothe

SACs.Theadvantagesare:

(i) It enables a product to be thoroughly screened to spot theShari’ahissues,ifany.Thisisthemostdifficultpart.TheSACshaveaSecretariateachmannedbyofficerswho,notonlyhaveShari’ahbackgroundbutareexposedtoIslamicfinance.(Frommyownobservation,theShari’ahofficersatBankNegaraandtheSecuritiesCommissionareamongthebestinthecountry,ifnotthebest,forthejob.)TheofficersintheSecretariatsareassistedbytheircolleaguesfromotherdepartments,Islamicorconventional,when the need arises. Other institutions underBankNegara,likeISRAandINCEIFarealsotheretoassist.TheSecretariatshaveaccess to the industry.Theofficersare inapositiontocallonthepeople inthe industryforconsultationandfeedback.BankNegaraandtheSecuritiesCommissionhaveregulatoryandsupervisorypowersoverthebankinginstitutions,insurance companies, takaful operators and capital marketinstitutions under their respective jurisdictions. Bank NegaraandtheSecuritiesCommissionareinapositiontoensurethattherulingsarecompliedwith.Nootherreligiousdepartment,religious council or fatwa committee has all such power andexpertise.Withsuchexpertiseandfacilities,theSecretariatsareable to present very comprehensive papers for considerationoftherespectiveSACs.Wheneverthereisacommonissue,thetwoSACsholdajointmeeting.

(ii) HavingtheSACsatnationallevelenablesspeedyrulingonanissue.TheSecretariathastoprepareandpresentthecasefordeliberationandrulingtoonecouncilonly.Otherwise,itwouldhavetodoit,atleastfourteentimes,atfourteendifferentFatwaCommittees.Thatwouldtaketimeandtherulingsmaydifferfromonestatetoanother.(Thisisnottakingintoaccounttheissueofjurisdiction).


88 89

(iii) ItpromotesconsistencyofrulingsonShari’ahissues.Imagineputting those issues to be determined by fourteen FatwaCommittees, fourteen Shari’ah Courts of Appeals or leavingthem to the respective Shari’ah Committees of the financialinstitution. We are concerned about uncertainty in contracts,butuncertaintyinShari’ahrulingsisevenworse.

Whynotthecivilcourts?

CivilcourtsdonothavetheexpertisetodecideShari’ahissues.Indeedfrommyobservation,wehavereachedastagenowthatevenanulama’oraMuftialoneisnotinapositiontomakeaproperrulingonaShari’ahissueinIslamicfinanceanymore. Intheircase, it isnotforthelackofknowledgeoftheShari’ahorIslamicjurisprudence,butitisduetothedifficultytounderstandthecomplexityoftheproducts.Judges,sittingaloneoreveninthree’sareinnobetterposition.TheylacktheknowledgeoftheShari’ahandIslamicjurisprudence.

Inthecaseofcommonlaw,civilcourtjudgesareinapositiontolookforthelaw.Theymayevenfindthatthesubmissionsofbothcounselsarewrong.But,theyareunabletodothesameinthecaseofaShari’ahissue.Intheend,theywouldjustlistentothesubmissionsofthetwoopposing,partisanand,withrespect,equally“un-learned”lawyers,andchoosewhichsubmissiontoaccept.

DoyouwantShari’ahissuestobedecidedthatway?Whatmore,whereboththelawyersandthejudgesarenotevenMuslims!Canyouaccepttheir rulings which would bind everybody, institution, government,corporationorindividualalike?

Somemaysaythatthecourtwillbeassistedbyexpertwitnesses.Letmetellyouthis.Inmyfortyyearsexperienceinandaroundthecourt,Ihavenotcomeacrossanexpertwitness(Iamspeakinggenerally)whogivesevidencedetrimentaltothepartycallinghimaswitness.Otherwisehe

wouldnotbecalledbythepartyandpayhimforit.Itisassimpleasthat.So,theytooarepartisan.

WhynottheShari’ahcourts?

Shari’ah courts do not have jurisdiction over finance, banking andinsurance,noroverlimitedcompaniesandbanks,theynotbeing“persons professing the religion of Islam”. Companies law, bankruptcy law,contractslaw,landlawandahostofotherlawsrelevantandapplicabletoIslamicfinanceareoutsidethejurisdictionsofShari’ahcourts.NeitherShari’ahjudgesnorShari’ahlawyers,unlesstheyarealsomembersoftheBar,haveexpertiseinthoselaws.

LegaldocumentsareinEnglishandcommonlawlawyerswhodraftthosedocumentscouldnotappearintheShari’ahcourts.ThelawisinEnglish.Thewitness,localandmoresoforeigners,giveevidenceinEnglish.

There are fourteen Shari’ah Courts of Appeals as against one FederalCourt. That could lead to inconsistency in the rulings on a particularissue.

Shari’ahissueisaveryrareissueincourt.In2009theMua’malatDivisionof the High Court in Kuala Lumpur alone disposed of 940 cases asagainst691registeredinthatyear.In2010,1270casesweredisposedofasagainst1260registered.UptoSeptember2011,1033casesweredisposedofasagainst1020registered.(First,pleasenotethatthecourtsaredisposingmorecasesthanregisteredduringtheyear,cuttingdowntheoldbacklog).SofaronlyoneShari’ahissuehasbeenreferredtotheSAC of BankNegaraMalaysia i.e. this year. Those thousands of othercaseshadbeendecidedonissuesoflandlaw,lawofcontract,companieslawandothersinwhichtheShari’ahcourtshavenojurisdictiononandShari’ahjudgesdonothavetheexpertisein.Shari’ahcourtsdonotevenhaverulestocoverthoseactions.


90 91

Lastly,ReciprocalEnforcementofJudgmentsAct19588doesnotextendtojudgmentsoftheShari’ahcourts.

So,donotthinkthatbytransferringthejurisdictiontotheShari’ahcourts,evenifpossible,everythingwouldbefine.

Actually,whatwehavedonehadreceivedveryfavourablereportfromothercountries.Iwillonlyquotetwopassages.Thefirstisfromthebook“The Art of Islamic Banking and Finance” by Yahia Abdul Rahman at page 79:

“This approach (the Malaysian approach - added) saves a lot of confusion and conflicts within different Shari’aa Boards. The involvement of the Central Bank adds credence and weight to the rulings. In addition, because the Shari’aa Board is operated and supervised by the Central Bank, there is no potential for conflict of interest, because the individual banks are not paying their own hand-picked scholars for their services.”

ThesecondisfromGIFRReport2011,atpage165:

“The existence of a structured and powerful National Supervisory Advisory Council (NSAC) (SAC – my addition) was originally intended to ensure clarity in terms of fiqh muamalat practices, but today it also has the power of final arbiter on Shari’a issues in any IBF dispute. By having legal authority, there will be coherence and assurance of validity of pronouncements by Shari’a scholars. In most other jurisdictions, the status of Shari’a pronouncements for IBF contracts remains vague and ambiguous when it comes to enforcement under the law.”

I am reminded of the Hadith narrated by Abu Hurairah in which theProphet(p.b.u.h.), interalia,said, “When the power or authority comes ___________________________8 First enacted in 1958 (Ordinance No. 65 of 1958) and revised in 1972 (Act 99

w.e.f.15December1972.)

in the hands of unfit persons, then wait for the Hour (doomsday.)” 9 .ThatHadithshowshowseriousthematteris.

ProducingthehigheststandardofShari’ahcompliantproductsisnottheendofthematter.Itisequallyimportantthattheimplementationandthesettlementofdisputes,iftheyariselater,bedoneinaShari’ahcompliantenvironment.Ourlaws,insofarastheyareapplicabletoIslamicfinance,shouldbeShari’ah compliant.Towards this end, someworkhadbeendonebytheLawReviewCommitteeestablishedbyBankNegarain2003butthatwasinsofarasremovinganyimpedimentsthatmayexistinthelawthen.

But,that isnotall.Weare, infact,goingonestepfurther:wewanttogivelegaleffecttoShari’ahprincipleswhichareappliedinthepractices,servicesandproductsofIslamicfinanceinthemarket.Agoodexampleiswa’ad.Thisistoensurelegalcertaintyofthoseprinciples.

On27thJulylastyear(2010)BankNegaraannouncedtheestablishmentoftheLawHarmonisationCommittee(LHC)andIhavebeenentrustedtochair it.TheCommitteeconsistsof representatives fromBankNegara,SecuritiesCommission,AttorneyGeneral’sChambers,practicinglawyers,ISRAandtheAssociationofIslamicBankingInstitutionsMalaysia(AIBIM).Itissupportedbyafull-timeSecretariatatBankNegara.

Theobjectivesare:1.Tocreateaconducivelegalsystemthatfacilitatesandsupportsthe

developmentofIslamicfinanceindustry;

2. To achieve certainty and enforceability in theMalaysian laws inregardtoIslamicfinancecontracts;

___________________________9BookNo.3HadithNo56SahihBukhariwww.searchtruth.com/SearchHadith.ph


92 93

3.TopositionMalaysiaasthereferencelawforinternationalIslamicfinancetransactions;and

4. For Malaysian laws to be the law of choice and the forumfor settlement of disputes for cross border Islamic financialtransactions.

From the beginning, the Committee adopts a practical approach andworkswithinthesystem.WewouldidentifythelawsorprovisionsthatarenotconsistentwiththeShari’ahorwhicharenotconducivetoIslamicfinance,ascertaintheShari’ahposition,drafttheShari’ahalternativeandsendittotherelevantauthoritiesforlegislation.Wewouldnotdebateabout the Federal and State jurisdictions or Civil and Shari’ah Courtjurisdictions. We would accept the constitutional provisions as theyare.IftherearelegalorShari’ahissues,wewouldrefer,respectively,totheAttorneyGeneral’sChambersforadviceortotherelevantSACsforrulings.

In identifying the Shari’ah non-compliant provisions we adopted theapproach:any law that is not un-Islamic is Islamic.Incaseyouareshockedbythatstatement,pleaserememberthat,thatwasexactlywhatEmeritusProfessorAhmad Ibrahimdidwhenheandhis teamweredraftingtheprocedurallawsfortheShari’ahCourts.

Wehave,sofar,identifiedanumberofissues,includingwa’adandibra’ andanumberofprovisionsthatneedtobeharmonisedandareworkingonthem.WehavealsoformedaLandLawsSub-Committeetolookatthelandlaws.TheCommitteehasidentifiedanumberofarease.g.regardingcharges,liensandothersandisworkingonthem.

Thequestionthatkeepscomingtomymindisthis:

“Are these the only areas where our laws are not Shari’ah compliant or that need be addressed to facilitate the development of Islamic finance in Malaysia?”

Sincetherearemanyacademiciansinthishall,Iwouldliketotakethisopportunitytoappealtoallofyouthatif,inthecourseofyourresearchorteaching,youhadcomeacrossanyareainourlawapplicabletoIslamicfinancewhicharenotShari’ahcompliantorwhicharenotconducivetothedevelopmentofIslamicfinance,pleaseletushavethem,preferablywiththeShari’ahpositionandyourrecommendation.Wewilleveninviteyoutopresentyourfindingsandsuggestionsatourmeeting.

Betweenallofyou,youmusthavedonecenturiesofresearch.Iamsurethatyouhavecomeacrosssomethingthatwouldbeusefultous.Letushavethem.Letusputtheresultsofyourresearchtopracticaluse.Tome,todoaresearchwithoutputtingthefindingstopracticaluseislikeconceivingwithoutdelivering.

Ifwesucceed in thisproject, I amsure thatwewillputMalaysia inaveryfavorablepositioninourquesttomakeMalaysiathehubforIslamicfinance. Investors will know that not only our products are Shari’ahcompliantbutthelawsapplicabletothemaftertheissuanceandinthesettlementofdisputes,arealsoShari’ahcompliant.

ThereisanotherareathatneedstobefocusedifwereallywanttomakeMalaysiaaholistichubforIslamicfinancei.e.theareaofsettlementofdisputes.Inthisrespectwewillhavetofocusonthelawyers,theJudges,thecourtandthearbitrators.

Inoursystem, indeed inanysystemintheworldnow, lawyersplayaveryimportantroleinfinance,conventionalorIslamic.Theyaretheoneswhoadvisethefinancialinstitutionswhenissuingaproduct,theyaretheoneswhoadvisethecustomersonthelegalaspectsoftheproduct,theyaretheoneswhodrawupthecontracts,theyaretheoneswhoadvise


94 95

thepartieswhen there is a dispute, they are the oneswho appear incourtwhenthereisacase,theyaretheoneswhomakethesubmissionson the facts and the law for the Judge to decide, in reality, trying topersuadetheJudgetodecideintheirclients’favor.So,theyhavetoknowIslamicfinancetobeabletodoallthosethings.Otherwisetheywouldbemisleadingeverybodywhoseekstheiradvice,includingthecourtthathearsthecase.

However,evenhere,Ithink,wehaveanadvantage.MostofourlawyerswhospecialiseinIslamicfinance,areMuslims.Thefaithfactoristhere.Secondly, we have many institutions of higher learning which offercourses in Islamic finance, full-time or part-time. The lawyers mayenrollthemselvesinsuchinstitutions.Infact,manyhavedoneso.ThisargumentcouldbeextendedtoJudgesandarbitrators.

We now come to the courts. First, our court system is based on thecommonlawsystem.Letmeremindyouthatwehaveadoptedthesamesystem for our Shari’ah courts. The systemhas the advantageof oralanddocumentaryevidence,oralandwrittensubmissionsbycounsels,fullwrittenand reasoned judgments insteadofmereorders.All theselead to transparency and reduce the incidence of corruption. What isimportant is that the judgments and the reasons thereto are open toscrutinybyeverybody,forever.Next,followingthecommonlawsystem,thecourtsabidebythedoctrineofprecedentwhichleadstoconsistencyandcertaintyofthelaw.Inthisrespect,wehaveanedgeovercountrieswithMuslimmajoritypopulationwhichpractisethecontinentalsystem.Inthisregard,anotherpointinourfavouristhatourlawyersandjudgesspeak English, proceedings in the superior courts (where these casesgo)areinEnglishandjudgmentsarewritteninEnglish,thelanguageofmodernmua’malat,inpractice,ifImaysayso,withrespecttoArabic.

Ourcourtsnowstandamongthebestintheworldintermsofspeedydisposal,aftera fair trial. In theMua’malatDivisionof theHighCourtinKualaLumpur(wheremostoftheIslamicfinancecasesgo),forwrit

actions,mostof thecases thatgo for trial,aredisposedofwithinsixmonths. For summary judgment andOriginatingSummons, it is threemonths.TheWorldBankinitsProgressReportentitled“Malaysia: Court Backlog and Delay Reduction System” published in August this yearhasgivenaveryfavorablereportontheachievementoftheMalaysianJudiciaryinitsreformtoreducebackloganddelaysincourt.Whatisleftis forour lawyers and Judges, at least someof them, to specialize inIslamicfinance.Thatwouldputthemaheadoftheircounterpartsinothercommonlawcountries.

Awordaboutarbitration.MostofwhatIhavesaidaboutthecourtappliestoarbitrators.ThisiswhatGIFRReportsays:

“.....the Kuala Lumpur Regional Centre for Arbitration (KLRCA) provides a convenient alternative resolution platform by having a specific rule to govern disputes including IBF matters. The Rules for Arbitration (Islamic Banking and Financial Services) 2007 was specially drafted and introduced to provide a customised platform and mechanism for the resolution of disputes in the Islamic financial services sector.”

Iagree,intheory.But,letuslookatthereality.InSeptember2009,whenpreparing my paper for the Islamic Financial Services Industry LegalForum2009,IcheckedwithKLRCAtofindouthowmanycaseshadbeenregistered andheard since themakingof theRules. The answerwas:NONE.Igavethereasonswhyitwassointhatpaper.WhilepreparingthislectureIcheckedagain.Theansweris:ONE.IthinkthereasonsthatIgavein2009arestillvalid.However,abeginninghasbeenmade.ItisinterestingtonotethatinthatcaseaShari’ahissuewasreferredtotheSACofBankNegaraMalaysia,itwasdulyansweredandeffectwasgiventoit.Anotherfirst.Atleastwehaveseenthesystemworking.


96 97

IwillendmydiscussionofthispartbyquotingfromGIFRReport2011again,atpage167:

“It is observed that all these while English law has been the preferred law of reference for international Islamic finance transactions, therefore the objective of the Committee is arguably very ambitious. Considering that English law has a long tradition of being the reference law for international contracts and English courts command enormous respect in the international arena for its impartiality and independence there are many reasons for people to be skeptical. However, if we consider that Malaysia is simply offering a value proposition whereby parties to an international Islamic finance contracts are comfortable that:

- The jurisdiction is neutral to all parties to the contract;

- The Malaysian law offers absolute certainty and predictability with regard to Shariah issues as the NSAC ifthefinalarbiteronsuch matter – which no other jurisdiction can offer;

- The Malaysian courts and arbitration are competent in dealing with disputes arising from IBF contracts, and then there is no reason to reject the possibility of making Malaysian law as the reference law for IBF contracts.”

So,evenforeignerssittinginLondonwritingthereportthinkthat it ispossible forMalaysian lawtobe the lawof reference for internationalIslamicfinancecontracts.Itisuptoustomakeithappenandthatiswhatweshoulddo,together.

Letusnowtrytoreassessourposition.

First, Malaysia, in the eyes of the world, is an Islamic country.Internationally,itisseenasmodelIslamiccountry.ItisonlynaturalforMalaysiatowanttobethehubforIslamicfinance.

Second,MalaysiaisalreadytheleaderinIslamicfinance.

Third, no other Government in this world has done more than theMalaysianGovernmentindevelopingandforthedevelopmentofIslamicfinance.

Fourth,wealreadyhaveapoolofShari’ahscholarswhohavespecialisedin Islamicfinance.SomeofourShari’ahscholarsaresitting inShari’ahCommitteesallovertheworld.Wealsohavepeopleintheirthirties(tome,therightage),whoareproficientinbothArabicandEnglishwhoarealsotrainedinlawandShari’ah.Theyareourpotentials.

Fifth,wehave theShari’ahAdvisoryCouncilofBankNegaraMalaysia(SAC,BNM)andtheShari’ahAdvisoryCounciloftheSecuritiesCommission(SAC,SC)atnationallevel,tomakeShari’ahrulingsonIslamicfinance.Hopefully,thetwocouldbemergedintooneinthenearfuture.

Sixth,wealreadyhavethecommonlawandthecommonlawsysteminplaceandworkingcomparativelywell.

Seventh, Malaysian lawyers and Judges speak English, our laws andjudgmentsofoursuperiorcourtsareinEnglish.

Eighth, our courts and arbitrators are efficient, competent andindependent. Remember that the cases are pure civil cases based oncontract involvingcompaniesand individuals.There isnopolitic in it.NegativeperceptionshouldnotbeanissueunlessthereareMalaysianswho go around the world condemning our courts and arbitratorsfor ulterior motives. In terms of knowledge in Islamic finance, ourJudges,Arbitratorsandlawyers,takenasawhole,areatparwiththeir


98 99

counterpartsinothercountries,ifnotbetter.

Ninth,wehavetheinfrastructure.Ourcourtroomsareamongthebestintheworld,ourtransportationandcommunicationaregood,ourstreetsandhotelsarefreefromsuicidebombing(sofar),ourcostof livingiscomparativelycheapandwehavesummerthroughouttheyear.Allthesefactorsareconducivetoforeignlawyerscomingtodolitigationhere.

So,IthinkwehavetherightingredientstobetheholistichubforIslamicfinance.Butwemusthaveconfidenceinourselves,oursystemandourcountry.Wemustthinkpositively.Weshouldthinkofthebiggergainstoshare, inthispresent life itself, ifMalaysiasucceedsinthisaspiration.WeshouldworktobuildandnottodestroyMalaysia’spositioninIslamicfinance,forashorttermgain.

We are honoring Emeritus Professor Ahmad Ibrahim by being heretoday.Letuscontinuetohonorhimbycontinuingtheworkthathehaddone.LetusthinkbeyondourownStateandnationalbordersbecausethe opportunity is borderless. And, let us not be “an ummah of lost opportunity”,toborrowthewordsofSheikhNizamYaqubi.

Thankyou.

ANNEXURE C : Glossary

TERMS EXPLANATION

Alienation TodisposestatelandinperpetuityorforatermofyearsinconsiderationofthepaymentofrentinaccordancewithprovisionsofNationalLandCode1965

Ar-Rahn Pledge/charge

BeneficialOwnership

Apersonwhoenjoysthebenefitsoflandownershipeventhoughthelandtitleisinanother’sname

Caveat AtypeoflandtransactionrecognisedinMalaysianlandlawsystemgivinganypersonclaiminganunregisteredinterestinlandanopportunitytopreventhisinterestfrombeingunjustlyoverriddenbyasubsequentlycreatedadverseregisteredinterestinrespectofthesameland

Charge AtypeofsecuritytransactionrecognisedinMalaysianlandlawsystemwhichamountstoaninterestinlandoncedulyregistered

ChoseinAction Arighttopersonalthingsofwhichtheownerdoesnothavethepossession,butmerelyarightoflegalactionfortheirpossession

Dealings Transactionsundertakenbetweenindividualsorbodies,whetherpublicorprivate,effectedwithrespecttoalienatedlandbutdoesnotincludecaveatorprohibitoryorder

Debenture Aninstrumentacknowledgingdebtsofacompany

Gharamah Fine/penalty

Ibra’ Rebate/waiverofpartialortotalclaimagainstcertainrightordebt

Ijarah Leaseorservicecontractthatinvolvesbenefit/usufructofcertainassetorworkforanagreedpaymentorcommissionwithinanagreedperiod

Istisna’ Salecontractbywayoforderforcertainproductwithcertainspecificationsandcertainmodeofdeliveryandpayment(eitherincashordeferred)

ANNEXURES

100

JudgmentDebt Theamountofmoneyinacourtjudgmentawardtothewinningparty,whichisowedtothewinnerbythelosingparty

Kafalah Guarantee

Lien AtypeoflandtransactionrecognisedinMalaysianlandlawsystemcreatedupontheentryofalien-holder’scaveatatlandofficebyapersonorbodywithwhomtheissueofdocumentoftitlehasbeendepositedassecurityforaloan

Mudarabah Profitsharingcontract

Murabahah Salecontractwithadisclosureoftheassetcostpriceandprofitmargintothebuyer

Musyarakah Profitandlosssharingcontract

MusyarakahMutanaqisah

Acontractofpartnershipthatallowsone(ormore)partner(s)togivearighttograduallyownhisshareoftheassettotheremainingpartnersbasedonagreedterms

Mutatismutandis

Thingsaregenerallythesame,buttobealtered,whennecessary

Muwa’adah Bindingpromiseofbothparties

OrderforSale Anordermadebycourtorlandofficeforpropertytobesold

ScheduledChargee

Listofpersons/bodyrecognisedinstatesreservelandenactmentsallowedtocreatechargeoverreservelandsassecurityforaloan

SpecificPerformance

Impliesanordercompellingapartytoperformsomeactordosomethingthatisrequiredunderthecontract

Sukuk Islamicsecurities/bonds

Ta’widh Compensation

TorrensSystem Asystemoflandtitleregistration,adoptedoriginallyinAustraliaandlaterinsomeothercountriesincludingMalaysia

Wa’d Promise

Wa’dan Twowayunilateralpromise