Tuesday 11 April 2017

CASE REVIEW: Tan Sri Abdul Khalid Bin Ibrahim v Bank Islam Malaysia Berhad

1.0  INTRODUCTION
Journal:                        Malaysian Law Journal (MLJ)
Case:                           Tan Sri Abdul Khalid Bin Ibrahim v Bank Islam Malaysia Berhad
Citation:                      [2012] 7 MLJ 597
Judge Panel:                Zawawi Salleh J
Reported by:               Kohila Nesan
Judgement Date:         2nd December 2011 at High Court (Kuala Lumpur)

2.0  CASE SUMMARY
The defendant, Bank Islam Malaysia Bhd had provided two murabahah financing facilities to Tan Sri Abdul Khalid bin Ibrahim (‘the plaintiff’), enabling the plaintiff to acquire more shares in a company called ‘Kumpulan Guthrie Berhad’. The facilities were later restructured to the BBA facility following some breaches by the plaintiff. After defaulting the payment of the first instalment, the plaintiff claimed that the bank had mishandled the BBA facility with actions contravening the Islamic teaching. Therefore, he sought to declare the agreement to be null and void. The defendant had denied the claim, relying on the civil law and Shariah principle that the agreement is valid and binding to both parties.
            Thereafter, the bank carried out a debt recovery action ('the defendant's suit') against the plaintiff stating that the plaintiff had defaulted the terms of the BBA facility agreement. These two suits were later consolidated. Before the consolidation, the bank applied for summary judgment in respect of its suit but plaintiff refused so. The High Court allowed the summary judgment application. However, the plaintiff appealed to the Court of Appeal, which allowed the appeal.
            On the case management stage of this consolidated action, the plaintiff applied to refer certain questions to the Shariah Advisory Council of Bank Negara Malaysia ('SAC'), in pursuant to section 56 of the Central Bank of Malaysia Act 2009. This is due to the fact that the plaintiff had raised Shariah issues and according to the Act, such issues should be referred to the SAC. It was further added that the ruling made by the SAC shall be binding on the court. The plaintiff objected the application.


3.0  ISSUES
1) Whether there is any question concerning the Shariah matter arises?
2) Whether the court is functus officio from making a reference to the SAC as the question has previously been referred to the same board at the summary judgment process?
2) Whether a reference regarding the Shariah issue arises (if any) can still be made to the SAC?
3) Whether Section 56 and Section 57 of the Central Bank Act contravene the Federal Constitution?

4.0  PLAINTIFF CONTENTION
The plaintiff stated a few grounds for his contentions in this case. Firstly, the plaintiff had argued that the BBA facility was not Shariah compliance as it does not strictly follows the true manner and practice of a BBA facility, as according to the Shariah law. He added that the facility offered was practice with the presence of the element of interest, which is prohibited in Islam.
Secondly, the plaintiff questions the validity of the defendant’s act that had disposed his shares without his permission upon the default of payment. It is pertinent to note that, the disposal was carried out according to the terms of the agreement as the shares are the security in the BBA agreement. This leads to another question of whether the plaintiff obligation to pay his debt is still applicable, had the BBA facility truly departed from the shariah teaching.
It was also the plaintiff's argument that the execution of the BBA facility and the consolidation of the suits were effected before the Act came into force and therefore Section 56 and 57 of the Act could not be applied retrospectively.
Apart from that, he also argued on the constitutionality of Section 56 and 57 of Act 701. He questioned on the constitutionality of the SAC’s duty to interfere with the court’s duty.

5.0  DEFENDANT CONTENTION
The defendant had denied the allegation by the plaintiff who said that the BBA facility offered in non-compliance with the Shariah principle. The bank also argued that a debt is still a debt until it is settled and the parties to a contract are bound to the agreement until the disposal of their respective duties. Such was relied upon the civil law and the Shariah principle.


6.0  JUDGEMENT
Based on the contentions made by the plaintiff and the defendant, it was held that there are Shariah issues exist in this case and they need to be verified by the SAC. They are, inter alia, the legality of the BBA facility agreements according to the Islamic principle, the legality of the bank’s move of selling the Plaintiff’s share without his permission after his failure to pay back his debt, the validity of the agreement should it turned out to be departed from the Shariah principle, and the obligation of the Plaintiff to settle his debt if the BBA facility agreements were found to be contrary to the principles of Shariah.
In addressing the second issue where the plaintiff claimed that the Shariah issue in this case should be estop from being re-addressed to the SAC for reference, the court held that the said reference letter which was sent to the BNM during the summary judgment stage was indeed not issued to addressed the dispute between the parties before the court, but is an existing resolution which was issued before the dispute aroused. Therefore, the court is free to make reference the Shariah issue to the SAC.
In answering to the plaintiff’s argument that the BBA facility agreement should be null and void due to the fact that the agreement was made before the Act came into force and it should not be applied retrospectively, the court relies on the view that amendments to purely procedural statutes should be given retrospective effect and amendments that change substantial rights be given prospective rights. The amendment made had changes the gravity of the ruling made by the SAC. Previously, it is the discretionary power of the court to consider whether to follow or not on the ruling made by the SAC. However, now the SAC’s ruling is no longer the discretion of the court as it shall bind the decision of the court. But, it is important to differentiate the binding effect of the SAC’s finding in Shariah matters from the finality of the decision made by the judge. This fact is raised in the next issue.
Next, the court also found that Section 56 and Section 57 are not ultra vires to the Federal Constitution and thus valid. The court in this case had highlighted that eventhough the SAC’s ruling is binding towards the court decision, it is sophistic to say that the SAC holds the decision making role, instead of the court. It was further stated that it is practical to have an expert body such as the SAC to help sort out the difference of view regarding the shariah issue in the banking industry in Malaysia.
For the above reasons, the court held that the application is allowed with costs.













7.0  ANALYSIS
In this case, I am in my view agreed with the judgement made by Zawawi Ahmad J in dismissing the appeal and allowed appellant (BIMB) to refer to Syariah Advisory Council (SAC) pertaining validity of BBA contract. Before we go further into the discussion, let us take a look on the meaning of murabahah and also Bai Bithaman Ajil (BBA) first since those are type of contracts entered into between Plaintiff and Defendant and becomes the vital elements in this case.
For murabahah, according to Institute of Islamic Banking and Insurance website, it is a type of contract of sale entered into by bank and its client for the sale of goods at a price, plus an agreed profit margin for the bank[1]. Basically, murabahah is a particular kind of sale and not a financing in its origin because it does not involve loan. Since murabahah is a sale transaction, rules of Syariah must be complied with to avoid riba. In murabahah contract, transaction is done on a ‘cost plus profit’ basis which is the seller discloses the cost to buyer and adds a certain profits to it at the final selling price. So here, riba which rises depending on the term of deferred payment made can be avoided since there involves profits at agreed price by both parties. Payment can be made on the spot, in instalment or in lump sum after certain time. However, by time murabahah is said not to be syariah compliance by some Islamic legal experts since it may involve riba especially when penalty for late payment is imposed[2]. But still, it is considered as a valid contract in Malaysia[3].
Meanwhile, BBA is a ‘deferred payment sale’ or a type of loan agreement which works like a murabahah contract, but with payment generally made on a deferred basis and it is not transaction type of agreement like murabahah. The sale price quoted for the asset in the contract is inclusive of the profit. The typical assets for such contracts are the land, building, machinery and other equipment. Bai Bithaman Ajil is one of the most popular Islamic financing techniques used in Malaysia and it can be considered as a substitute of the finance lease. It is used by customers to purchase assets of substantial value in instalments, from which they can generate future cash flows. In this agreement, the customer gets the asset and is required to make payments as per the agreed tenure in instalments. The customer purchasing the asset is required to pay the profit to the financial institution that arranges the assets[4]. However, it is also said to have few weaknesses and some scholars contended that it is almost the same as conventional loan. But still, BBA contract is recognized in Malaysia and being used by most Islamic financial institutions like BIMB.
So the above are simple explanation regarding murabahah and BBA contract. Going back to Tan Sri Abdul Khalid’s case, plaintiff at first entered murabahah contract with BIMB and later on, due to some breaches by plaintiff, defendant offered to change it to BBA contract which is a loan agreement based on deferred payment. However, plaintiff defaults on the first instalment and later on challenges validity of BBA contract. Here we can see that plaintiff refused to continue with the contract made between him and BIMB and intended to put an end to the contract[5]. I am in my view, agreed with decision of Rohana J in referring the matter to SAC since the judge may not have the expertise to decide the matter pertaining Islamic banking and transactions. Since SAC on its ruling held that BBA is a valid contract so it is only right for the judge to rely on the ruling and decides the case in favour of defendant. However, as we can see from this case, plaintiff was not satisfied with the Court judgement so he made an appeal and challenged the validity of Section 56 and 57 of Central Bank of Malaysia Act 2009 (CBMA 2009) which gives more influence of SAC upon deciding each case of Islamic legal matters.
 Based on this case after appeal has been made, 4 issues was raised. The first one is whether there is any matter pertaining syariah issue arises, second, whether the High Court functus officio. Third, whether a reference regarding the Shariah issue arises (if any) can still be made to the SAC. Lastly, whether Section 56 and 57 of CBMA 2009 is constitutional.
Regarding the first issue on whether there is any matter pertaining syariah issue arises, the Court held that, it does involve Shariah issue. We can see based on this case that the contract signed between plaintiff and defendant was Murabahah and BBA type of contract which are part of the Islamic banking and financial agreement. Therefore, when dispute happened, obviously the issue of Shariah matter arises especially when plaintiff on his contention said that BBA was not Shariah compliance and the contract entered should be null and void.
On the second issue of whether High Court functus officio in deciding the case on favour of defendant, I believes that the court had comes up to the correct decision. The defendant, in bringing this matter seems to had misunderstood the situation. During the summary judgment stage, the reference made by High Court Judge to SAC was merely a request for information on whether there was any ruling by SAC regarding BBA contract. It has never touches on the matter discussed before this court in specific. Thus, to say that the court should be estop from bringing the case to the SAC so as to avoid repeating trial on the same matter is not right because the matter that is to be brought before the SAC this time is totally different. As there was no previous reference to SAC for the ruling, the High Court cannot be functus officio.
The third issue is whether a reference regarding the Shariah issue arises (if any) can still be made to the SAC. It must be noted that before 2009, upon issue involving Shariah matter, the Court may refer to SAC for ruling pursuant to Section 56 and 57 of CBMA 1958. The word ‘may’ here shows discretionary of the Court on whether to refer such matter to SAC or not. After the Act has been revised, Section 56 and 57 make it a must for the Court to make reference to SAC whenever issue on Shariah matter arises. The said provision is read as follow;
Section 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.
While Section 57 stated that;
 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.
Based on the above provision, on Section 56 of the said Act, the word ‘shall’ make it compulsory for any Court to make a reference and take consideration on any rulings made by SAC when the issue of Islamic Banking or syariah matter arises. That is why I agreed with the decision of Rohana J and Zawawi Ahmad J in allowing the Court to refer the matter pertaining validity of BBA contract to SAC. Since SAC decided that BBA contract is a valid contact, the Court in making reference to the ruling, may decide the matter accordingly. The rational of making reference to the SAC for ruling is that most of the judges in Civil Courts are not conversant with the rubric of Islamic Banking law or Shariah matter. Since the SAC have the expertism over such matter, reference to it should be made in order to avoid injustice to any of parties.
Lastly, the issue regarding constitutionality of Section 56 and 57 of CBMA 2009 on whether it is inconsistent with Federal constitution and should be void. It must be noted that in Federal Constitution under Article 74(1), parliament is empowered to make laws with respect to any matters mentioned in Federal List (List I) or Concurrent List of Ninth Schedule. Item 4(k) of List I provides that parliament is empowered to make laws in respect of Islamic Law and other personal laws for purposes of federal law. Since banking is a matter categorized under the Federal List and Islamic Banking Act 1983 as well as Central Bank Malaysia Act 1958 (CBMA) are under Federal Laws, Section 56 and 57 of CBMA are within parliament power to enact. Therefore, these sections cannot be said to be inconsistent with Federal Constitution.
Apart from that, Under Part IX, Article 121(1) of Federal constitution, the provision vests the judicial powers of federation in Courts grant by federal law. Therefore, the Court can perform the functions or to exercise power and jurisdiction. It is important to note that function of SAC is only to ascertain Islamic financial matters or business and it does not hear evidence or decide cases. That is the reason why the Court is allowed to cite Section 56 and 57 and make reference to the SAC for statutory ruling. Also, the ruling of SAC under Section 57 does not take away judicial functions and duties of Court, and that is why SAC like other expert, does not perform any judicial function in determining the ultimate outcome of dispute before Court and cannot be said to usurp or take away judicial functions of Court. Hence, I agree with Zawawi Ahmad J in stating that Section 56 and 57 are constitutional.


8.0  CONCLUSION
In conclusion, I agreed with the holding made by the Court in dismissing Tan Sri Abdul Khalid’s appeal and make an order for defendant to settle all the debt to BIMB. From this case, it is clear that Shariah matter does arise when it involves BBA contract which formed part of the Islamic Banking facilities. Apart from that, even though some expert said that the BBA contract might have allows the practice of the element of riba, it must be noted that Islamic Banking is still new in Malaysia and lots of improvements are being made from time to time in order to ensure that Malaysia Financial System to be more Shariah compliance. Therefore, regardless of criticism, BBA contract is still recognized in Malaysia and each party to the contract are binding to it.
In addition, pursuant to Section 56 and 57 of CBMA 2009, the provision making it compulsory to make reference to SAC whenever Islamic Banking or Shariah matter arises simply because SAC have the expertise over such. Also, we can conclude that Section 56 and 57 of CBA 2009 are constitutional and supersede the repealed CBMA 1958. All in all, SAC has imperative roles in assisting our current Islamic Financial Framework in order to make it more Shariah compliance.











9.0  REFERENCES
Ahmed Ali. (n.d.). Murabaha  process, documentation, and application of murabaha.

Institute of Islamic Banking & Insurance | Murabaha on Syari’a ruling. Retrieved on 22nd

IslamicBanker | Bai Bithaman Ajil. Retrieved on 23rd October, 2016, from

Muhammad Amir. (2009). Financing : Murabaha. Retrieved on 23rd October, 2016, from

Zul Kepli. (2013). Introduction to Islamic finance. Retrieved on 24th October, 2016, from



[1] Institute of Islamic Banking & Insurance | Murabaha on Syari’a ruling. Retrieved on 22nd October, 2016, from http://www.islamic-banking.com/murabaha_sruling.aspx
[3] Muhammad Amir. (2009). Financing : Murabaha. Retrieved on 23rd October, 2016, from https://islamicbankers.me/islamic-banking-islamic-contracts/in-focus-murabahah-contract/
[4] IslamicBanker | Bai Bithaman Ajil. Retrieved on 23rd October, 2016, from https://www.islamicbanker.com/education/bai-bithaman-ajil
[5] Zul Kepli. (2013). Introduction to Islamic finance. Retrieved on 24th October, 2016, from http://what-is-islamic-finance.blogspot.my/2013/06/analysis-cases-law-on-islamic-finance.html

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