Transmenu powered by JoomlArt.com - Mambo Joomla Professional Templates Club

The 2nd seminar of Level 1 on Islamic Banking Products & Services and Recovery Actions in Islamic Banking Transactions concluded on 16 August 2007. It was yet again another prolific session by the seminar series speaker, Mohamed Ismail Shariff.

The session opened with an announcement by Steven Thiru, Chair, Professional Standards and Development Committee that a briefing on the status of Bank Negara's proposal under the MIFC initiative to admit foreign lawyers to practise here under minimal restrictions, will be held at the start of the next session, Seminar 3 on 6 September 2007 at 2.15 pm.

Preliminary views have been exchanged between the Bar and Bank Negara and negotiations continue, to ensure, as a matter of priority, that the interest of the legal profession is safeguarded in the advent of the MIFC. Members were urged to attend and unreservedly share their views.

Jalalullail Othman, a partner of Messrs Shook Lin & Bok, and Chairman of the Bar Council GATS sub-committee on Islamic Finance moderated the session. After a generous introduction, Ismail was invited to continue the session, or the 2nd hole of the 9-hole game, as he jokingly put.

He started with a brief re-cap of Seminar 1, touching on the fundamental difference between conventional and Islamic banking. The session then dealt more specifically on the essence and elements of Islamic trading transactions, and moved on quickly to elucidate participants on 2 types of Islamic banking products, Bai Bithaman Ajil and Bai Inah. The last part of the session was dedicated to the difficult area of recovery actions, with reference to decided cases.

In Seminar 1, the speaker emphasised that interest in Islam is forbidden and one cannot borrow, hence in Islamic banking there is no money lending transaction (loan) but rather a trading transaction, namely an asset-based or economic activity-based transaction. However, for the conventional banking mind, to whom borrowing and lending money is the very foundation of banking, this, is difficult to conceptualise. The speaker stressed that a successful Islamic banking practitioner must go through a paradigm shift, to escape the "Shift-F2" syndrome of thinking that Islamic banking is merely conventional banking where "interest" is replaced by the word "profit".

The speaker went on to explain that trading is not confined to buying and selling of assets, but may involve other types of commercial transactions based on both tangible and intangible assets.

How does one enter into a sale transaction?

Contracts of Sale

In order for any type of contract of sale to be valid, the shariah requires that:

1. The contract possesses all its essential elements; and
2. Each element meets the necessary conditions

Examples of contracts under sale transactions are Bai Murabahah, Bai Bithman Ajil, Bal Salam and Bai Istinaa.

Taking Bai Bithman Ajil or BBA as an example, the shariah essential elements (similar to the civil law of contract) are:

1. There must be a Vendor and a Purchaser
   Necessary conditions:
   1. V & P must be aqil (of sound mind) and rasheed (capable of managing own affairs) and at least 18 years of age by the lunar calendar.
   2. V & P are not prevented from trading (eg. undischarged bankrupt)
   3. No coercion on V & P
      
      
2. The subject-matter of the contract:
   Necessary conditions:
   1. must exist (future goods, with exceptions, cannot be sold)
   2. must be of significant value
   3. must be owned by V
   4. must be capable of being delivered
   5. must be known with clear specifications by V & P.
      
      
3. The price
   Necessary conditions:
   1. Currency must be specified
   2. Amount must be absolute, not approximate or dependent on unknown factors
      
      
4. The contract or aqad
   Necessary conditions:
   1. must be absolute and decisive, not conditional
   2. acceptance must be in agreement with offer
   3. must be executed at one and same time

A useful illustration of a contract of sale is the BBA, an Islamic banking product widely used in Malaysia. Although not recognized as a valid contract of sale in many parts of the Islamic world, our Shariah Advisory Council accepts it as a halal product. Nevertheless its popularity is fading and it may be phased out very soon.

Bai Bthaman Ajil

BBA is essentially a "deferred payment" sale or a credit sale. For an easy understanding of how this product operates, Ismail gave a step-to-step comparison between BBA and a conventional housing loan transaction for the purchase of a property.

Comparison between BBA and conventional housing loan

Ismail cautioned that just because both transactions achieve the same end result, they are not to be assumed to be of the same nature, but remain 2 distinct types of transactions.

Security

The speaker sought to allay the common concerns surrounding security for Islamic banking transactions. He explained that the sale transaction and security are distinct issues, the security does not validate the loan or sale, rather it secures the repayment of the loan (in conventional banking) and payment of the sale price (in Islamic banking). Therefore, it is possible for a conventional loan and an Islamic financing facility to share the same security.

Hibah

The speaker also explained Hibah, which is a gift without consideration, given by one person to another based on personalty or immovable property. In financing transactions, Hibah is made by a Deed or Letter of Hibah.

Bai Inah

The 2nd Islamic banking product that was discussed was Bai Inah, which is the converse of BBA, Like BBA, it involves a combination of 2 successive contracts of sale, namely:

1. Credit sale
2. Cash sale

This product is used by banks to provide personal financing, and can be given with security. Simply, it involves the following steps:

1. The Bank sells as asset to the Customer on credit terms under an Asset Sale Agreement (ASA).
2. The Customer agrees to pay a sale price over a period of time in instalments.
   Sale price (facility amount + profit)
3. The Customer then sells the asset back to the Bank on cash terms under an Asset Purchase Agreement (APA).
4. The Bank pays the purchase price immediately to the Customer.
   Purchase price (facility amount)

Recovery Actions

The speaker concluded the session by dealing with applications for Order for sale in Islamic financing transactions.

The prevailing law on Order for sale is equally applicable to shariah transactions. Unfortunately, Order 83 RHC 1980 which came into force before the introduction of Islamic banking and finance in Malaysia does not take into consideration the principles and procedures of Islamic banking.

This has caused some difficulty in the compliance of Order 83 in order for sale applications involving Islamic banking/financing transactions. For example, what is the correct "amount of advance" - is it the Purchase Price or the Sale Price; the "amount remaining due under the charge" - can it include unearned profit; the "calculation of a day's interest", etc. as required by Order 83.

In this context, the speaker critically analysed the 1st decided case on application for Order for sale involving an Islamic banking transaction, Bank Islam Malaysia Berhad v Adnan bin Omar [1994] 3 AMR 44. The High Court, having considered the elements of Order 83, found that the plaintiff had sufficiently satisfied them in the context of Islamic banking and thus, granted Order for sale. On appeal, the then Supreme Court upheld the Order for sale. Though a highly significant decision, unfortunately no written judgment was handed down.

Conclusion

As expected, Ismail expounded this technical session with ease and clarity. He was happy to take on questions throughout the session for as long as time permitted, and cleared members' uncertainty, mainly in the areas of security (on the type, procedures, content of annexure) and enforcement. Amongst the seminar material, Ismail's article appearing in the Malayan Law Journal [2006] 3 I-clxviii on the recently decided Affin Bank Berhad v Zulkifli bin Abdullah [2006] 3 MLJ 67 is a must-read.

We hope the significant increase in participation in this 2nd Seminar would encourage members to sign up early for the 3rd Seminar to be held on 6 September 2007. The next session will deal with an in-depth analysis of 5 decided cases on financing transactions.

For registration and further information, please contact the Professional Development and Standards Committee at 2031 3003 x 174 (Sivanes).

Comments (0)

Subscribe to this comment's feed