legal guide09.indd - Islamic Finance News

Shariah Litigation & Arbitration in Malaysia
By Mohamed Ismail Mohamed Shariff
Malaysia has a dual court system. One is the common
law system that is practised in England and other
Commonwealth countries. This system is familiar to
most readers. The other is the Shariah court system.
In Malaysia the Shariah courts deal only with Islamic
personal law issues as applicable to Muslims; they
have no jurisdiction over other matters even where
they involve Islamic law, such as Islamic banking and
finance transactions. A significant development was
the establishment in 2003 of a dedicated Muamalat
division within the High Court solely to hear Islamic
banking and Takaful cases.
Another notable feature of the Malaysian legal
framework is that Malaysian law comprises both
civil law (statute law and common law and equity
as applied in Malaysia) and Islamic law. This
unique situation provides diversity and richness to
Malaysian law while creating certain potential areas
of conflict.
As in other jurisdictions, in tandem with the court
system, there is a well-developed arbitration system
with a center, the Kuala Lumpur Regional Center for
Arbitration, which facilitates the proper conduct of
arbitration. In 2007, the Center set up the machinery
for the arbitration of Islamic financial business
disputes and published the Rules for Islamic Banking
and Financial Services Arbitration 2007. Thus, the
legal infrastructure for the resolution of disputes is
in place.
There is thus a comprehensive system for dispute
resolution in place in Malaysia. The writer is not
aware of any other jurisdiction where a situation
such as that in Malaysia obtains.
Islamic banking cases in the courts
Soon after the introduction of Islamic banking and
finance in Malaysia in 1983 and Takaful in 1984,
cases were filed in the courts. These were mainly
of a domestic nature, the vast majority of these
arising from defaults in home and business financing
transactions. Before the establishment of the
Muamalat division these cases were heard in the
commercial division of the High Court.
While most cases were heard and disposed of in
the usual course, there were instances when the
documentation employed were challenged as being
null and void, either on the ground that they did
not comply with Islamic law or were contrary to
existing civil laws. The first ground of challenge was
mounted mainly, with respect, on a lack of proper
understanding of Islamic banking principles by the
lawyers handling those cases while the second was
based on perceived conflicts with civil law.
Many of the civil laws still in force were enacted
before Islamic banking was introduced and these
legislation, obviously, did not take account of
Islamic principles. In some instances the Islamic
banking concepts and principles employed in the
transactions were seen to be in conflict with the
enacted laws which the courts had to apply as being
the law of the land. This situation arose because
when the Islamic Banking Act 1983 was enacted,
suitable transitional provisions were not included
to deal with such conflicts. While amending each
of the existing enacted laws would have required
considerable legislative time, some form of omnibus
provision could have been introduced to cater for
such situations.
A saving feature in the Malaysian system is that
the Islamic law applicable to the transactions was
determined by a Shariah advisory body established
in each Islamic bank. Later a Shariah Advisory
Council (SAC) was established under the aegis of the
Central Bank of Malaysia (CBM) which issued rulings
on these matters.
The SAC was subsequently revamped and its scope
widened and has now become the authority for the
determination of Islamic law for these purposes. By
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