legal guide09.indd - Islamic Finance News

Shariah Litigation & Arbitration in Malaysia (continued..)
a recent amendment to the law, the determinations
of the SAC and rulings issued by the CBM based on
them are binding on all parties, including the courts.
In this manner, a degree of certainty has been
introduced into the law.
Differences of opinion
There are four schools of jurisprudence (madhab)
in the Sunni branch of Islam. While they all agree
on the fundamentals of Islam, they differ in certain
other areas. Though these schools form a substantial
body of Islamic law, they are regarded as secondary
sources, the primary sources being the Qu’ran and
Sunnah (the teachings and examples of the Prophet
of Islam). There are also many other secondary
sources of Islamic law, such as Ijma (consensus of
opinion of early Islamic scholars), Qiyas (analogical
deductions) and Ijtihad (individual reasoning). It is
therefore not surprising that there are differences of
opinion regarding Muamalat issues.
These differences have often been used to challenge
the validity of the principles used in many transactions
in Malaysia. A case in point is the Islamic contract of
Bai Bithaman Ajil (BBA) (deferred payment sale) and
the related Bai al Inah (sell and buy back contract).
The BBA contract (which involves a purchase of an
asset by the financier from a client on cash basis and
the sale of the same asset back to the client by the
bank on credit terms at a price which includes the
bank’s profit for the deferred term), has been used
in Malaysia since 1983 although it is not accepted as
valid in many other jurisdictions, such as the Middle
East and Pakistan.
Recent case involving BBA contract
In a series of BBA cases in 2008, the Muamalat court
held that the BBA contract was not a valid Islamic
contract but, in fact, a loan agreement. The judge
ruled that the profit arising in the sale transaction
was in reality interest and, since interest is prohibited
in Islam the bank could not recover the profit but
only the purchase price (the conventional equivalent
being the principal sum).
The effect of this decision was far-reaching as well
as devastating, as banks in Malaysia had provided
billions of Malaysian ringgit in financing to thousands
of customers and all those contracts were in
jeopardy. This contract (and the Bai al Inah contract)
has also been extensively used in capital market
transactions. The judgement caused great shock
and consternation in the Islamic financial sector. If
allowed to stand, the judgment could have caused
the closure of some of the smaller Islamic banks and
delivered a terrible blow to Islamic banking generally
in Malaysia.
The judge’s finding was largely based on a comparison
of the BBA contract with conventional loan
agreements, where he found that the BBA contract
was more onerous to a customer than a conventional
loan and therefore could not be Islamic.
The banks appealed to the Court of Appeal (in which
the writer was the lead counsel for the banks) and
the court, in an unanimous decision, overturned
the judgment of the High Court. It held, among
other points, that the BBA was a valid contract in
Malaysia.
The CA also found that whatever perceived unfairness
there was in a BBA contract was illusory and there
was sufficient mechanisms already in place within
the banks and the system to address these concerns.
In fact, these had been instituted since the early days
of Islamic banking in Malaysia. The position of the
BBA contract was restored to where it was before
the High Court decision.
Arbitration in Islamic banking disputes
To the writer’s knowledge there has been no major
dispute that has been referred to arbitration in
Malaysia. Arbitration, and latterly mediation, are
not only alternative dispute resolution procedures
that have become popular among the business
community, but are also methods that are
encouraged in Islam. It would not be surprising if
these modes gain popularity for resolving Islamic
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