LEGAL FRAMEWORK AND

REGULATORY ISSUES IN
ISLAMIC BANKING SERVICES
DR. AZNAN HASAN,
DEPARTMENT OF ISLAMIC LAW,
AHMAD IBRAHIM KULLIYYAH OF
LAWS
1

OUTLINES

An overview of Malaysian Financial System

Malaysian Islamic Financial System
Legal Framework for Islamic Finance
Salient features of various laws on Islamic
Finance in Malaysia and their impacts on
the practice of Islamic finance
Court of Adjudication in IBF issues
Some legal Issues and Challenges in the
practice of Islamic finance in Malaysia
Remedies and the way forward
Conclusion
2

Malaysian Financial System

Non-Bank Financial Interm.

Banking System

Mon.

Saving
Institution

Non-mon.

BNM,
Com. Bank

Finance Com
Merchant Banks Financial market
Discounts Houses
etc

CM

MM

Equity

Bond

Der.

DFIs
BSN
BRM
BP

Leasing Com.
Etc
Insurance
Com.

The Provident &

Pension Funds

Islamic Financial System

More or less, Islamic financial businesses
have permeated into almost all the
abovementioned financial areas

Islamic Banking

IIMM

Takaful

Non Financial
Institution
Islamic Capital
Market
4

Legal Framework for Islamic Finance

LEGAL FRAMEWORK

Regulatory Laws

Banking & Takaful

CBT 1958
IBA 1983
BAFIA 1989
DFIA 2002
Takaful 1984
Gov. Invest. Act

Laws related to
transactions

ICM
CMSA 2007
Various Rules
& Guidelines

Contracts Act 1950

National Land Code 1965
Companies Act 1965
Stamp Duty Act
Taxation Laws
Procedural Laws

Salient Features of Various Laws on Islamic

Finance in Malaysia and Their Impacts on the
Practice of Islamic Finance

Central Bank Act 1958

The main authority for the monetary and
prudential financial regulations
Sec. 4 of the CBT:
The principal objects of the Bank shall be
(a) to issue currency in Malaysia and to keep reserves safeguarding
the value of the currency;
(b) to act as a banker and a financial adviser to the Government;
(c) to promote monetary stability and a sound financial structure;
(ca) to promote the reliable, efficient and smooth operation of
national payment and settlement systems and to ensure that the
national payment and settlement systems policy is directed to the
advantage of Malaysia; and
(d) to influence the credit situation to the advantage of Malaysia.
6

Contd

Among the main tasks:

- Implementation of all laws and
regulations related to financial activities
- initiating various changes and
amendments to the laws (when
necessary)
- Issuing various rules, guidelines and
circulars relevant institutions, from time
to time
7

Contd

The most relevant provision peculiar to IBF

Sec. 16B:
Among the salient provision of the sec:
Establishment of NSAC at BNM
Accorded the sole Shariah Authority in
Islamic Finance Matter

(1) The Bank may establish a Syariah Advisory

Council, which shall be the authority for the
ascertainment of Islamic law for the purposes of
Islamic banking business, takaful business,
Islamic financial business, Islamic development
financial business, or any other business which is
based on Syariah principles and is supervised and
regulated by the Bank.
8

Contd

Will be referred to by the court or arbitrator in

disputes involving shariah issues in IBF & Takaful.

However, any ruling made by the Syariah

Advisory Council:
a) if the reference was made by a court, be
taken into consideration by the court in
arriving at its decision; and
(b) if the reference was made by an arbitrator,
be binding on the arbitrator.
9

Amendments made to CBA (act

701) 2009

Consistent with the goal to promote Malaysia

as an international centre for Islamic finance,
the Act gives due recognition to the Islamic
financial system in Malaysia.
The Act also provides for an enhanced role of
the Syariah Advisory Council on Islamic
Finance to facilitate consistent application of
Islamic law on Islamic financial matters.
Main provisions of the act regarding Islamic
finance are discussed here

Recognition of Islamic finance as

mainstream finance in Malaysia

Dual financial system :

Sec 27: The financial system in Malaysia

shall consist of the conventional financial
system and the Islamic financial system.
This section provides Islamic finance to be
at par with conventional, not just a niche
area.
Demonstrates the intention of BNM to
promote further Islamic banking and
finance in Malaysia

Provisions Relating to SAC

1)Establishment:

51.
(1) The Bank may establish a
Shariah Advisory Council on Islamic
Finance which shall be the authority for
the ascertainment of Islamic law for the
purposes of Islamic financial business.
(2) The Shariah Advisory Council may
determine its own procedures.

Contd

2) Functions of Shariah Advisory Council

52. (1) The Shariah Advisory Council shall have the

following functions:

(a) to ascertain the Islamic law on any financial matter and issue a ruling
upon reference made to it in accordance with this Part;
(b) to advise the Bank on any Shariah issue relating to Islamic financial
business, the activities or transactions of the Bank;
(c) to provide advice to any Islamic financial institution or any other
person as may be provided under any written law; and
(d) such other functions as may be determined by the Bank.

(2) For the purposes of this Part, ruling means any

ruling made by the Shariah Advisory Council for the
ascertainment of Islamic law for the purposes of
Islamic financial business.

Contd

3) Appointment: Sec. 53:

Appointment by The Yang di-Pertuan
Agong on the advice of the Minister after
consultation with the Bank.
Person who are qualified in the Shariah, or
who have knowledge or experience in the
Shariah and in banking, finance, law or
such other related disciplines as members
of the Shariah Advisory Council.

Contd

4) Consultation by BNM and Islamic

financial Institutions

The Bank and Islamic financial institutions to consult

Shariah Advisory Council
55. (1) The Bank shall consult the Shariah Advisory
Council on any matter
(a) relating to Islamic financial business; and
(b) for the purpose of carrying out its functions or
conducting its business or affairs under this Act or any other
written law in accordance with the Shariah,
which requires the ascertainment of Islamic law by the
Shariah Advisory Council.

Contd

(2) Any Islamic financial institution in

respect of its Islamic financial business,
may
(a)
refer for a ruling; or
(b)
seek the advice,
of the Shariah Advisory Council on the
operations of its business in order to
ascertain that it does not involve any
element which is inconsistent with the
Shariah

Contd

5) Decision made by SAC with regards to reference

referred to it by the Court and Arbitrators

Reference to Shariah Advisory Council for ruling from court or

arbitrator
56. (1) Where in any proceedings relating to Islamic financial business
before any court or arbitrator any question arises concerning a Shariah
matter, the court or the arbitrator, as the case may be, shall

(a) take into consideration any published rulings of the Shariah Advisory
Council; or
(b) refer such question to the Shariah Advisory Council for its ruling.

(2) Any request for advice or a ruling of the Shariah Advisory Council
under this Act or any other law shall be submitted to the secretariat.

Contd

6) Effect of Shariah rulings

57. Any ruling made by the Shariah

Advisory Council pursuant to a
reference made under this Part shall
be binding on the Islamic financial
institutions under section 55 and the
court or arbitrator making a reference
under section 56.

Contd

7) Shariah Advisory Council ruling

prevails

58. Where the ruling given by a Shariah

body or committee constituted in
Malaysia by an Islamic financial institution
is different from the ruling given by the
Shariah Advisory Council, the ruling of the
Shariah Advisory Council shall prevail.

Promotion of Malaysia as an
International Islamic Financial Centre

60. (1) The Bank shall, in co-operation with the Government

or any Government agency, statutory body, supervisory
authority or international or supranational organization,
develop and promote Malaysia as an international Islamic
financial centre.
(2) For the purposes of subsection (1), the Bank may

(a) establish a secretariat or other committees to assist the

Government or any organization, council, agency or committee
established by the Government; and

(b) generally take such measures or facilitate such actions or provide

financing,

as may be necessary for the development and promotion of

Malaysia as an international Islamic financial centre.

Related Guideline

Guidelines of the Governance of

Shariah Committees for Islamic
Financial Institutions (BNM/GPSI)
A Shariah body in the industry which
is to be known as a Shariah
Committee is to be established
Relationship: plays a complementary
role to SAC of BNM
21

Application of the GL

Applicable to all Financial Institutions

regulated & supervised by BNM.
Including:-IBA
-BAFIA - Islamic Banking Scheme
Banks
-DFIA
-Takaful
22

Shariah Committee

Every Financial Institution is required

to establish a SC
In the case of BAFIA banks, it may
establish one SC for the banking
group

23

Membership

Shall consist a minimum of 3

Qualification: Islamic Jurisprudence
plus experience & expertise

24

Restrictions

No members form SAC of BNM

(section 16B(6) of CBA (1950)
Cannot appoint a person who sits in
SC for another institution in same
industry
Industry
Banking

IBA

BAFIA

Takaful
DFIA

25

Duties & Responsibilities

To advise the Board on Shariah matters in

its business operation to ensure compliance
To endorse Shariah compliance Manual
To endorse and validate relevant
documentations to ensure the products of
IFI comply with shariah.
To advise on matters to be referred to the
SAC. In case of conflict opinion of the SAC
wil prevail
26

Relevant Statutes, Provisions and

Cases

Regulatory
- IBA
- BAFIA
Adjudication
- What law will be applicable
- Advantages and Disadvantages

27

ISLAMIC BANKING ACT 1983

brief Act of 60 sections & 8 parts

modelled from the Banking Act 1973 with
minor modifications to suit shariah
requirements
provides licensing & regulation of Islamic
banks
establishment of BIMB & BMMB
amendment in 2003
Important provisions salient features of
IBA :
Definition - Sec 2
Licensing - Sec 3
SAC - Sec 13
Financial requirements Part III

Contd

Procedural and not substantive.

Mainly provides for the licensing &
regulation of Islamic banking
business in Malaysia
Amended in 2003, to allow for a
better supervision from BNM

29

Important provision of IBA

Definition:

Sec 2 of IBA (what is Islamic Banking):

- Islamic Bank as any company which

carries on Islamic banking business and
holds a valid licence;
- Islamic banking business as banking
business whose aims and operations do
not involve any element which is not
approved by the Religion of Islam.
30

Observation

Too wide & general religion of Islam

Banking business: should mirror the
conventional?
What mazhab should be followed
Can a minor opinion be accepted in
any school of law only be applied
Opportunity or threat?
31

Opportunities

Wide definition? Can carry out

normal businesses?
Can search for a very minor opinion
in any school of law
Which is not approved by religion of
Islam
Innovations and financial engineering
in product development
32

Threats?

Abuse of juristic opinions?

Shariah Arbitrage? Relying on the
easiest is not allowed?

33

Important Provisions in IBA (2)

Licensing: Sec 3 (1)

- Islamic banking business shall not
be transacted in Malaysia except by
a company which hold a valid licence
in writing

34

Issues

Only company registered under

Companies Act can operate IB
Companies enacted under different
laws cannot get the license as IB

eg: Bank Kerjasama Rakyat (M) Bhd

Registered under Co-operative
Societies Act 1948
BKRM is de facto Islamic bank but
not de jure Islamic bank
35

Important Provision (3)

Who Decides on Shariah

Compliance ?
Sec. 3 of IBA (licensing of IB) inter
alia.
- Must only carry activities not
contrary to religion of Islam
- Must established SC to advise the
bank on religion.
36

Contd

The same can also be seen in

- Takaful Act (sec (5)(b)
- Prospectus for the issuance of Unit
trust
- Guidelines for Islamic Securities

37

IMPORTANT PROVISIONS (4)

Shariah Advisory Council (sec 3 & s 13A)

Licence will not be given if no SAC
Bank shall comply with the advice of
SAC
SAC to seek advice of SAC of BNM
Uniformity of standard practice &
product development between IBs
SAC to ensure adherence of shariah
principles in the operation & product
innovations

Issues on Shariah Supervision

Active or passive contributions

Diversification & standardisation
Knowledge in other areas

39

Financial Requirements &

Duties (Part III)

The IBA comply with prudential & financial

requirements similar with conventional
banks

eg: capital adequacy framework ; statutory

reserves ; liquidity framework ; statistical
reporting ; audited financial reports ;
ownership control & management ;
restriction on business

Instill confident to the conventional

bankers & customers

BANKING AND FINANCIAL INSTITUTION ACT 1989

(BAFIA)

BAFIA replaces Banking Act 1973 & Finance

Companies Act 1969
Provides laws for licensing & regulation of
institutions carrying banking & finance, merchant
banking, discount house & money broking
businesses
In 1993 BNM allows conventional banking
institutions to participate in IBF using existing
structure
As a result, BAFIA was amended (sec 124) to:
(i) Formalise the carrying on of Islamic banking
business by conventional bank
(ii) Establishment of SAC to advise Islamic product

Section 124 (1)- Except as provided in

section 33, nothing in this Act or the
Islamic banking Act 1983 shall prohibit or
restrict any licensed institution from
carrying on Islamic banking business or
Islamic financial business, in addition to its
licensed business, provided that the
licensed institution shall consult the Bank
before it carries on Islamic banking
business or any Islamic financial business.

Banking and financial

Institutions Act 1989

42

Section 124(2) of BAFIA states:

(2) For the avoidance of doubt, it is declared that a

licensed institution shall, in respect of the Islamic
banking business or Islamic financial business carried on
by it, be subject to the provisions of this Act.

Section 66 (1)(b) states:

(1) Except as may be provided in any regulations made

under section 116(2), no licensed institution shall
acquire or hold(a) ; or
(b) any immovable property or any right or interest
therein, except such as may be reasonably necessary for
the purpose of conducting its business, or of providing
housing or other amenities for its staff, and as may in
either case be approved by the Bank.

43

Section 124 (4)

Any Licensed institution carrying
on Islamic banking business or
Islamic Financial business, shall
comply with any written directions
relating to the Islamic banking
business or any other Islamic
financial business, carried on by
such licensed institution, issued
from time to time by the bank, in
consultation with the Syariah
Advisory body.

44

Contd
A Syariah Advisory Body is set
up to ensure that the business of
the bank does not contravene the
Islamic law.

45

Issue

Is IBA wider than Islamic banking business

in BAFIA
Argument:

1) BAFIA confined the banking

business into:
Receiving deposits CA/SA etc
(ii) Paying or collecting cheques
(iii) To provide loan/finance
So, IB under BAFIA should also confine itself
within this framework and not to follow IBA
in its universality
(i)

46

Contd

BAFIA Bank cannot own property except

for the purpose of conducting its usual
business
This contrary to IBAs provision
Section 66 (1)(b) states:

(1) Except as may be provided in any regulations made under

section 116(2), no licensed institution shall acquire or hold(a) ; or
(b) any immovable property or any right or interest therein,
except such as may be reasonably necessary for the purpose of
conducting its business, or of providing housing or other
amenities for its staff, and as may in either case be approved
by the Bank.
47

Important Provisions

124(5) the institution shall not be

deemed an Islamic bank
124(6) BAFIA shall not apply to
Islamic bank
124(7) related terms
(a)
(b)
(c)

SAC refers to SAC of BNM

Islamic banking business same with IBA
Islamic financial business any financial
business which the aims & operations do not
involve any element against Shariah

48

Development Financial
Institutions Act

Caters for financial intermediaries

such as Bank Rakyat etc
Put such institutions under purview
of Bank Negara in respect of financial
transactions
Allows Islamic banking policies of
Bank Negara to include such
institutions
49

RELEVANT STATUTES
ON IBF
Real Property Gains Tax Act
1976
Stamp Act 1949
Government Investment Act
1983
Takaful Act 1983

STAMP ACT 1949 (AMD 1989)

Liability of banking
instruments to stamp duty
1989 amendment to sec 14A
to avoid double stamp duty for
Islamic financing documents
Equal treatment for Islamic
financial documents in terms of
stamp duty

 Sec

4 Stamp Act

Instrument chargeable with duty

First Schedule on stamp duty

Principle

document based on
the schedule (ad volarem)
Subsidiary documents RM10

Parties to determine which is

principle docs & which is
subsidiary docs

Sec 14A

Principal securities in syariah

financing
Where it is shown that a principal or
primary security secures the repayment
of moneys provided under a scheme of
financing made according to the syariah,
duty chargeable thereon shall be
calculated on the principal amount
provided by the financier or financing
body

 Fees

for IB docs

Stamp Duty (Exemption) (No.5) Order 1984

(effective 1st Oct 1983)
All instruments for purchase of property under
Murabahah & BBA is subject to exemption of
stamp duty
PPA (Property Purchase Agreement)

bank purchase property from customer

Exempted stamp duty subsidiary doc

PSA (Property Sale Agreement)

bank sells the property to customer at cost plus profit

margin
Ad valorem stamp duty
on principal amount/price
NOT total selling price (cost plus profit)

Further exemptions

Stamp Duty (Exemption)(No.2)Order

2004 (PU(A) 19/2004)

Stamp Duty (Exemption)(No.3)Order

2004 (PU(A) 20/2004)

Exemption for Asset Sale Agreement or Asset

Lease Agreement

Docs related to purchase of property by

financier for purpose of leasing back to
customer

Stamp Duty (Remission) Order 2004

(PU(A) 22/2004)

Asset Lease Agreement for purpose of

rescheduling or restructuring

REAL PROPERTY GAINS TAX 1979

RPGTA provides for imposition,

assessment & collection of tax on
gains/profits derived from disposal or
acquisition of real property/shares in
real property companies
Since BBA & murabahah involve
purchase & sale between bank &
customer (legally the transaction
amounts to acquisition & disposal)
1985 : amendment to sec 3 avoid
double taxation on IBF transactions

Tax is based on the price at the

time of disposal and/or
acquisition
For Murabahah or BBA price at
the time/date of agreement (PPA
& PSA)

 TAKAFUL ACT 1983

Regulates takaful companies, brokers

& adjusters
Requires registration of takaful
companies with BNM in relation to
their takaful business :
Family takaful business (Life insurance)
General takaful business (General
insurance)

Requires the SAC to be set up to

advise the company on Shariah law &
principles in its operations

Regulates the conduct of business :

To establish & maintain separate
takaful funds (family & general
business) and shareholders fund
Investment of takaful must be
shariah compliant
Re-takaful (reinsurance) matters
Product regulation matters

Court of Adjudication in IBF issues

Granting of facilities by the bank

though based on principles of
Syariah are regarded as commercial
transactions
Comes within the jurisdiction of civil
courts.
Why?

60

Relevant Provision

Art. 121 of FC:

- Establishes the jurisdiction of
courts in Malaysia
- Civil Courts have no jurisdictions
over Shariah matters
- What kind of Shariah matters? Are
banking and finance considered to be
Shariah matters?
61

Jurisdictions of Shariah Courts

9th schedule, Para II (state list)
Among others:
- Administrations of Islamic law, i.e the
Shariah matters
- But jurisdictions are only on personal
matters.
- Only on persons professing the religion of
Islam
IBF matters fall outside this ambit because
they are considered to be non-personal
matters and banking and financials
institutions are neutral (religion-free)

62

Jurisdiction of Civil Courts

All matters conferred by federal & state law,

except for personal law of Muslim
List

I (Federal List) of 9th Schedule

Civil & criminal procedures
Administration of justice
Contracts & mercantile laws
Arbitration
Etc

- obviously include banking &

finance

63

Contd

This position is strengthened further:

- by the application of sects. 3 & 5 of
the Civil Law Act:
Sec 3:
Sec 5:
- Also the fact that legislation on IBF
are only made within the federal
ambit.
64

What are the jurisdiction of

Shariah Courts?

Para I of List II (State List) of 9 th Schedule

Organisation & procedure of Shariah

Courts
Islamic law
includes divorce, wakaf,
Personal law
succession, offences against
Family law
religion of Islam

No jurisdiction over criminal matters

Jurisdiction only over persons professing Islam

Jurisdiction on IBF?
-

lies in the Civil Court

because of the following reasons:
IBF comes under contract &
mercantile matters provided in Federal
List (List I of 9th Schedule)
Islamic law (as provided in Para I, List
II of 9th Schedule) is limited only to
persons professing religion of Islam
thus exclude other persons & legal
persons such as banks & financial
institutions

 Furthermore

the legislation of IBF

are all federal legislations
This has been shown clearly in
some Islamic banking cases
No

state legislation on IBF (?)

Muassasah Gadaian Islam
Trengganu 1991
which confers jurisdiction on
Shariah Court

Cases on IBF

Bank Islam Malaysia Berhad v Adnan bin Omar

[1994]
3 CLJ 735

Dato Hj Nik Mahmud bin Daud v BIMB [1996] 1 CLJ

576 (High Court); [1998] 3 MLJ 396 (Supreme Court)

Tinta Press v Bank Islam Malaysia Berhad [1986] 1

MLJ 474

Bank Kerjasama Rakyat (M) Bhd v Emcee Corp [2003]

1 CLJ 625

Tahan Steel v BIMB [2006] 6 CLJ 25

Affin Bank Bhd v Zulkifli Abdullah [2006] 1 CLJ 438

Contd

Malayan Banking Berhad v Marilyn

Ho Siok Lin [2006] 3 CLJ 796
Bank Muamalat Malaysia Berhad v
Suhaimi Md. Hashim & Anor [2006] 7
CLJ 321
Malayan Banking Berhad v Yakup bin
Oje & Anor [2007] 6 MLJ 389

69

e.g:
Bank Kerjasama Rakyat Malaysia v Emcee
Corporation [2003] 1 CLJ 625, COA.
.the facility is an Islamic facility, but that
does not mean that the law applicable in this
application is different from the law that is
applicable if the facility were given under
conventional banking. The charge is a charge
under the national Land Code (NLC). The remedy
available and sought is a remedy provided by the
NLC. The procedure is provided by the Code and
the Rules of the High Court 1980. The court
adjudicating it is the High Court. So, it is the same
law that is applicable, the same order that would
be, if made, and the same principles that should be
applied in deciding the application.

70

Local Cases.
DATO'

HJ NIK MAHMUD DAUD V.

BANK ISLAM MALAYSIA BHD

The appellant, who was the plaintiff in the

court below, had applied for an order that
the charges executed by his attorney in
favour of the defendant in respect of
twenty five lots of land all in Section 12,
Kota Bharu, Kelantan (hereinafter "the
properties") be declared null and void and
of no effect and that the memorandum of
charge registered be cancelled.
71

Contd
He had also applied for an order that the
Property Sale Agreement and the Property
Purchase Agreement executed by the parties
dated 6 May 1984 be declared null and void and
of no effect and that consequent to both these
prayers, the respondent be ordered to return the
titles of the properties, free of all encumbrances,
to him.
Claimed documents amounted to a colourable
exercise to defeat the very purpose and intention
of the Malay Reservations Enactment 1930 of
Kelantan
72

UK cases
Shamil Bank of Bahrain EC v
Beximco Pharmaceuticals Ltd &
ors [2004] All ER 1072, COA
England
Symphony Gems case.

Both cases deal with the construction of

Islamic transactions in English court.
- Held : to be construed as an English law
contract even though the Courts did not
construe as Islamic contracts
-

73

Contd

Give effect as intended

In the case of Islamic Investment

Company of the Gulf (Bahamas) Ltd v
Symphony Gems NV & Other [2002]
EWHC 1:

On arguments expert evidence not a

Murabahah and liquidated damages not
permissible, judge held since it is
governed by laws of England the
contract is still valid.
74

Contd
Sanghi Polyesters Ltd (India) v. The
International Investor (KCFC) [2000]
Lloyds Rep 480 QBD England.
- Istisna contract provided that any dispute
shall be governed by the laws of England
except to the extent it may conflict with
the Islamic Sharia which shall prevail.
Held: Whatever Shariah law might be, it
was not the law of England and Wales

75

Address expressly those

assumed as implied
Shamil Bank of Bahrain v. Beximco Pharmaceuticals Ltd : Subject to the

principles of the Glorious Sharia'a, this agreement shall be governed by and

construed in accordance with the laws of England."

POTTER LJ said that one principle expressly stated in the Qur'an was that the charging of interest
upon a loan was "Riba" and was contrary to the Sharia. The bank's claims against the first and
second defendants were made under two Morabaha agreements [sale contracts recognised as
valid by Islamic law] and against the third, fourth and fifth defendants as guarantors. The principle
defence advanced was that the agreements amounted to unlawful agreements to pay Riba and
were thus void and/or unenforceable.The task of construction was to ascertain the presumed
intention of the parties. The proviso "subject to the principle of the Glorious Sharia'a" should be
approached on a basis which was reconcilable with the purpose evident from the words which
followed, rather than operating to defeat such purpose. Mr Hacker conceded that there could not
be two governing laws and that the governing law was that of England. He argued that the clause
should be read as incorporating simply those specific rules of Sharia which related to interest and
to the nature of Morabaha contracts. The doctrine of incorporation could only sensibly operate
where the parties had by the terms of their contract sufficiently identified specific "black letter"
provisions of a foreign law or an international code or set of rules apt to be incorporated [italics] as
terms of the relevant contract [italic] such as a particular article or articles of the French Civil Code
or the Hague Rules. By that method, English law was applied as the governing law to a contract
into which the foreign rules had been incorporated.

76

Advantages

Advantage: The civil courts system &

civil law judges are more systematic
& established
The judges are more learned with
regard to commercial and banking
law

77

Disadvantages

The court may fail to appreciate the pecularity

of Islamic contract
This has been shown in several cases
E.g anomalous decisions in terms of Shariah
principles and rules despite the equitable
remedies may have been served to the parties
E.g: Dato Hj Nik Mahmud bin Daud v
BIMB [
Shariah law would not be considered not a
law of any country
78

Example
DATO'

HJ NIK MAHMUD DAUD V.

BANK ISLAM MALAYSIA BHD

The appellant, who was the plaintiff in the

court below, had applied for an order that
the charges executed by his attorney in
favour of the defendant in respect of
twenty five lots of land all in Section 12,
Kota Bharu, Kelantan (hereinafter "the
properties") be declared null and void and
of no effect and that the memorandum of
charge registered be cancelled.
79

Contd
He had also applied for an order that the
Property Sale Agreement and the Property
Purchase Agreement executed by the parties
dated 6 May 1984 be declared null and void and
of no effect and that consequent to both these
prayers, the respondent be ordered to return the
titles of the properties, free of all encumbrances,
to him.
Claimed documents amounted to a colourable
exercise to defeat the very purpose and intention
of the Malay Reservations Enactment 1930 of
Kelantan
80

How to remedy

Shariah court should adjudicate the

cases of IBF? Are the courts ready?
Appointing Civil Law judges to the
Shariah Courts? Is the legal
framework sufficient?
What if the parties are non-Muslim?
How to hear the cases?

81

Contd

Establishment of Muamalat Court (Dagang

4, KL High Court) currently headed by
Dato Abdul Wahab Patail (Practical
Directionno1/2003)
Can this solve the problem and provide
some level of assurance that that the
judgment will be made in accordance with
the Shariah principle
What about the recent cases?

Affin Bank Bhd v Zulkifli Abdullah [2006]

1 CLJ 438

82

Arbitration

Realising that in some judgment, the decisions were not

that consistent with the Shariah principles (despite that
equitable remedies was given to the parties), some quarter
have suggested that other mode of dispute resolutions,
especially arbitration is used in resolving commercial cases.
Even by some, it is considered to be a better alternative to
the normal litigation process (via court decision).
Even though arbitration is considered to be of the pre
Islamic era origin, its practice was endorsed by the Prophet
and as such is deep-rooted in Islamic traditions and culture
Various verses and traditions of the Prophet propagate
dispute resolution via arbitration process rather then court
proceeding
In fact, in Islamic law, mediation and arbitration are
considered better means for dispute resolutions, than the
traditional judicial litigation, particularly for commercial
disputes
83

Definition

Arbitration is a procedure in which a

dispute is submitted, by agreement
of the parties, to one or more
arbitrators who make a binding
decision on the dispute.
In choosing arbitration, the parties
opt for a private dispute resolution
procedure instead of going to court.
84

Principal Characteristics

Arbitration is consensual
The parties choose the arbitrator(s)
Arbitration is neutral
Arbitration is a confidential
procedure
The decision of the arbitral tribunal is
final and easy to enforce
85

Advantages / disadvantages
of arbitration vis--vis litigation
Litigation
Multiple

proceedings under

different
Laws with risk of conflicting
results
Possibility of actual or perceived
home court advantage of party
that
litigates in its own country

Arbitration
A

single proceeding under the

law
determined by parties
Arbitral procedure and nationality
of
arbitrator can be neutral to law,
Language and institutional culture
of
parties

Decision maker might not have

relevant expertise

Parties can select arbitrator(s)

with relevant expertise

Procedures often drawn-out

Arbitrator(s) and parties can

shorten the procedure

Possibility of appeal

Limited appeal option

Public proceedings

Proceedings and award are

86

Quotation
To pursue a lawsuit is to gamble on
victory. To elect conciliation is to seek
fairness.
Victories
undermine
relationships.
Fairness
strengthens
them. Those who build for the long term
would do well to choose conciliation."
Eliot
Richardson:
An
statesman and lawyer

American

87

The Progressing Effort Towards

Arbitration in IBF

To compliment to legal infrastructure for IBF, arbitration

procedures must be established and strengthened as an
alternative mode of dispute resolution.
This has been emphasized in the The Islamic Financial
Services Industry: TEN-YEAR MASTER PLAN (2006
2015), initiated by IDB and IFSB
This has led to the establishment of the International
Islamic Centre for Reconciliation and Commercial
Arbitration for Islamic Finance Industry, headquartered
in Dubai (2005)
The centre will be and settle financial and commercial
disputes between financial and commercial institutions
that have chosen to comply with the Shariah to settle
disputes. The promoters were General Council for
Islamic Banks and Financial Institutions and IDB
88

Contd

Besides this, several other arbitration

centres have been established to
serve the same purpose
Arbitration for Islamic financial
business under the auspices of the
Kuala Lumpur Regional Centre for
Arbitration
GCC Commercial Arbitration Centre
(Bahrain).
89

Issues in Arbitration

The decision for arbitration must be agreed

by the parties.
In certain circumstances, the party to the
dispute may be reluctant to proceed for
arbitration, if he thinks that the judgment
will benefit him more.
As such, if there is no clause for arbitration
was provided for in the contract, the
settlement by way of arbitration might not
be possible.
90

Contd

To put an arbitration clause in the agreement:

"Any dispute, controversy or claim arising out of
or relating to this contract, or the breach,
termination or invalidity thereof, shall be decided
by arbitration in accordance with the Rules for
Arbitration of the Kuala Lumpur Regional Centre
for Arbitration."
The parties may agree on other things, like:
- Appointing authority
- no. of arbitrators
- place of arbitration
- language(s) to be used in the arbitration
- The applicable law to the contract
91

Contd

In modern commercial transaction, the importance of arbitration

is undeniable
Two kinds of arbitrations: domestic or international
Whilst arbitration in domestic cases is relatively easier,
arbitration related to cross boarder transaction is more
complicated.
Even some countries refused to resort to international
arbitration. E.g. in in Saudi Arabia(Arbitration Regulations and
Implementation Rules), the judicial system generally applies
Saudi law only, even if the parties have consented to some other
law, as such this will put a hurdle for international cases to use
arbitration.
The Iranian Civil Code and the Execution of Civil Judgments Act
of 1977 includes some conditional possibilities for the
enforcement of foreign awards.
Iraqi law does not enforce foreign arbitral awards, either under
the ICC rules or foreign municipal laws, although there are some
exceptions
92

Contd

In the same way, Egyptian law

enforces foreign awards provided
that they are not against public
policy or morals, or in conflict with
Egyptian judgments or awards
All these hurdles will, of course
impede the aspiration towards
settlement of cases via arbitration
93

Contd

Since Malaysia has scheduled the 1958 New

York Convention on Recognition and
Enforcement of Foreign Arbitral Awards of
1958 to its Convention (the Recognition and
Enforcement of Foreign Arbitral Awards Act
1985 (Act 320), foreign arbitral award will be
fully enforced in Malaysia.
In Malaysian situation, if the reference in
made by the arbitrator (s) to the NSAC of
Bank Negara, the ruling of the council is
binding upon arbitrators by virtue of sec. 16
(b).
94

Challenges & The Way Forward

Human Capital
Globalisation and its effect on small IFIs
Issue of risk and liquidity management
Divergences of Opinion
Legislative framework
Documentation of Islamic Financial
Contracts

95

Human Capital (Judges & Lawyers)

Qualification of judges and lawyers

-No discussion on minimum
requirement to deal with Islamic
banking matters
- Adequate knowledge (benchmark)
- Wrong interpretation to some nature
of Shariah
- Drafting Islamic legal documentation
96

Human Capital (contd)

Bankers
- Attitude: Conventional or Islamic;
what matters are making money
- Adequate knowledge about IBF
- Compliance in structures and legal
documentation, but what about
implementation? E.g. sequence of
contracts
97

Shariah Advisors

Do they understand the language of the bankers,

lawyer, and practitioners
Vice versa is also valid
What are the knowledge needed for them to carry
their task sufficiently
Differences on Shariah compliance: refer back to the
legal framework on compliance; religion of Islam.
- Acceptability or unacceptability:
- Certain practices: savings & current accounts
based on wadiah
- Certain contract, e.g. bay al-inah, bay al-dayn
- Clauses in contracts: Compensation
clause,rebate clauses
98

Cond

A more holistic approach to Shariah advisory

practices
total engagement in all IBF activities
Shariah audit: compliance is not only in term of
certification on the product structures and and legal
documentation, but also in the practice and
operations on the ground
Concerted efforts.
- Shariah Advisers knowledge in other areas
(legal, economics, finance, taxation framework,
accounting, needs of time etc.
- Regulators, bankers, lawyers, practitioners etc.
with
good knowledge and understanding of
Shariah principles.

99

Suggestions

Comprehensive, systematic, and goal-directed structure

So far, Seminars & Conferences. Are they suitable for all
levels. What about beginners?
Trainings and courses. are the contents adequate? Content?
Up to the required standard? Who determine? Profit-making
driven?
Training leads to certification. Various centres of excellent,
e.g. INCEIF, IBFIM, AIBIM, etc.
What about the role of University? More concerted effort,
more reliable, learning-outcome driven? But what is the
true state of affair?
Various bodies and institutions should also jump into the
train, especially in the tining of judges and lawyers, e.g.
ILKAP, Bar Council

100

Contd

Training, workshop, degree etc. must be

directed more towards creating a well
capable personnel in IBF, including but not
limited to regulators, judges, lawyer, shariah
advisors, accountants, auditors, actuaries,
financial planners, fund managers, etc.
Continued Professional Education (CPE) in
various areas, to ensure continuous
development of these personnel and the
updating of their knowledge. Licensing?
Accumulating points in order to maintain
their license?
101

Divergences of Opinion

Where to find the law?

Divergence of opinion? Variation?
Should we have full convergence?
Harmonisation? Standardisation?

102

Documentation of Islamic Financial

Contracts

Islamic Commercial law in IBF has to be applied

within the existing common law system of courts.
Hence, not only substantive laws must be
observed, but also procedural laws and court
procedure.
So, ant document must comply with:
- Islamic law (according to the interpretation of the
SAC as the supreme Syariah Council in IB)
- All other applicable law
- Be structured in such a way (e.g. form, manner of
execution, registration) that makes it enforceable
in the civil courts.
Still there is a risk that the Islamic contract be
enforced but in the right way
103

Legislative framework

Unfriendly?
E.g. compliance with the National Land Code on
registration of transfer & charges beneficial &
legal ownership
Compliance with various state enactments that
restrict the dealing on landed properties
Continuous revision and amendment to suit the
practice. Regulator should act pragmatically, and is
willing to revisit any legal provision should the
provision impedes the practice of IBF. Consequence
promulgation of new law, amendment exemption
or supplement must be considered faster

104

Conclusion

Legal framework of IBF may differ from one legislation to

another.
In Malaysia, the practice of dual banking system has,
somehow, rendered Islamic banking to be viewed the same
way conventional banking framework works.
In fact the broad definition of IB and Islamic banking
business has allowed the IB to operate more than just
conventional bank, yet this opportunity is yet to be
benefited accordingly.
Having said so, it is also true to say that other then this
aspect, and shariah compliance aspect, the two banking
systems work almost in the same way, especially in the
monitoring aspect, litigation , etc.
The issue of civil court is the court of adjudication in Islamic
banking cases has been discussed widely as both parties
have their own argument for or against that practice.
105

THANK YOU
WASSALAM

106