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(This is the report on the second day of the symposium. The report on Day 1 was uploaded on 14.08.2009.)


On the second day of the Symposium, a special address entitled “Islamic Banking and Finance: The Way Forward”, was delivered by YBhg Dato’ Mohd Razif bin Abdul Kadir, Deputy Governor of Bank Negara Malaysia (“BNM”).  He gave an overview of IBF in both Malaysia and internationally.  He highlighted very recent developments in the area of IBF, especially the improved perception of IBF arising from the current international financial crisis and the need to review the global financial architecture.  He reminded the Sabah lawyers present of the importance of being “Shariah savvy”, noting that a robust legal community and infrastructure were critical to support the growth in the IBF sector.  There was also an opportunity to showcase BNM’s Malaysian International Islamic Financial Centre initiative.   

This was followed by 2 presentations by Associate Professor Dr. Engku Rabiah Adawiah of the Ahmad Ibrahim Kulliyyah of Laws, International Islamic University Malaysia.  She said that in appreciating the expectations of IBF, one had to consider the needs of the customer, the needs of the bankers, compliance with the Shariah, the need to earn profits, compliance with the law and validity and enforceability of contracts.

Broadly speaking, legal systems in the world were divided into 3 groups.  There were the purely conventional legal systems, e.g. Japan, US, China.  There were those with a conventional framework but with special laws or regulations for IBF, e.g. Malaysia, Brunei.  And there were generally Islamic systems, e.g. Saudi Arabia, Sudan.

In Malaysia there was a need to for omnibus legislation for Islamic Finance, similar to the Capital Markets and Services Act 2007 for conventional banking.  The current system had several constraints.  There was a lack of substantive law; what existed was more regulatory and supervisory.  There was also an absence of legal definitions for Islamic concepts.  Parameters were being discussed and a draft had been circulated on mudharabah.

There were also judicial issues in that civil courts, judges and counsel were not trained in Shariah principles or how to deal with conflicts with Shariah principles and philosophies.  Judicial decisions may actually contravene the Shariah.  A lack of substantive law aggravated the problem.  Other legal issues concerned the applicability of general laws to IBF, especially when such general laws were not meant to cater for IBF.  Where there were contradictions, there was no clear-cut provision on which would prevail.

She also described the trends in Malaysian case law.  These were mainly on BBA, with a few on istisna’ and one on ijarah.  BBA had been used right from the start of IBF in Malaysia, e.g. BIMB’s house financing since 1983.  BBA was still the main contract used for asset financing in Malaysia though some Islamic banks had begun using other types of contracts.  Recent court decisions had questioned aspects of the BBA, e.g. the profit vs. rebate question, the validity of BBA.  The status of novation from a Shariah perspective was not settled.  Some felt that a BBA transaction was not valid without a novation.  But even when there was a novation, there was a question whether the full price could be claimed.  This depended on whether the financing period was completed or not.  If it was not, the argument was that the bank could not have the whole sum.  Thus, should there be a rebate on the unearned profit?  There were 2 conflicting decisions, namely BIMB v Adnan bin Omar and Affin Bank v Zulkifli.  Both related to Order 83 Rule 3(3)(c) and (7) of the Rules of the High Court.

The decision in Adnan was that the rebate was discretionary.  However in Zulkifli the court held that the rebate was compulsory.  The Islamic law position was that there should be a rebate on the BBA selling price.  But if the debt was not yet due, the majority of scholars would not allow a rebate.  If the debt was due, there was agreement among jurists on permissibility.  This was the decision in the Taman Ihsan Jaya case.  However what would occur if a BBA debt became due because of an event of default?  This was the so-called clause on “right to recall”.  If there was a right to recall, a rebate could be given.  The majority view was that the rebate was discretionary.  However in the Hanafi school, in the case of murabahah, there was a compulsory rebate if the amount due was paid earlier.  But in any event the rebate should only be calculated from the date of full settlement and not date of judgment.

The last session of the second day was taken once again by En. Shuhaimi, who spoke on “Legal Documentation – New Products”.  In his second session, En. Shuhaimi focused on newer IBF products which were gradually being introduced into the market.  En. Shuhaimi also dealt with the consequence of the new provision of section 57 of Bank Negara Malaysia Act 2009 which had been highlighted by the Deputy Governor of BNM in his speech.  The effect of this was to bind the civil courts in the event there had been an opinion delivered by the Shariah Advisory Board of BNM.

Overall, the Symposium considered Shariah principles and reviewed the fundamentals and distinctive of IBF.  The participants were taken through first principles through to documentation for existing products and then introduced to new IBF products.  There was also an opportunity to review the various legal and practical issues surrounding IBF.  

The IFC and AIBIM will be organising a 5th edition of the National Symposium in Kuala Terengganu on 21 October 2009.  A 6th edition is being planned for Sarawak, in co-operation with the Advocates Association of Sarawak.  Details will be announced as they become available.