Ensuring Shariah Compliance at The Court PDF

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Ensuring Shariah Compliance At The Courts And The

Role Of The Shariah Advisory Council In Malaysia
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ENSURING SHARIAH COMPLIANCE AT THE COURTS

AND THE ROLE OF THE SHARIAH ADVISORY
COUNCIL IN MALAYSIA*
DR. SHERIN KUNHIBAVA**
According to the Islamic Financial Services Act 2013, an Islamic financial
institution must comply with Shariah, this includes Shariah compliance for all its
products and services. There are in place a number of mechanisms to ensure that the
products and services of an Islamic financial institution are Shariah compliant
especially at the product development and application stage. However at the product
enforcement and dispute resolution stage, Shariah compliance is an issue. This
research investigates Shariah compliance at the dispute resolution stage by analysing
past case law in Malaysian courts where Shariah compliancy has been disputed. The
changes in the laws and cases during each period are also discussed. This research
recommends that the role of the Shariah Advisory Council of Bank Negara be
extended to more than just ascertaining Islamic law. It also recommends allowing
other parties to seek advice from the Shariah Advisory Council, that the resolutions
of the Shariah Advisory Council are updated regularly, and the questions referred to
it by the courts and arbitrators are recorded in a standardised manner.
Keywords: Shariah Compliance, Shariah Advisory Council, Dispute Resolution,
Islamic Banking and Finance Cases, Central Bank of Malaysia Act 2009, Islamic
Financial Services Act 2013, Practise of Islamic banking, Ascertainment of Islamic
Law.
INTRODUCTION
Shariah compliance is at the heart of Islamic finance; it is what distinguishes
Islamic finance from conventional or commercial finance. Shariah compliance
is also a head to toe requirement since all the activities, operations, business
and aims of an Islamic financial institution (IFI) must comply with Shariah:
s 28(1)of the Islamic Financial Services Act 2013 . Thus in an IFI Shariah
compliance is required in three stages: at the product development stage,
during the product application, and lastly at the enforcement, and possible
dispute resolution of the product and transaction.
At the product development stage, Shariah compliance is achieved through
firstly the consultation, vetting procedure and approval of the individual
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Shariah Committees1 of IFIs and then the vetting and final approval by the
Shariah Advisory Council (SAC) and Bank Negara Malaysia (BNM). At the
product application stage, according to the Shariah Governance Framework,
Shariah compliance is achieved through Shariah review, the Shariah risk
management mechanism, Shariah auditing and consultation with the Shariah
committees of IFIs. At the enforcement and dispute resolution stage, Shariah
compliance is a joint effort by the court or arbitrator and the SAC.
A great amount of effort is spent by the various organs outlined above to
ensure that products comply with Shariah at the product development stage
and application stage; it is however at the dispute resolution and enforcement
stage that Shariah compliance may be left unchecked. As observed by Assoc
Prof Engku Rabiah:
In the case of disputes arising between an Islamic financial institution and its
clients, they will have to refer the matter to the civil or common law courts that
have jurisdiction to hear the litigation. This may result in decisions that may not
comply with the Shariah rules. This problem is further exacerbated by the
non-existence of any substantive law on Islamic financial services and banking
practices in such countries. In short, although the transactions entered by the
parties may be Shariah compliant in the first place, but upon enforcement of the
contracts, the court may make orders and decisions that may sideline the Islamic
legal principles.2
This article provides insight into this understudied area of Shariah compliance
and its effectiveness at the enforcement stage at the courts by analysing past case
law where Shariah compliance was one of the issues facing the court judge. This
research will focus on whether Shariah compliance is achieved at the Malaysian
courts.
The methodology used in this research is case law and case judgment
analysis. This consists of selecting and analysing cases from case law3 databases
in Malaysia where the parties in the cases have claimed Shariah noncompliance of Islamic financial products or services. Thus the inclusion criteria
for analysis of the cases in this study are: firstly Islamic banking and finance
1
2
For further information on the role of the Shariah advisory committee on Shariah
compliance see this article: Rusni Hassan, Agus Triyanta, and Adnan Yusoff, Shariah
Compliance Process in Malaysian Islamic Banking [2011] 5 MLJ lxxx.
See Engku Rabiah Adawiah Engku Ali, 'Constraints and Opportunities in Harmonization
of Civil Law and Shariah in the Islamic Financial Services Industry,' [2008] MLJ 4 pg ill.
Quoted by J Mohd Zawai in Tan Sri Abdul Khalid bin Ibrahim v Bank Islam Malaysia Bhd
[2012] 7 MLJ 597p 612.
Such as LexisNexis, CLJ Law and West Law.
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products and services, and secondly a claim that there has been Shariah
non-compliance. Cases where Shariah non-compliance was impliedly
contested and not expressly contested were also included in the analysis. In
other words, not all past case laws on Islamic banking and finance products and
services have been included in this research, only those that fall within the
inclusion criteria. In analysing the case law and Shariah compliance, the SACs
role in jointly resolving issues of Shariah compliance at the dispute resolution
stage and how it has evolved is also explored.
This research is presented in the following way: the first section of this
article begins with an analysis of cases prior to the SAC and then discusses the
evolution of the SAC. Thereafter, this research analyses the cases
chronologically according to the amendments made to the relevant laws. This
study ends with further thoughts and recommendations for better Shariah
compliance at the enforcement stage.
SHARIAH COMPLIANCE IN ISLAMIC BANKING IN MALAYSIAN
COURTS BEFORE THE SAC
In Malaysia, Shariah compliance has been an issue in local cases possibly from
as early as 1987, before the SAC was set up, and before the SAC was given the
mandate to be the ultimate authority on Shariah matters in the industry. It is
possibly the first case claiming Shariah non-compliance, because no mention
of Shariah or Shariah non-compliance is made in the case, however the
defaulting party claimed the transaction was actually a loan agreement and not
a leasing agreement as claimed by the IFI.
In the case of Tinta Press Sdn Bhd v Bank Islam Malaysia [1987] 2 MLJ 192
( Tinta Press) in the Supreme Court Civil Appeal, Bank Islam Bhd, the
respondent, bought printing equipment from the appellant and leased the
equipment back to them thus providing financing.
There was a first agreement for a lease of seven years. The appellant had to
pay rentals and also two rental deposits. The appellant defaulted. The parties
entered into a second agreement whereby, while there were no rental deposits,
there was a security deposit and rentals to be paid by the appellants. The
appellants again defaulted. Bank Islam Bhd took steps to take possession of the
equipment but was prevented from doing so because the appellant shut down
the premises. Bank Islam Bhd applied ex parte for a mandatory injunction
which was granted. The appellants appealed.
One of the main issues raised by the appellant was that the lease agreement
was in fact a loan agreement. The Supreme Court held that this was incorrect
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according to the documents attached and the affidavit evidence. The

relationship between the parties was that of a lessor and a lessee; the
respondents were the legal owners of the equipment, thereby retaining
ownership of it while the appellant at whose request the equipment was
purchased had the possession and use of the equipment. The Supreme Court
did not examine whether the transaction was really a lease according to Shariah
principles or just a loan agreement. Islamic banking was at a very early stage
during the time the transaction was entered into; it was actually entered in
December 1983, the very year Bank Islam Bhd was incorporated and the
Islamic Banking Act 1983 was passed.
After Tinta Press, there were other cases which involved parties who had
engaged in Islamic banking but in none of these cases was the defence of
Shariah non-compliance raised,4 until the unreported case of Bank Islam
Malaysia Bhd v Shamsuddin Bin Haji Ahmad [1999] MLJU 450 in the High
Court of Alor Setar. In this case, the defendant claimed that there was the
presence of interest in the charge of the case and this was prohibited in Islam
and was against the Islamic Banking Act 1983. The court held that this
argument was not raised by the defendant in his affidavit but only in his
defence, thus thwarting the plaintiff s opportunity to defend and explain itself
through the affidavits. The court thus held that it did not have to consider this
point. However, as the plaintiff had nevertheless given an explanation on the
point of interest, the judge believed it to be the correct position. The judge
stated that no interest existed in the transaction because the amount claimed
was the resale price to the defendant.
Both of the above cases reveal the judges literal approach in viewing the
transactions. The transactions were read at face value only with no questions
asked by the judges on the actual practise of Islamic banking. The judges
believed that the arguments made by the former customers of the IFI were
made to escape from paying the amount due. While in all honesty this was
correct, one wonders what would have happened to the Malaysian Islamic
financial industry if the judges at this stage of case development had taken a
more purposive approach and searched deeper as to whether there was interest
or whether the lease was actually a loan? Had the judges done so, would the
bankers have taken more care when conducting Islamic business to ensure
Shariah compliancy? Or alternatively could the judges have done a favour to
See Bank Islam Malaysia Berhad v Adnan bin Omar [1994] MLJU 221; [1994] 3 CLJ 735;
[1994] 3 AMR 44;; [1994] 4 BLJ 372, Dato' Nik Mahmud bin Daud v Bank Islam Malaysia
Bhd [1996] 4 MLJ 295.
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the Islamic financial industry by ensuring its continued progress by upholding

the transactions? These questions and many more will never be answered.
The defence that Islamic banking transactions did not comply with Shariah
was naturally raised in further cases. However these cases existed after the
legislative developments which led to the requirement of referring a Shariah
matter to the SAC. The next part of the article will explain the development of
the legislation and the SAC.
EVOLUTION OF THE SACS ROLE IN SHARIAH COMPLIANCE AT
THE MALAYSIAN COURTS
Islamic banking was formally introduced in Malaysia through the enactment of
the Islamic Banking Act 1983 and the establishment of Bank Islam Bhd in the
same year. Bank Islam Bhd was the first fully fledged Islamic bank that offered
Islamic banking products and services. This was to remain for ten years.5
During this time, the Shariah committee of Bank Islam Bhd ensured that
products offered by Bank Islam Bhd to the industry were Shariah compliant.6
As there was only one Islamic bank, one Shariah committee was sufficient.
Then in 1993, commercial banks, merchant banks and finance companies
were allowed to offer Islamic banking products and services under what was
known as the Islamic banking scheme also known as Islamic windows.7 This
move was to enable a larger proportion of the public whether Muslim or
non-Muslim to participate in Islamic banking.
In light of this, and the fact that each institution offering Islamic banking
products could have their own Shariah committee, it became essential to have
one ultimate authority to have the final say as to whether a product was Shariah
compliant to ensure consistency in the market, and prevent a situation where
different financial institutions would be offering different Islamic banking
products based on the interpretation of their individual Shariah committee.
5
6
7
Nik Norzul Thani, Mohamed Ridza Abdullah, and Megat Hiziani Hassan, Law and
Practice of Islamic Banking and Finance, 2nd Ed (Petaling Jaya: Sweet & Maxwell Asia,
2010) p 103.
Abdul Hamid Mohamad and Adnan Trakic, 'The Shariah Advisory Council's Role in
Resolving Islamic Banking Disputes in Malaysia: A Model to Follow?' Isra Research Paper 47
(2012): 3.
Thani, Abdullah, and Hassan p 245.
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Thus the SAC was established at Bank Negara in 1997 to be the ultimate
authority in Islamic banking and takaful on Shariah compliance for products
introduced by IFIs. 8
However it was only in 2004 that the role of the SAC was extended through
s 16B(8) of the Central Bank of Malaysia (Amendment) Act 2003 (Act
A1213),. The SAC was given the mandate to be the ultimate authority to
ascertain Islamic law for the purposes of dispute resolutions in Malaysia.
Section 16(8)of the Central Bank Act 1958 set out that in any proceedings
involving Shariah issues the court or arbitrator may take into consideration any
written directives issued by Bank Negara after consultation with the SAC or
refer the issue to the SAC for a ruling. The decision of the SAC was binding on
an arbitrator but not on a court. However this discretion given to the court was
revoked in 2009 with the coming into force of the Central Bank of Malaysia
Act 2009 (CBMA 2009), where it is now mandatory for courts to refer to any
published rulings and in the absence of published rulings, refer a question to
the SAC for a ruling on Shariah matters and the ruling shall be followed by a
court of law: ss 56 & 57 of the CBMA 2009.
It would seem that the courts are required to refer to published rulings of the
SAC first and if there is no rulings on that point, then the court can refer the
matter to the SAC, this sequence of reference is suggested in the Manual
Rujukan Mahkamah dan Penimbang Tara kepada Majlis Penasihat Syariah
Bank Negara Malaysia (Manual for Reference by the Courts and Arbitrators to
the Shariah Advisory Council of Bank Negara Malaysia)9 in Appendix A.
Thus it is important to have access to the recent rulings of the SAC. The
latest published rulings of the SAC known as the resolutions of the SAC are
downloadable from Bank Negaras website and include all the rulings made by
the SAC with Shariah sources added as of 2011 in English and 2012 in Malay.
The resolutions are easy to search and the court that is trying to find a ruling on
a matter need only do a simple search on the document once it is downloaded.
As for the more recent or contemporary rulings of the SAC, these are also
found on BNMs website in summarised form for the SAC meetings from 30
April 2013 onwards (ie from the 134th meeting of the SAC onwards). This
means that when the SAC meets and discusses Shariah issues on a monthly or
8
9
Mohamad and Trakic: 3.

BNM, Manual Rujukan Mahkamah Dan Penimbang Tara Kepada Majlis Penasihat
Syariah Bank Negara Malaysia Di Bawah Seksyen 51 Dan Seksyen 56 Akta Bank Negara
Malaysia 2009(2014, accessed 31 October 2014); available at http://www.bnm.gov.my/
index.php?ch=7&pg=1038&ac=419bb=file1. Published on February 10 2014.
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more frequent basis, the rulings made by them are summarised in English and
made accessible to the public. To access the ruling, one has to click on each
individual meeting held by the SAC, for example The Shariah Advisory
Council Bank Negara (SAC) 154th meeting:
The Shariah Advisory Council of Bank Negara Malaysia (the SAC) 154th
Meeting
The Shariah Advisory Council of Bank Negara Malaysia (SAC) held its 154th
meeting on 17 December 2014. The meeting discussed issues mainly relating to
the draft Shariah Standard on Wakalah. Among the key decisions reached by the
SAC on Wakalah relates to the situation where the wakil under wakalah bil ujrah
(fee based agency) shall be entitled to a fee in undertaking the task mandated by
the muwakkil. With regard to the arrangement of wakalah with kafalah, the SAC
decided that both contracts may be combined in one agreement provided that:
(i)
the validity of one contract is not contingent upon the other; and
(ii)
such combination shall not result in guaranteeing the investment

capital by the wakil.10
This is definitely a good move. However these rulings are brief and are not
backed up with Shariah sources. Further the rulings of the meetings from 2012
- April 2013 are not available. Also the question or issue faced that led to the
ruling has not been added. The most challenging part for a researcher or judge
seeking a recent ruling relevant to the case before it is the inability to easily
search for the SAC rulings from the meetings on a particular Shariah point. For
example, if the Shariah issue facing the court is on Musharakah mutanqisah, a
simple search with these keywords would not be possible for contemporary
rulings. A judge would have to click open each and every separate meeting and
read it before being able to find a ruling relevant to it. Even then if a ruling is
found, the summary provided may be too brief to answer the issue before the
court.
It is suggested that the resolutions which was last updated in 2011 in
English and 2012 in Malay are updated frequently and all the latest rulings be
added so that judges, arbitrators, lawyers, bank officers and all members of the
Islamic financial industry have access to the latest Shariah rulings and updates.
With the rate of development of Islamic banking and finance, a ruling made in
10 BNM, Shariah Advisory Council of Bank Negara (Sac) 154th Meeting (2014, accessed 11
February 2014); available at http://www.bnm.gov.my/index.php?ch=en_about&pg=en_
sac_updatesac=439.
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2012 is not considered recent enough. The lack of detailed contemporary and
new SAC rulings could deprive the industry of much needed guidance on
Shariah.
Another point is when a Shariah issue is referred to the SAC by the courts or
arbitrators, details of the question posed by the court or arbitrator and the
subsequent rulings on the Shariah matter need to be published for the use of
the industry. In fact the court and the case name should also be made known so
that in the event research needs to be done on the Shariah issue and the facts of
the case, the researcher who could be a judge, arbitrator, or lawyer could easily
find the information. Currently the only information available on the website
is the fact that the SAC discussed a Shariah issue referred to it by the courts:
The Shariah Advisory Council of Bank Negara Malaysia (the SAC) 141st
Meeting
The Shariah Advisory Council of Bank Negara Malaysia (SAC) held its 141st
meeting on 26 November 2013....
...
SAC has also deliberated issues related to the Islamic financial transaction
referred by the court.11
Thus greater emphasis on the accuracy and availability of rulings should be

made by BNM to help the courts, lawyers, bankers and even the customers in
understanding the Shariah provision applicable to them.
Next this research moves on to analysing case law on how Shariah
compliancy was ensured during the period when it was at the courts discretion
whether to refer a Shariah issue to the SAC.
THE ROLE OF THE SAC IN SHARIAH COMPLIANCY AT THE
COURT AND THE CASES DURING SECTION 16B(8) OF THE
CENTRAL BANK ACT 1958
Prior to the CBMA 2009 during the period from 2004 to 2009, it was only
optional for the court to take into consideration any written directives issued
by BNM after consultation with the SAC or refer Shariah matters to the SAC.
During this phase, a number of cases were decided where the Shariah
compliancy of the transaction was questioned by the defendants (former
customers of the IFI).
11 Ibid.
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During this period, the fact that the courts were given an option to refer
Shariah matters to the SAC was acknowledged, however none of the cases
during this period actually referred any Shariah matter to the SAC for any
ruling.
A. Shariah Compliance Handled by the Courts Alone
The first case in which the court extensively discussed Shariah compliance of an
Islamic banking product is Arab-Malaysian Merchant Bank Bhd v Silver Concept
Sdn Bhd [2005] MLJU 201. This case is interesting because the parties to this
case met three different times at three different courts under three different
judges based on the same set of facts. In all three cases, the defendants claimed
that the Islamic banking facility was not Shariah compliant. The cases, courts
and the judges are:
1.
Arab-Malaysian Merchant Bank Bhd v Silver Concept Sdn Bhd [2005]

MLJU 201; [2006] 8 CLJ 9 at the High Court Malaya, Shah Alam
heard by Suriyadi Halim Omar J (as he was then).
2.
Arab-Malaysian Merchant Bank Bhd v Silver Concept Sdn Bhd [2008]

6 MLJ 295 at the High Court (Kuala Lumpur) heard by Abdul
Wahab Patail J (as he was then).
3.
Arab-Malaysian merchant Bank Bhd v Silver Concept Sdn Bhd [2010]

3 MLJ 702 at the High Court (Kuala Lumpur) heard by Datuk
Rohana J (as she was then).
In addition to the above, foreclosure proceedings was also taken out against
Silver Concept Sdn Bhd as chargor at the land office in respect of the charged
properties held under land office title.
The cases involved an Al Bai Bithamin Ajil (BBA) facility and a Al-Wujuh
facility which were secured by charges on a number of titles on a land. To
understand why there were three cases on the same set of facts the lawyer, Ms
Fadzilah Mohd Pilus who appeared as counsel for the plaintiff in all three cases,
was contacted. According to Ms Fadzilah the first case was a foreclosure action
against the property, the second case was a civil action on the BBA facility and
the third case was a civil action on the Al-Wujuh facility.
The facts for all three cases are the same:
The defendant had bought a large tract of land ('the land') from Ng Eng
Plantations Sdn Bhd and to part finance the acquisition of the land, the
defendant had requested a consortium of financial institutions, with the
plaintiff as the arranger and agent to help out. The assistance sought was for a
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BBA facility. An Al-Wujuh agreement was also executed between the defendant
and the vendors to provide the defendant a revolving Al-Wujuh facility. The
Al-Wujuh agreement consisted of a BBA facility and revolving drawing rights
on an account maintained by the plaintiff as part agent.
In executing the BBA facility the defendant, the plaintiff as agent and Ng
Eng Plantations Sdn Bhd entered into a sale and purchase novation agreement
(the novation agreement). This novation agreement involved a tri-partite
agreement whereby certain rights and obligations between Ng Eng Hiam
plantations Sdn Bhd and the defendant under the original sale and purchase
agreement were novated from the defendant to the plaintiff on behalf of the
consortium.
The BBA facility and the Al-Wujuh facility were secured by way of two
charges entered on the land. The defendant later defaulted in an instalment
payment on both facilities. The plaintiff cancelled the facilities and
commenced foreclosure proceedings in respect of the land at the Shah Alam
High Court for titles held under registry title and commenced foreclosure
proceedings at the land office in respect of titles held under land office title.
Among the defences raised by the defendant was that the Al-Wujuh Facility
was a loan agreement and not a sale agreement with fixed interest rate payable
by the defendant. Likewise the BBA Facility had the same flaws. The very fact
that the properties were charged accentuated and confirmed the loan status.
On behalf of the plaintiff, it was contended that just because a charge was
created and a debenture was issued, it did not mean that the transaction was a
loan transaction. Further, the transaction was made with the full knowledge of
the defendant that the transaction was created within the boundaries of Shariah
compliance. Also it was submitted that the profit element in the case was based
upon Islamic banking principles.
In all three cases the plaintiff s claim succeeded. The learned judges decided
the issue of Shariah compliance without referral to the SAC.12 The first case
actually summarises the approach of the courts in dealing with Shariah
12 The third and last case was decided after the Court of Appeal decision in Bank Islam Berhad
v Lim Kok Hoe & Anor and Other Appeals [2009] 6 MLJ 839 which had upheld the Al-Bai
Bithamin Ajil contract, and thus the learned High Court Judge Rohana Yusoff following
precedent upheld the agreement and held that the al-Wujuh revolving facility is made on
the basis of a fluctuating facility on a short to medium termmethod of financing via the
principle of Bai Bithamin AjilIt is wrong for the defendant to say it is interest when both
agreed them to be profit.
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compliance during this era. That is - the courts recognised the role of the SAC
but decided for themselves whether the agreements were Shariah compliant.
In the first case, learned Judge Suriyadi Halim Omar explained the role of
the SAC and its importance of resolving Shariah issues, however went into
great lengths explaining the intricacies of Islamic banking and its sources and
then decided on the Shariah compliance of the transaction without referring
any Shariah issue to the SAC:
Learned Suriyadi J on the SAC Under the Central Bank of Malaysia (Amendment) Act (Act A1213) new
provision of 16B (8), where in any proceedings relating to Islamic banking
business etc. before any court or arbitrator, any question that arises concerning a
Syariah matter, the court may refer such question to the SAC. The court thus
may even refer the matter to that body in the midst of any proceedings. 13
... With the above mind boggling minefield awaiting lawyers and judges alike it
is small wonder that the Syariah Advisory Body has been mandated to be
formulated. It is when rulings are required that the latter body must give its
opinion. Under the above new section 16B of Act A1213, the Syariah Advisory
Body appears to have a rather wide scope of referral, and not merely confined to
the issue of whether the matter at hand involves any element which is not
approved by the Religion of Islam. Needless to say the final say must rest with the
presiding judge (see s 16B(9)(a)).14
The judge deciding without reference to the SAC on the Shariah compliance of
the transaction:
Notwithstanding the above, I reject any argument that injects the argument that
it is not permissible to buy on credit, especially when there is mutual consent.
Even Prophet Muhammad had occasion to buy some grain from a Jew to be paid
at a specific time, with his coat of mail as security. I am unable to acquiesce to any
argument too that, just because a larger sum is agreed to be paid back founded on
a buy back concept, with the defendant openly having requested for deferred
payment, and with the differential sum resembling interest, the agreement must
be void. I am unable to acquiesce to such a suggestion as there is no clear text that
prohibits such a transaction entrenched with all those ingredients. Even the
followers of the Shafii and Hanafi schools and the majority of Muslim scholars
consider it lawful, calling it 'Shifa al ilal fi hokum ziyadat al-thamam li mujarrad
al-ajal (translated: The reason for increasing the price due to lapse of time)' (The
Lawful and Prohibited in Islam by Yusuf al-Qaradawi). I therefore reject the
13 [2005] MLJU 201; [2006] 8 CLJ 17, para 18.

14 Ibid p 18 at para 25.
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argument of the defendant that, just because the defendant pays more than what
was needed to buy the impugned property, such sum (here called profit) must be
interest per se.15
One would wonder as to why the learned judge did not refer the matter to the
SAC for a ruling, the answer is provided in the second case by learned judge
Abdul Wahab Patail16 It was submitted for the plaintiff that the Syariah Advisory Council had
determined that the Al-Bai Bithaman Ajil complied with the Shariah and once
the determination is made on the issue of Shariah compliance by the said Syariah
Advisory any question on their said determination can be referred to the Syariah
Advisory Council. Section 16B of the Central Bank of Malaysia Act 1958 (Act
591) however does not make reference mandatory. It clearly did not intend the
Syariah Advisory Council in the executive branch of government to be the
judicial authority. Thus, its rulings are binding only upon the arbitrator where
reference is made by an arbitrator. In the case of reference by the court, the ruling
is not binding but shall be taken into consideration. Given that reference is
discretionary and the rulings are not binding, and taking into consideration the
issue is not as to the Shariah compliance of the ABBA facility but the
interpretation of its terms, the court is of the opinion reference is not necessary.17
J Abdul Wahab Patail succinctly stated that reference to the SAC is not
mandatory by the courts and the SACs rulings are not binding thus reference
to the SAC was not made. Another pertinent point made by the learned judge
is that the issue faced by the court was not on the Shariah compliance of the
BBA product, for this has already been vetted by the SAC, but the Shariah
compliance of how the BBA contract is being practised. This is a matter of
interpretation of the terms.
15 [2005] MLJU 201; [2006] 8 CLJ 17, para 34.

16 J Abdul Wahab Patail decided for the plaintiffs based on two reasons, firstly the agreement
entered into was a novation arrangement and thus in the learned judges opinion was valid
as it involved the three parties --the original vendor, the purchaser and the new or
substituting vendor, in other words it was not just an arrangement between the defendant
and the plaintiff which resembled very much the conventional practice of a loan this was
the fatal flaw in the transaction arrangement in Arab-Malaysian Finance Bhd v Taman Ihsan
Jaya Sdn Bhd & Ors (Koperasi Seri Kota Bukit Cheraka Bhd, third party) [2008] 5 MLJ 631;
[2009] 1 CLJ 419. Secondly the financing term had expired and thus the whole amount of
money became due, there was no issue of unearned profit a term coined by the learned
judge in Arab-Malaysian Finance Bhd v Taman Ihsan Jaya Sdn Bhd & Ors (Koperasi Seri Kota
Bukit Cheraka Bhd, third party), taken to mean the amount of profit claimed by the
financial institute for the period not yet expired in the financing duration when the
customer defaults.
17 [2008] 6 MLJ 295 para 12.
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Does this mean that the role of the SAC is limited to the ensuring Shariah
compliance of the product before it is offered to the public, and not Shariah
compliance of the transaction as it is being practised? To answer this lets have a
look at some other cases during this period.
B. Shariah Compliance and the Practise of Islamic banking
The next case is Affin Bank Bhd v Zulkifli bin Abdullah [2006] 3 MLJ 67;
[2006] 1 CLJ 438 ( Affin case) in the High Court Malaya, Kuala Lumpur
before Abdul Wahab Patail J. In this case, it was not stated in the judgment that
the defendant claimed the facility was Shariah non-compliant however the
court compared a conventional home loan to the BBA financing and decided
the latter was more onerous than the former, thus bringing up issues of Shariah
and compliance. The learned judge also highlighted the function of the SAC
and why it was not referred to in this case. The facts are as follows:
In 1997, and subsequently by a revised agreement in 1999, the defendant
took a secured house financing of RM394,172.06 from the plaintiff bank
through the Islamic financing scheme of BBA (the facility). The facility
specified, inter alia, that upon default, the defendant would repay not only the
sum financed but also the banks profit margin spanning through the 25-year
tenure of the facility (pre-quantified and known as the bank selling price). The
defendant defaulted in 2002 after paying the bank RM33,454.19, and the
bank, pursuant to the terms of the facility, claimed from the defendant the
bank selling price of RM958,909.2118 and applied for an order for sale of the
charged property. The issue arose as to amount the defendant had to pay and
whether the whole amount of RM958,909.21 should be paid by the
defendant, notwithstanding the fact that he had only enjoyed a few years of the
facility.
The judge noted that in a conventional loan which procured interest, a
debtor would be far better off by not having to pay more than the tenure for
which he enjoyed the financing facility. The learned judge refused to allow the
Islamic bank to claim the whole bank selling price and went on to calculate the
amount that should be paid by the defendant. As for the fact that ibrar (rebate)
18 It should be noted that the original sum owed by the defendant to the Islamic bank was
much lower as he had been an employee of the Islamic bank at that time, the amount was
revised when the defendant left his job at the Islamic bank.
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may be given by the bank and was discretionary, the judge felt, was irrelevant,
the court also felt that it could not leave it to the discretion of one party whether
to give rebate or not.19
On the SAC, Abdul Wahab Patail J explained the reason for not referring a
question to the Shariah body An initial thought was to consider referring the question to the National Syariah
Advisory Council under the Banking and Financial Institutions Act after first
ascertaining all the relevant facts ...
Since the question before the court is the interpretation and application of the
terms of the contractual documents between the parties and of the decisions of
the courts, reference of this case to another forum for a decision would be an
indefensible abdication by this court of its function and duty to apply established
principles to the question before it. It is not a question of Syariah law. It is the
conclusion of this court, therefore, that there is no necessity to refer the question
to another forum.20
Thus the learned judge recognises the role of the SAC but believes that the issue
before it is not a question on Shariah law but one on interpretation and
application of the terms of the contractual documents before it. This is the
same approach the same judge took later in the case of Arab Malaysian
Merchant Bank v Silver Concept Sdn Bhd [2008] 6 MLJ 295 (as stated above).
While it is correct that the issue is one of interpretation of the term bank
selling price whether the bank selling price in cases of early termination due
to default means the bank is entitled to the whole bank sale price or only the
amount for the tenure up to the default. Nevertheless, it is opined that to
interpret the issue, a clear understanding of Shariah is required especially the
nature of the BBA contract which is actually a sale agreement and ibrar which
19 The case of Malayan Banking Bhd v Marilyn Ho Siok Lin [2006] 7 MLJ 249; [2006] 3 CLJ
796 in the High Court of Sabah & Sarawak, Kuching, JC David Wong Dak Wah, which
chronologically came after the Affin case followed the approach taken by J Abdul Wahab
Patail. The facts were similar to the Affin case. The defendant obtained an Al-Bai bithamin
Ajil financing from the plaintiff bank. The instalments were for 240 months but the
defendant defaulted after 14 months. The question arose as to whether the plaintiff could
claim for the whole bank selling price minus the instalments made.
The learned judge held that in the interest of equity which was consistent with the teachings
of Islam and consistent with the approach of the Affin case it would not be equitable to
allow the plaintiff bank to recover the sale price as defined when the tenure of the facility is
terminated prematurely. The learned judge went on to calculate the amount due by the
defendant. No mention was made by the court on referring a question to the SAC. The
court also did not discuss ibrar.
20 Ibid at p 448 para 22.
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is unilateral and discretionary in nature. It is also true that a learned judge of the
high court has available to him many resources to refer to when making a
judgment. With all these resources at hand, it could be that in the case of
understanding Shariah law, the courts will not turn to the SAC for an answer.
This was what was concluded in the next case, that is, the SAC is only one
of the resources available to the courts when it is faced with a Shariah issue.
In Malayan Banking Bhd v Ya' kup bin Oje & Anor [2007] 6 MLJ 389;
[2007] 5 CLJ 311, in the High Court Sabah & Sarawak, Kuching Hamid
Sultan Abu Backer JC had to again decide whether the bank was entitled to the
whole bank selling price when the defendant defaulted on a BBA financing
facility. In this eloquently written judgment, the learned judge reviewed
previous authorities, reviewed in detail justice and equity in Islam, went into
detail about the need to avoid riba and gharar in Islamic transactions, and
noted that Islamic banks were actually trading houses rather than financial
institutions because of the permissibility of trading and the prohibition of riba
in Islam. The learned judge noted that the issue in the case was not about the
validity of the BBA but on the interpretation of whether the Islamic bank could
claim for the bank selling price.
He also ruled that justice means justice to the defendants and plaintiffs, and
took note of the fact that ibrar is normally exercised by the Islamic banks and
that Islamic law of commercial transactions will not permit the Islamic bank to
state the rebate for default in the BBA. However he also noted that in the name
of justice and equity and to ensure transparency there was nothing that
prevented the Islamic banks from openly stating their policy and rates of rebate
without stating them in the BBA agreements.
The learned judge decided:21 as equity applied to the plaintiff and the
defendant, the plaintiff was to be given the opportunity to demonstrate equity,
by filing an affidavit which stated the rebate, and the amount of rebate. The
learned judge required the amount of rebate to be according to the prevailing
market practises of Islamic banks taking into account the decision of the Affin
case. The judge was to review the amount and if satisfied allow it, but if not
satisfied make such other order as the justice of the case required.
On matters of Islamic law, the learned judge believed that a judge has the
choice to decide on its own the issue, or refer to expert opinion, or alternatively
21 [2007] 6 MLJ 389, pp417417; [2007] 5 CLJ 311, pp 351353
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refer the relevant questions to the SAC. In other words, the SAC was only one
of the resources available to the courts to refer to on questions of Islamic law:
Islamic contract relating to commercial transactions is not only subject to the
terms of the contract but must be decided subject to the Quranic injunctions
and/or Islamic worldview as the case may be. For this very purpose, the court can
on their own motion decide the issue or alternatively call experts to give their
views, pursuant to s 45 of the Evidence Act 1950 or pose the necessary questions
to the SAC for their views. 22
The next case that discussed the SAC was Arab-Malaysian Finance Bhd v Taman
Ihsan Jaya Sdn Bhd & Ors (Koperasi Seri Kota Bukit Cheraka Bhd, third party)
[2008] 5 MLJ 631; [2009] 1 CLJ 419 ( Taman Ihsan Jaya) in the High Court
Malaya, Kuala Lumpur Abdul Wahab Patail J.
This infamous case literally changed the landscape of Islamic home
financing. The case involved several cases which were bundled together and
decided jointly by the learned judge. All the defendants in the cases were
customers who obtained the BBA facility to finance their home purchase. In all
the cases, the defendants had already purchased their property from a third
party and partly paid the price. They had then sought Islamic banking
financing from the plaintiff banks. The plaintiff banks entered into a direct
bilateral agreement which involved the selling of the property by the
defendants to the plaintiffs under a Property Purchase Agreement (PPA) and
then the plaintiffs selling it immediately back to the defendants under a
Property Sale Agreement (PSA); in other words a Bai-inah was executed, the
original vendor was not a party to the agreements and there was no novation
agreement performed. The defendants defaulted, and the plaintiffs claimed for
the whole bank selling price. The defendants raised the issue of whether the
agreements entered into involved elements not approved by the religion of
Islam, that is, whether the agreements were Shariah compliant.
The learned judge in delivering his judgment discussed, inter alia, the
meaning of the term religion of Islam, riba and the difference between profit
in a sale and interest in a loan. He believed the difference between the two could
not be in form alone but must be in substance as well. He stated it is the reality
and not the form and labels that matter.23 The learned judge also noted that
the SAC had already approved the BBA contract and Bai inah, and other
Islamic contracts and thus these contracts did not have elements which were
22 Malayan Banking Bhd v Ya' kup bin Oje & Anor [2007] 6 MLJ 389; [2007] 5 CLJ 311 at
para 12.
23 [2007] 5 CLJ 311at para 29.
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not approved by the religion of Islam. There was thus neither necessity nor
reason to refer these concepts to the SAC for any ruling, which in any case,
while they are to be taken into consideration, are not binding upon the
court.24 The learned judge concluded that it was the function of the court to
examine the application of these Islamic concepts, as to whether as
implemented, and in the particular cases before it, the transactions do not
involve any element not approved in the Religion of Islam. It is a question of
looking at the particular facts. That remains the judicial function of the court
which it cannot abdicate.25
The learned judge believed that as the SAC had approved the Islamic
contracts it was not an issue of whether these contracts were Shariah compliant
but a question of how these contracts were applied in practise. In other words,
whether the application of these Islamic contracts were Shariah compliant, and
it was the function of the court to determine this. This approach taken by J
Abdul Wahab Patail was consistent with his former rulings.
On the facts of the case, the learned judge concluded that where parties to
the contract entered into a novation agreement which involved the substitution
of the original vendor with the bank, the sale to the customer is a bona fide sale,
and the selling price is as interpreted in Affin case. In other words, the court will
calculate the ibra to be given and not leave it to the discretion of the Islamic
bank. On the other hand, in cases where there was no novation agreement and
the bank directly buys the property from the customer and sells it back to the
customer, it is not a bona fide sale. In such cases, it is a financing transaction
and contrary to the Islamic Banking Act 1983 and the Banking and Financial
Institutions Act 1989. In such cases, as the present, the plaintiffs are entitled
under s 66 of the Contracts Act 1950, the return of the original facility amount
they had extended.
The learned judge thus concluded that when Islamic banks practise BBA, it
must be Shariah compliant not only in form but in substance and thus where
24 Ibid at para 30.

25 Ibid at para 31.
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the bank just bought from and sold to the customer without the original
vendor it was nothing more than a financing agreement and not a bona fide sale.
26
It is opined that this judgment is significant because the judge distinguishes

between theory and practise. While the theory has been approved by the SAC
as Shariah compliant, it is the practise which has to be examined for Shariah
compliance. Whose function is this? Is this the job of the civil courts only or
does the SAC have a role in this? The SACs role according to the Central Bank
of Malaysia Act 1958 and the CBMA 2009 is to ascertain Islamic law, the
question occurs whether this includes determining whether the practise of
Islamic banking and finance is Shariah compliant? More on this will be
examined below when discussing the next case which was the appeal of the
Taman Ihsan Jaya. This issue was explored directly as we will see later in the case
of Mohd Alias bin Ibrahim v RHB Bank Bhd & Anor [2011] 3 MLJ 26; [2011]
4 CLJ 654.
The case of Bank Islam Malaysia Bhd v Lim Kok Hoe & Anor and other
Appeals [2009] 6 MLJ 839 (Lim Kok Hoe) was the appeal case of Taman Ihsan
Jaya and was heard at the Court of Appeal by Raus Sharif, Abdul Hamid
Embong and Ahmad Maarop JJCA.
The Court of Appeal allowed the appeal and held that J Abdul Wahab Patail
had erred in his judgment and concluded that the BBA was a valid agreement.
They based their judgment on the following reasons:
Firstly, the BBA is a sale agreement and should not have been compared to
a conventional loan agreement which is a money lending transaction. The
profit earned by the BBA transaction by the Islamic bank is not the same as the
interest of a conventional loan. However the laws that apply to both the
transactions are the same.
Secondly, J Abdul Wahab Patail had rewritten the contracts of the parties by
stating that the profit should be calculated by the court as in Affins case when
the BBA was conducted by novation and the term had not expired yet. This was
wrong.
26 This judgment shook the Islamic banking industry and many Islamic finance experts wrote
on the judgment of J Abdul Wahab Patail, some defending the BBA contract and its practise
others not. See for example Fakihah Azahari, 'Islamic Banking: Perspectives on Recent Case
Development' [2009] 1 MLJ xci. Ashgar Ali Ali Mohamed, 'Al-Bai' Bithaman Ajil - Its
Consistency with the Religion of Islam: With Special Reference to Arab-Malaysian Finance Bhd
V Taman Ihsan Jaya Sdn Bhd & Ors and Other Cases' [2008] 6 MLJ xiv.
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Thirdly, the court of Appeal disagreed with J Abdul Wahab Patails

interpretation of the term religion of Islam. The Court of appeal held that the
religion of Islam does not mean as approved by the four madzhab in Islam, and
that in actual fact there are more than four madzhabs anyway. Fourthly, there
exists a legal infrastructure for the courts to rely on the SAC on matters relating
to the religion of Islam; the Court of Appeal held that the court cannot take it
upon itself to decide what the religion of Islam is when the Shariah board and
the SAC exist and have approved the products. Lastly, there existed case law
precedent that the BBA was binding such as in the case of Bank Islam Malaysia
v Adnan Bin Omar [1994] MLJU 221 and this should have been followed.
The Court of Appeal did not address the fact that J Abdul Wahab Patail had
actually acknowledged that the BBA was found to be Shariah compliant in
theory, it was with the practise of the BBA that he was concerned with, and it
is with practise that the J Abdul Wahab Patail opined should be within the
purview of the courts jurisdiction. Instead, the Court of Appeal held that as the
SAC had approved the instrument it should thus be valid.
It is opined that Shariah compliance should not be assumed in practise just
because in theory the contract has been approved to be Shariah complaint.
With respect to the Court of Appeal it is the writers opinion that the High
Court judges approach in examining the practise was correct. The question
remains however whether the role of the SAC includes practise and whether the
courts should refer it to the SAC to decide or whether it is within the purview
of the courts jurisdiction. If J Abdul Wahabs approach is taken and it is for the
courts to decide, then the role of the SAC is severely diminished.
The truth of the matter is that practise must be Shariah compliant and this
is a very important requirement. If the role of the SAC is only to explain and
ascertain the Islamic law on an issue and not decide on whether the practise of
the industry is Shariah compliant, then the role of the SAC is narrow with
regards to ensuring Shariah compliance when the product is at the enforcement
stage. At the same time, it is the courts jurisdiction to decide a case on the facts
of the case and this should include whether a matter is practised in a Shariah
compliant manner.
However the question arises as to whether the courts are equipped to decide
on whether the products have been practised in a Shariah compliant way.
To answer this question, we move on to the next case and see how the High
Court decides on whether a matter is Shariah compliant in practise.
C. An Enquiry Referred to the SAC
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Just prior to the decision of the Court of Appeal in Lim Kok Hoe (as a matter of
fact prior by only five days), justice Datuk Rohana Yusof (as she was then)
delivered the decision of the case of Tan Sri Abdul Khalid bin Ibrahim v Bank
Islam Malaysia Bhd and another suit [2009] 6 MLJ 416; [2010] 4 CLJ 388 (Tan
Sri Khalid case).27 This case is significant because it is the first case that
forwarded an enquiry to the SAC. The case involved the restructuring of two
Murabaha facilities offered by Bank Islam to Tan Sri Khalid to redeem and
acquire more shares in a particular company. The restructuring of the
Murabaha facilities was carried out because of the repeated breaches of the
Murabaha facilities by Tan Sri Khalid. The two facilities were restructured into
a Revolving Al-Bai Bithaman Ajil Facility (BBA Facility Agreement) and were
consented to by Tan Sri Khalid. Tan Sri Khalid defaulted on the first payment
of the BBA Facility Agreement, and Bank Islam applied to enter summary
judgment; Tan Sri Khalid on the other hand, inter alia, challenged the validity
of the BBA Facility Agreements due to Shariah non-compliance.
The learned judge in her judgment discussed at length the role and
functions of the SAC vis-a-vis Bank Negara and the provisions of the Central
Bank of Malaysia Act 1958, and decided to send an enquiry to the SAC as to
whether a ruling had been made on the validity of the BBA. Datuk J Rohana
stated the following in her judgment28 at pp 399400
[16] Under s 16B(8), it is provided that in any proceedings before the court
when a question arises concerning a Syariah matter, the court or the arbitrator
may take into consideration any written directives issued pursuant to sub-s. (7)
or refer such question to the SAC for its ruling. Relying on this clause in fact,
after the submissions was made before me by both counsels on the Syariah issue
raised; I had caused an enquiry to be made to the SAC as to whether a ruling has
been made on the status of BBA Agreement. The secretariat to SAC responded
with a written ruling from the SAC which states essentially, that BBA Agreement
is acceptable and a recognised transaction in Islam. I have furnished the said
written ruling from the SAC to both counsels. Thereafter, counsel for Tan Sri
Khalid in a letter dated 5 May 2009 seeks leave for a further submission on the
Syariah issue. In a further written submission, learned counsel contends that the
mode of execution of APA and ASA was improper because Tan Sri Khalid was
made to sign both agreements first before they were passed back to be completed
by the bank. There was therefore no separation of the APA with the ASA and no
distinction in term of time of execution as required under the said ruling of the
SAC. As such there was no complete sale of shares to the bank under the APA
27 This case received a lot of publicity at the appeal stages because of the position held by the
plaintiff who was then the Chief Minister of the State of Selangor in Malaysia.
28 [2009] 6 MLJ 416 at pp 425426; [2010] 4 CLJ 388
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before the bank can resell shares to Tan Sri Khalid in the ASA. To my mind, this
issue is based on mere technicality and a trivial one. The consensus between
parties has been arrived at the point the letter of offer was accepted by Tan Sri
Khalid. The agreement to be bound is subject to the formalities of the execution
of various documents. Signing of the written agreements is to formalise and to
translate the consensus of parties in the terms clearly agreed upon. Besides, it has
always been a practice, for the borrower to affix signatures on all banking
documents before the bank executes the same, and it is rather inconceivable to
suggest that it can affect the validity of the contract. Furthermore, a written
confirmation from the banks own Syariah Council in exh. GN4 confirmed that
the mode employed for the execution of the documents in the present case is in
order and has no bearing from Syariah perspective. With seven sets of APA and
ASA documents signed in the same manner, the parties would have condoned
and accepted such practice. As such, I fail to see how these agreements will not be
binding on parties merely because they are signed without following orders of
precedent, when after entering into the seven sets of transaction the defendant
never protests or raises any issue.
Datuk J Rohana sent an enquiry to the SAC as to whether a ruling on the

validity of the BBA had been made, it should be noted that this enquiry was not
a question on a Shariah issue, and thus this is not exactly the first case to utilise
the SAC to give a ruling on a Shariah issue. The enquiry was answered by the
secretariat which confirmed that a ruling had been made and that the BBA was
a valid contract. Thereafter Tan Sri Khalids counsel requested that another
Shariah issue be decided by the SAC, this Shariah issue was actually on the
practise and execution of the BBA contract. They claimed that the sequence of
signing the contracts was wrong and therefore the contract should be void.
This, a question of whether the practise of executing the contract was Shariah
compliant, was not submitted to the SAC by Datuk J Rohana who decided on
the facts of the case and proof of the Shariah Boards acceptance of the practise.
As can be seen from this case, even though J Rohana did not mention the
dichotomy between theory and practise of Shariah contracts the learned judge
herself decided on the matter rather than referring it to the SAC. It could be
that when it comes to practise of Shariah contracts it is the role of judges to
decide on the matter.
The saga of the Shariah issues in this case and whether to refer a question to
the SAC did not end with this summary judgment. Dissatisfied with the
decision of Datuk J Rohana, Tan Sri Khalid appealed to the Court of Appeal
vide Civil Appeal W-02 (IM)-182809. The Court of Appeal allowed the
appeal and stated in its brief grounds that in view of the conflict of views of the
experts, the matter ought to proceed to a full blown trial. The case proceeded to
the High Court and was decided by J Mohd Zawawi Salleh. The case was
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decided after the coming into force of the CBMA 2009 and will thus be
discussed below under the next section.
A review of these case law prior to the CBMA 2009 and during s 16B(8),
demonstrates that none of the courts referred the SAC with questions on
Shariah. The general approach was that since referring a matter was at the
discretion of the court and the decision of the SAC was not binding, referral to
the SAC was unnecessary. J Abdul Wahab Patail believed that when it came to
the practise of Islamic banking it was within the sole jurisdiction of the court to
resolve these issues without referring the matter to the SAC. Hamid Sultan Abu
Backer JC noted that the SAC was only one of the sources for the courts to turn
to when faced with an issue on Shariah. The one case that elevated the role of
the SAC during this period was the last case during this period the Tan Sri
Khalid case. J Datuk Rohana went into great detail in her judgment about the
role of the SAC and even caused an enquiry to be referred to the SAC. The
dichotomy between theory and practise raised by J Abdul Wahab Patail was
unfortunately not addressed by the Court of Appeal in Lim Kok Hoe. We shall
see whether in the next section this was addressed and whether the courts
changed their approach with the coming into force of the CBMA 2009.
CASES POST THE CBMA 2009
A. Early Case Post the CBMA 2009
Bank Islam Malaysia Bhd v Azhar bin Osman and other cases [2010] 9 MLJ 192;
[2010] 5 CLJ 54heard by Datuk Rohana Yusuf J was decided shortly after the
CBMA 2009 was passed. This case was the continuation of the Taman Ihsan
Jaya saga. The Court of Appeal in Lim Kok Hoe had held that the BBA was a
valid sale contract and then sent down these cases to the High Court to decide
on the quantum of claim. The issue in this case was whether the bank could
claim for the full sale price notwithstanding the fact the facility had been
prematurely terminated. Following this was the Shariah issue of whether rebate
(ibrar) was to be left at the sole discretion of the bank or whether the court
could dictate that rebate should be given. Datuk Rohana Yusuf did not refer the
matter to the SAC even though the CBMA 2009 was in effect, perhaps due to
the fact that the learned judge did not believe it was a Shariah issue but rather
an issue of interpretation of the documents.29 Instead the learned judge
implied a term that the bank must grant a rebate and such rebate shall be the
29 See Mohamad and Trakic: 29.
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amount of unearned profit as practiced by Islamic banks.

It is interesting to note that on appeal of this case, the Court of Appeal in
Bank Islam v Mohd Azmi bin Mohd Salleh Civil Appeal: W-02-609-2010,
reversed the decision of Datuk Rohana Yusuf J and in their broad grounds
decided that an Islamic bank could claim the whole sale price of the contract
because it was a sale transaction, and further the quantum was at the discretion
of an Islamic bank. In other words, ibra is given in early settlement cases but not
for early termination due to default.
It is opined that the Court of Appeal took a literal approach in interpreting
the BBA contract as a sale contract; in a way it is a harsh approach as Islamic
banking customers that default in their payment would be at the mercy of
Islamic banks as to whether they will get a rebate and if so, what the quantum
would be.
Be that as it may, it is heartening to note that through Bank Negara
Guidelines on Ibra (Rebate) for Sale-Based Financing in 2013, the ibra issue is
now settled. It is now a requirement that IFIs grant ibra to all customers who
settle their financing before the end of the financing tenure, and this includes
default cases as well. Further to ensure legal certainty of providing ibra, IFIs are
required to incorporate in their offer letter and other legal documentation
related to the sale-based financing, a clause on its commitment to provide ibra.
B. First Case to discuss the Provisions of the CBMA 2009
The first case to discuss the new provisions of the CBMA 2009 was Mohd Alias
bin Ibrahim v RHB Bank Bhd & Anor [2011] 3 MLJ 26; [2011] 4 CLJ 654
(Alias). This case is significant because it decided on the constitutionality of
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the provisions of ss 56 & 57 of the CBMA 2009.30 Due to the significance of

the issues raised, the high court invited the Attorney Generals Chambers and
BNM as amicus curiae to proffer their views on the matter.
The case was an application by the plaintiff to decide on, inter alia, three
main matters:
Firstly: by making the ruling of the SAC binding upon the court, whether
the SAC is usurping the jurisdiction of the court in determining issues of law
which are properly within the jurisdiction of the court as provided by art
121(1) of the Federal Constitution and the Courts of Judicature Act 1964; and
whether in the absence of an express provision allowing the judiciary to
delegate its judicial powers to any other person or body, ss 56 and 57 of the
Central Bank of Malaysia Act 2009 are inconsistent with art 121(1) of the
Federal Constitution .
Secondly: whether parties to the litigation are being deprived of their right
to be heard, as there are no provisions to enable parties to address the SAC.
Thirdly: Whether ss 56 and57 of the Central Bank of Malaysia Act 2009
can have retrospective effect on transactions which occurred prior to the date
the said legislation came into effect.
On the first matter, the judge31 believed that because the SAC were
ascertaining and not determining the Islamic law on an issue it was not
performing a judicial or quasi-judicial role,32 it was merely acting as an expert
body33 for Islamic law for the court. Thus the function and role of the SAC did
not conflict with that of the court of law.
30 Sections 56 and 57
Section 56: Reference to Shariah Advisory Council for ruling from court or arbitrator
(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.
Section 57: Effect of Shariah rulings
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.
The new provisions of the CBMA 2009 now required the courts not only to
mandatorily refer a Shariah issue to the SAC but to be bound by the ruling.
31 [2011] 3 MLJ 26 at p 55; [2011] 4 CLJ 654 at p 682
32 Ibid at p 65 para 102 (MLJ); p 684 para 102 (CLJ) .
33 Ibid at p 56 para 109 (MLJ); p 686 para 109 (CLJ).
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The judge stated at pp 683684 on the role of the SAC:

[95] Act 701 is a federal law and its contents are consistent to the words
employed in the Federal Constitution. In this sense, it can be seen that the SAC
is not in a position to issue a new hukm Syara but to find out which one of the
available hukm is the best applicable in Malaysia for the purpose of ascertaining
the relevant Islamic laws concerning the question posed to them.
[96] For example, in a matter where there are differences of opinion regarding
the validity of a certain Islamic finance facility, the SAC can be referred to
ascertain which opinion of the jurist is applicable in Malaysia. This
ascertainment of Islamic law will be binding upon the courts as per the
Impugned Provisions. It will then be up to the courts to apply the ascertained law
to the facts of the case. At the end of the matter, the application and final decision
of the matter remains with the court. The court still has to decide the ultimate issues
which have been pleaded by the parties. After all, the issue whether the facility is
Shariah compliant or not is only one of the issues to be decided by the court.
(Emphasis added).
The judge explains that the role of the SAC is to ascertain which opinion is the
best to be applied in Malaysia in the event there is a conflict of jurists opinion.
It is the role of the judge to apply this to the facts of the case. The ruling of the
SAC is binding on the court.
The question that occurs is what about issues on the practise of the parties
and whether the practise of the parties are Shariah compliant is this
considered to be ascertainment of Islamic law and within the role of the SAC?
It would seem from the judgment that the SAC is to ascertain the Islamic law
on the matter, but the final decision on whether the practise of the parties is
Shariah compliant would be within the role and function of the courts. It is
opined that the role of the SAC while narrowed, is maintained as a body for
ascertainment of Islamic law only. The decision making process is with the
court of law alone.
On the second matter on the right to be heard at the SAC, the court did not
decide on whether the parties have a right to be heard, because Bank Negara as
amicus curiae pointed out that the SAC had not come out with a procedure yet
on whether parties in a proceeding have a right to be heard. Therefore this
matter could not be decided. However since the decision of the court the
manual has been published as highlighted above. More on the right of the
parties to be heard will be discussed in the next section.
On the last issue of whether the CBMA applies retrospectively, the court
held at p 692 that:
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[140] Since there is no limitation imposed on the SAC in the performance of its
statutory duties in the Act 701 prior to 25 November 2009 (which is the date the
Act is in force), the court should not add or infer any term to suggest any cut off
point to Act 701 (see Tribunal Tuntutan Pembeli Rumah v. Westcourt
Corporation Sdn Bhd & Other Appeals).
[141] Be that as it may, this case was registered on 28 January 2010, a date well
after the date Act 701 came into force, therefore, the retrospective issue is of no
relevance. At the time the parties signed the agreements which were somewhere
in 2003, there were no disputes which required the reference to the SAC.
The court did not restrict the enforcement of the CBMA 2009 from its date of
enactment and believed that the CBMA 2009 itself did not state a cut-off
point, further based on the facts of the case whether the CBMA 2009 applies
retrospectively was irrelevant. 34
The judge also noted a very important fact at p 689 at para 122:
To ignore the functions of the SAC is to open a flood gate for lawyers and cause
a tsunami of applications to call any expert at their own interest and benefit, not
only from Malaysia but also from other countries who might not be familiar with
our legal system, administration of Islamic law and local conditions, just to
challenge the Islamic banking transactions in this country.
This fact is true and can be seen in the Tan Sri Khalid case where the Court
of Appeal allowed the appeal contrary to J Datuk Rohanas order for summary
judgment because of the conflict between expert opinions.
The conflict of expert opinion is not a new problem faced by the court,
however when there exists the SAC to resolve any such conflict, why proceed
with individual expert opinion? More on this will be discussed below.
C. First time Shariah Question Referred to the SAC by a court
According to a paper written by Abdul Hamid Mohamad, and Adnan Trakic in
2012,35 the first real Shariah question was referred from the courts to the SAC
34 Later on in the case of Tan Sri Abdul Khalid bin Ibrahim v Bank Islam Malaysia Bhd [2012]
7 MLJ 597 J Mohd Zawawi Salleh clarified this point on retrospective effect and stated at
p 611 para 35 On hindsight, with all humility, the court agrees that the language used in
Aliass case has imported confusion on the true effect of the ruling on this issue. What the
court intended to state was this: since there is no limitation imposed on SAC in the
performance of its statutory duty in Act 701, ss 56 and 57 could be applied retrospectively.
35 Mohamad and Trakic: 31.
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around the middle of 2011 after an arbitration case36 referred its first Shariah
question to the SAC. The judge who referred the question was J Mohd Zawawi
Salleh. The question that was asked was whether the rate of tawidh could be
fixed or agreed upon (predetermined) by the parties to the agreement without
any proof of loss suffered by the bank.37 The case in which the issue arose was
not mentioned in the paper and a review of the judgments by J Mohd Zawawi
Salleh during mid-2011 to mid-2012 did not reveal in any of the learned
judges judgment whether he had referred a question to the SAC.
It is possible that the learned judge did not state in his judgment during that
time that a question was referred to the SAC because the Shariah question may
not have been requested by the parties to the case to be referred to the SAC, and
rather it was the judges own initiative, or alternatively the issue asked of the
SAC did not directly relate to the issues before the learned judge and therefore
did not require to be stated in the judgment. Whatever the reason, it is opined
with respect, that for the sake of certainty for future cases, Shariah questions
raised to the SAC should be stated in the judgments of the judge so there will
be a precedent available on that Shariah question.
Cases Post the CBMA 2009 that referred to the Resolutions of the SAC or Referred
a Shariah Question to the SAC
The next case is CIMB Islamic Bank Bhd v LCL Corporation Bhd & Anor [2012]
3 MLJ 869; [2011] 7 CLJ 594 where the presiding judge J Mohd Zawawi
Salleh referred to the SACs resolutions in his judgment.38 The material facts of
the case were as follows: the plaintiff had provided a First BBA facility to the
defendant to refinance a Short Term Advance Facility granted by CIMB Bank
Berhad. On application of the defendant, the plaintiff later granted another
BBA facility to refinance the first one. The defendant defaulted. The plaintiff
36 Swiber Marine (Malaysia) Sdn Bhd and Bank Islam Bhd (2011). This arbitration case was
about late payment charges and the questions raised to the SAC and the reply can be found
at p 30 in Ibid.
37 For the answer see ibid. p 31
38 See Surianom Miskam, Noor Aimi Mohamad Puad, and Nurauliani Jamlus Rafdi,
'Reference to the Shari'ah Advisory Council in Islamic Finance: Preliminary Analysis on Civil
Court Decisions,' in Proceeding of the Social Sciences Research ICSSR 2014 (Kota Kinanbalu
Sabah: http://WorldConferences.net, 2014) p 424.
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applied for a summary judgment for amounts owing and also for tawidh.39 The
defendant claimed, inter alia, that the BBA Facility should be null and void
because it was a disguise to reschedule repayments under the First Facility as the
First Facility had not been terminated and the same asset was utilised in both
BBA transactions. The defendants also claimed that the amount claimed was
wrong and they were entitled to ibra and that tawid was wrongly calculated.
The learned judge held that the BBA facility was not for rescheduling but for
refinancing the First Facility, there was no evidence to show the amount
claimed was wrong, and as for ibra, since this was a case of early termination
due to default, the plaintiff was under no obligation neither duty to grant an
ibra to the defendants. As for tawid J Mohd Zawawi Salleh quoted the SAC
resolutions and stated at p 609:
[48] The imposition of tawidh is essential. In its 95th meeting on 28 January
2010, SAC had this to say:
As a deterrent mechanism against cases of default by customers in discharging
their financial obligation arising from Islamic contracts, the imposition of late
payment charge by Islamic banking institutions that comprises both concepts of
gharamah (fine or penalty) and tawidh (compensation) is allowable.
[49] It is undisputed that the plaintiff has the right to impose the tawidh on the
defendants on the above said circumstances.
The judge then went on to agree with the plaintiff s revised calculations of the
tawid and granted the summary judgment.
In this case, the judge had actually at numerous times referred to the
resolutions of the SAC in coming to a decision based on the facts of the case. It
is possible that it was in this case the J Mohd Zawawi Salleh referred the first
question on tawid to the SAC, however nothing was stated in his judgment
about this fact. Whatever the case, it can be seen that post the CBMA 2009
there is definitely a greater influence of the SAC in the Islamic banking cases
coming before the courts. This can be evidenced in the case of Bank Islam
39 Tawid is compensation for damage done to another. The Fiqh Academy journal has defined
it as payment of a financial compensation or counter-value, which is obligatory as a result
of loss caused to others. Majallah Majma al Fiqh al-Islami, v 14, pt 4, p 510, as quoted in
Muhamad Akram Laldin, 'The Principles of Compensation and Penalty Charges in
Dealing with Loan Default in Islamic Finance,' in Contemporary Issues in Islamic Finance:
Deliberation at the International Shariah Scholars Dialogue 2006, ed BNM (Kuala Lumpur:
BNM, 2008). Many cases from this time period started claiming for tawid see Apnizan
Abdullah and Hakimah Yaacob, 'The Trend of Legal Suits Involving Islamic Financial
Transactions in Malaysia: Evidence from the Reported Cases,' in ISRA Research Paper
(2013), 32.
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Malaysia Bhd v Mustaffar @ Mustaffa Bin Yacob & Anor [2012] 6 MLJ 252;
[2012] 1 LNS 548 where J Mohd Zawawi Salleh referred to the SACs
resolution to enumerate the conditions for imposing tawid. Also in Bank
Muamalat Malaysia Bhd lwn Kong Sun Enterprise Sdn Bhd dan lain-lain [2012]
10 MLJ 665, J Kamarudin Hashim referred to the SAC resolutions as one of
the sources to conclude that the ijara contract is valid. In this case also the judge
rejected that a lawyer can give expert opinion on Islamic banking and finance
and added that the members of the SAC are those who are qualified to give
opinions on Islamic banking and finance.
The next case is also significant because J Mohd Zawawi Salleh had to again
rule on the interpretation of ss 56 and 57 of the CBMA 2009 and referring
Shariah issues to the SAC. The case Tan Sri Abdul Khalid bin Ibrahim v Bank
Islam Malaysia Bhd [2012] 7 MLJ 597 was the product of the Court of Appeal
reversing the decision of J Datuk Rohana to grant summary judgment (see
above). The parties contentions were as follows: during case management,
Bank Islam submitted that Tan Sri Khalid had raised Shariah issues and as such,
under s 56 of the CBMA 2009 these issues should be referred to the SAC,
whose ruling would be binding on the court by virtue of s57 of the Act.
Tan Sri Khalid objected to the application, inter alia, on the grounds that
there had been a prior reference to the SAC at the summary judgment stage;
that ss 56 and 57 of the CBMA 2009 did not operate retrospectively; that ss 56
and 57 contravened the Federal Constitution; that the Shariah issues were not
appropriate for reference to the SAC, and the application of ss. 56 and s 57 of
the CBMA 2009 would affect Tan Sri Khalids vested rights to lead expert
evidence on matters of Islamic law.
J Mohd Zawawi Salleh held the followingFirstly, there were Shariah issues to be decided in the case and reference to
the SAC should be allowed. The learned judge canvassed the Shariah questions
by agreement of the parties as follows:
(a) whether, pursuant to the terms of the BBA facility agreements, the mode of
execution of asset sale agreements and purchase agreements by the defendant
(Bank Islam) and the plaintiff (Tan Sri Khalid) at six monthly intervals, is
contrary to the principles of Shariah;
(b) whether it is a requirement under Shariah law for Bank Islam, after having
declared a default of the terms of the BBA facility agreements to obtain Khalids
consent prior to the disposal of the shares pledged by him as security under the
said agreements;
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(c) in the event that BBA facility agreements are found to be contrary to the
principles of Shariah, what would be obligations of the parties?;
(d) (i) whether it is the opinion of the Shafie Madzhab that there must be two
district and separate contracts/transactions between the first and the second sale
in bai-inah transactions;
(ii) if so, whether in light of the, inter alia, para D and E of the recital and article
2.3.1, 2.3.2 and 3.1(a) of the master revolving al-Bai Bithaman Ajil agreement
dated 30 April 2001 (BBA facility) and/or the fact that the BBA facility is a
restructuring of earlier Murabahah agreements, whether the qualification
referred has been violated?; and
(e) Whether, in the circumstances of this case, the revolving element of BBA
facility is tantamount to multiple contracts on the same subject matter ie the
Kumpulan Guthrie shares, and it so, whether is contrary to the Shariah
principles and the BNM SAC Resolution No 131. (Shariah issue). 40
As can be seen from the questions, the questions posed are questions on the
practise of Islamic banking by the parties; in other words, whether the practise
of the parties were Shariah compliant in light of the facts of the case. For
example question d(ii) requires the SAC to read and interpret the contract, and
question (e) refers to the circumstances of the case and whether the practise is
contrary to Shariah principles. It is opined that the questions posed are more
than just ascertainment of Islamic law but includes the SACs input on the
practise of the parties and its Shariah compliance. If these questions are allowed
then the role of the SAC would be wider, and their determination of the issue
at hand would be done with an in depth knowledge of Shariah and fiqh. One
could argue that the SACs input on whether the practise of the parties are
Shariah compliant would improve the Islamic finance industry as Shariah
compliancy would be ensured at the enforcement stage of the transaction. This
would ensure Shariah compliance from the product development stage all the
way to the practise and enforcement of the transaction.
However, the trial judge has more knowledge of the facts of the case and is
in a better position to make a decision on the facts of the case, and it cannot be
denied that if the SAC were to decide on whether the partys practise is Shariah
compliant, it would be more than ascertainment of Islamic law.
It is opined that one way to solve this impasse is to make it compulsory to
refer to the SAC questions of Shariah but the ruling of the SAC should not be
binding on the trial judge. In this way the trial judge would have the last say,
40 [2012] 7 MLJ 597 at p 602.
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issues of constitutionality would not arise and the court can easily refer
questions to the SAC on whether the practise of the parties are Shariah
compliant.
Continuing with the judgment, the second point J Mohd Zawawi Salleh
held was that J Datuk Rohanas inquiry was not a reference to the SAC for a
new ruling on Shariah issue.41 It was just an inquiry whether there existed any
resolution passed by the SAC and thus did not address any specific issue to be
decided by SAC.42 Thus Tan Sri Khalids contention that there had been a
prior reference to the SAC at the summary judgment stage could not stand.
Thirdly, on the issue of whether the CBMA 2009 applies retrospectively J
Mohd Zawawi Salleh held that ss 56 and 57 of the CBMA 2009 are procedural
and as such should apply retrospectively since there is a presumption that
amendments to purely procedural statutes are to be given retrospective effect
and amendments that change substantial rights be given prospective effects.43
Further the learned judge added that there would be no adverse effect to any
substantive right of Tan Sri Khalid, since the only difference introduced by the
CBMA 2009 would be taking away the discretion of the court to refer a matter
to the SAC and the ruling would be binding on the court.
On the issue of Tan Sri Khalids vested rights to lead expert witness, J Mohd
Zawawi Salleh rejected the argument on the following grounds at p 614:
[44] To my mind, the proposition that Tan Sri Khalid has a vested right to lead
expert evidence is untenable because SAC is a statute appointed expert. SAC has
been tasked with ascertaining Islamic law for the purpose of Islamic financial
business since the amendment to the Central Bank Malaysia Act, 1958 in 2003,
well before this action was brought before the court.
This observation by the judge is correct, the SAC is the expert witness
appointed by statute and Shariah issues are required to be referred to them,
there is actually no need for the parties to engage experts as they have the SAC
to refer to. This should be the case, however if one takes a look at the manual
on the procedure for courts and arbitrators to refer Shariah issues to the SAC,44
without an expert in Shariah the parties to the case would not have a right to be
heard at the SAC. The manual allows the parties the right to be heard only
through their experts on Shariah, the experts are allowed to submit a paper of
41
42
43
44
Ibid at 609 paras 28 and 29.

Ibid.
Ibid at 611 para 35.
See above note 14.
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their arguments when a matter is referred to the SAC. The SAC may also invite
the experts to explain their point on the Shariah matter. Thus it would seem
that expert opinion would be crucial when matters of Shariah issues crop up in
Islamic banking cases.
Lastly, on the constitutionality of ss 56 and 57 of the CBMA 2009, J Mohd
Zawawi Salleh repeated his decision in the Alias case, and confirmed the
constitutionality of the sections.
The learned judge ended his judgment with a warning on the complexities
of Islamic law and the incapability of Civil Court judges to resolve them even
with the help of expert evidence, and the necessity of a special body like the
SAC to resolve the Shariah issues. At pp 617 and 618 J Mohd Zawawi stated:
[56] Even if expert evidence is allowed to be given in court to explain or clarify
any point of law relating to Islamic banking, civil judges would be in a difficult
situation to decide because the divergence of opinions among Islamic jurists and
scholars to which the opposing experts might have and which they will urge the
court to adopt may be so complex to enable civil judges to make an independent
determination of Shariah principles.
[57] Thus, as has been expounded in Aliass case, the necessity of a special body
like the SAC to ascertain the Islamic law most applicable in Malaysia especially
in this Islamic banking industry is undeniable. Difference of opinion on Shariah
issues relating to Islamic banking should be resolved within SAC.
The judge thus allowed the Shariah questions to be referred to the SAC under
s 56, however before this could be done, Tan Sri Khalid appealed against the
decision. The Court of Appeal case is Tan Sri Abdul Khalid Ibrahim v Bank
Islam (M) Bhd [2013] 3 MLJ 269 at p 277; [2012] 1 LNS 634. After
considering the facts and arguments of the appellant, the Court of Appeal
dismissed the appeal and came to the following conclusions the previous
reference to the SAC by J Datuk Rohana was merely a request for information
thus J Mohd Zawawi Salleh could refer Shariah questions to the SAC. Sections
56 and 57 are valid and constitutional. Justice Mohd Zawawi Salleh was correct
in taking the position that s 56 and s 57 have retrospective effect.
On the role of the SAC the Court of Appeal stated that 45
The duty of the SAC is confined exclusively to the ascertainment of the Islamic
Law on financial matters or business. The judicial function is within the domain
of the court ie, to decide on the issues which the parties have pleaded. The fact
45 [2013] 3 MLJ 269 at p 277; [2012] 1 LNS 634 at p 1011
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that the court is bound by the ruling of the SAC under s 57 does not detract from
the judicial functions and duties of the court in providing a resolution to the
dispute(s) which the parties have submitted to the jurisdiction of the court. In
applying the SAC ruling to the particular facts of the case before the court, the
judicial functions of the court to hear and determine a dispute remain inviolate.
The SAC, like any other expert, does not perform any judicial function in the
determination of the ultimate outcome of the litigation before the court, and so
cannot be said to usurp the judicial functions of the court. Hence, s 56 and s 57
are valid and constitutional.
The Court Appeal separated the function of the SAC from the courts function
and confirmed that the function of the court was to apply the SAC ruling to the
particular facts. Thus whether the practise of the parties are Shariah compliant
should be within the purview of the court not the SAC. This is confirmed by
the manual on the procedure for courts and arbitrators to refer Shariah issues to
the SAC,46 where the manual strictly explains in paragraphs 5 and 6 and its
illustrations what type of questions are acceptable to be asked of the SAC.47
One then wonders about the Shariah questions canvassed by J Mohd
Zawawi Salleh and agreed upon by the parties in the High Court were they
not more than just questions on the Islamic law? The Shariah questions were
never officially sent to the SAC because Tan Sri Khalid appealed again and the
Federal Court granted leave for an appeal to be brought to the apex court on the
effect of ss 56 and 57 of the CBMA 2009.48 However before the appeal could
be heard the case was settled out of court by Bank Islam Bhd and Tan Sri
Khalid.49
46 See above note 14.

47 See paras 56 of BNM, Manual Rujukan Mahkamah Dan Penimbang Tara Kepada Majlis
Penasihat Syariah Bank Negara Malaysia Di Bawah Seksyen 51 Dan Seksyen 56 Akta Bank
Negara Malaysia 2009 (accessed).
48 Izahairani Izani, The Role of the Shariah Advisory Council in Islamic Banking Disputes in
Malaysia, 13:1 (Shern Delamore & Co, 2014, accessed 18 January 2015); available at
http://www.shearndelamore.com/assets/templates/images/pdf/2014/NewletterSD_March%202014.pdf.
49 One of the latest cases that touched on the SAC was the Federal Court case of CIMB Bank
Berhad v Maybank Trustees Bhd and other appeals [2014] 3 MLJ 169. One of the issues on
appeal was whether a pre-judgment interest claim of the bondholders should be allowed.
The High Court had dismissed the application due to a clause in the Trust Deed where the
parties had agreed that no interest would be charged. The Court of Appeal had reversed this
decision and allowed a 3% pre-judgment penalty. The respondent argued that to allow the
pre-judgment penalty would amount to riba which is prohibited. The Federal Court
allowed the appeal on this point because of two reasons: firstly, according to the Trust Deed
the parties had agreed not to impose any interest between them and thus based on this
contract no pre-judgment interest could be charged. Secondly, no evidence was adduced as
to the applicable rate imposed by the SAC and thus the order of the Court of Appeal was set
aside and the respondent did not have to pay any pre-judgment interest.
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The cases during this period show greater reliance on the SAC resolutions,
which is in line with s 56 of the CBMA 2009. Reference of questions to the
SAC have also taken place during this period however no records of it are found
in the judgments of the courts except for in Tan Sri Khalids case with J Mohd
Zawawi Salleh. However in that case no answers to the questions were obtained
because the case was eventually settled out of court. Evidence that questions are
being referred to the SAC can be found when mentioned in the brief
explanations of the SAC meetings found on BNMs website. There is, it is
opined, a need to record the questions, the case where the questions came from,
and the answers.
FINDINGS, FURTHER THOUGHTS AND RECOMMENDATIONS
Under this section, the findings of this research and possible recommendations
are discussed under the following headings:
A. Expert Evidence
The SAC is a statute appointed expert witness for Islamic banking and finance;
the question remains on why parties should have their own experts to give
evidence in the courts if reference to the SAC is compulsory. Expert evidence
would be crucial for the parties to perhaps understand Islamic law and seek
advice on the consequences of the transaction, however when it comes to
Shariah questions that need to be resolved in court, should not the SAC be
consulted rather than expert witness from both parties? Each party will have an
expert that forms an opinion which supports their own case, so there would be
a conflict of expert opinions which is allowed in Shariah, however how would
the trial judge make the right decision? The SAC was formed to stamp out
possible differences of Shariah opinions of the many Shariah committees on
the Shariah compliance of products to ensure certainty in the Islamic financial
industry in Malaysia. Sections 56 and 57 were enacted for the same reason
to ensure certainty in the outcome of disputes involving Islamic banking and
finance. If experts are allowed to give their opinion on Shariah matters and
contradict each other in court, would not the purpose of having the SAC to
ensure certainty be defeated?
Another take on this point is, if the SACs role is confined to matters of
ascertainment of Islamic law alone then the courts may want to seek expert
opinion on whether the practise of the parties were Shariah compliant. With
Islamic banking and finance matters becoming complex would it not be more
useful for the SAC to have the role as the sole expert opinion in courts? It is
opined that the SAC would be the best option to give expert opinion.
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B. Right to be Heard
The manual on the procedure for courts and arbitrators to refer Shariah issues
to the SAC,50 allows the parties the right to be heard only through their experts
on Shariah, the experts are allowed to submit a paper of their arguments when
a matter is referred to the SAC. The SAC may also invite the experts to explain
their point on the Shariah matter. The question arises on why only Shariah
experts are allowed to address the SAC. Why not the lawyers or even the parties
to the case? The simple answer would be that this is to ensure that the function
of the SAC is to ascertain Islamic law only and not encroach into the functions
of the courts.
C. Shariah Compliance and Practise of the Parties ss 56 & 57
At the stage of enforcement of the transaction, the actual crucial question that
has to be answered is whether the parties conducted their affairs in a Shariah
compliant manner. This is the crucial question because prior to this, the
contracts around which the transaction revolves would have been vetted and
approved by the Shariah committee of the IFI and approved by the SAC. So the
question that remains at the enforcement stage is not whether the BBA contract
is valid and approved by the SAC, but in light of the practise of the parties was
the transaction Shariah compliant? This crucial question it would seem is
within the purview of the courts. However are the courts equipped with the
right knowledge to come to the right decision? Are the courts qualified to
decide whether a matter is in practise according to Shariah? Should not the role
of the SAC be extended to look into the practise of the parties? Would not such
role extension benefit the Islamic financial industry by ensuring that at the
enforcement stage, Shariah compliance is taken very seriously? It is opined that
the role of the SAC should be extended to examining whether the practise of
the parties are Shariah compliant.
The solution to allowing the SAC to decide on such matters without
encroaching on the functions of the court is to have legislative changes to s 57
of the CBMA 2009. It should be compulsory to refer to the SAC questions of
Shariah and thus maintain s 56, however the ruling of the SAC should not be
binding on the trial judge. In other words, s 57 should be reverted to the old
provision of s 16(8). The court may take into account the decision of the SAC.
In this way, the trial judge would have the last say, issues of constitutionality
would not arise and the court can easily refer questions to the SAC on whether
50 See above note 14.
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the practise of the parties are Shariah compliant. After all an expert opinion is
exactly that it should be at the end of the day up to the trial judge to take the
ruling made by the SAC into consideration or not to take it into consideration
when making a decision.51
D. Role of the SAC to be extended
According to the Capital Markets and Services Act 2007, s 316E on the advice
or ruling of Shariah Advisory Council of the Securities Commission:
Any licensed person, stock exchange, futures exchange, clearing house, central
depository, listed corporation or any other person may:(a) seek the advice; or
(b) refer for a ruling,
of the Shariah Advisory Council on any matter relating to its Islamic capital
market business or transaction to ascertain whether such Islamic capital market
business or transaction involves any element which is inconsistent with the
Shariah.
This provision is similar to s 55(2) of the CBMA 2009 except that the s 55(2)
only allows an IFI to refer Shariah matters to the SAC:
(2) Any Islamic financial institution in respect of its Islamic financial business,
may
(a) refer for a ruling; or
(b) seek the advice,
of the Shariah Advisory Council on the operations of its business in order to
ascertain that it does not involve any element which is inconsistent with the
Shariah.
The two sections when compared show that in the case of the SAC of the
Securities access is easier since 'any other person' can refer any matter relating
to the Islamic capital market to the SAC of the Securities Commission; whereas
for the SAC of BNM, access to the advice of the SAC is restricted to IFIs only.
Why is there better access to the SAC of the Securities Commission? Why are
lawyers and bank customers not allowed access to seek advice of the SAC on
51 It should be noted that there are authors who believe that the SAC members should be
called as expert witnesses to court see Ruzian Markom and others, 'Adjudication of Islamic
Banking and Finance Cases in the Civil Courts of Malaysia,' European Journal of Law and
Economics 6, no 1 (2013) p 24.
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[2015] 3 MLJ

lvii
Shariah matters? Would it not be better if lawyers of customers were allowed to

seek the advice of the SAC on Shariah matters without having to wait for the
courts to refer the matter?It is opined that the role of the SAC should be
extended to not only BNM, IFIs, the court and arbitrators. They should be
more accessible to other persons who require their much needed guidance on
Shariah matters. If the SAC of the Securities Commission can open up their
doors, why not the SAC of BNM? To assist the Islamic financial industry, it is
crucial for the SAC of BNM to be more accessible to other stakeholders in the
industry.
It is opined that the role of the SAC should be extended to not only BNM,
IFIs, the court and arbitrators. They should be more accessible to other persons
who require their much needed guidance on Shariah matters. If the SAC of the
Securities Commission can open up their doors, why not the SAC of BNM? To
assist the Islamic financial industry, it is crucial for the SAC of BNM to be more
accessible to other stakeholders in the industry.
E. Questions referred to the SAC should be Recorded
As stated above there are judges who have referred to the SAC questions on
Shariah matters after the passing of the CBMA 2009, however the questions
asked and the answers received have not been recorded in the judgments. It is
necessary to record the questions and the answers provided for by the SAC
whether it be in the judgment or elsewhere. The case which referred the
questions should also be recorded so that researchers can understand the facts
of the case from which the questions arose. The importance of this cannot be
emphasised enough. It is important for the sake of transparency, and as a record
for future cases. It is also important for the development of fiqh in the area of
Islamic banking and finance.
F. Update the Resolutions of the SAC
The resolutions passed by the SAC should be readily available to the public, so
that lawyers, Shariah experts, Shariah advisors, the judges and even the
customers have access to the latest resolutions to make informed decisions.
Since it is now recommended in the manual on referring matters to the SAC by
the courts and arbitration that the court and arbitrator refer to the resolutions
of the SAC first, it is of utmost importance that the resolutions are released and
updated frequently.
CONCLUSION
//mlja/2015/Vol3/mlja2015_3_00002
lviii
Malayan Law Journal
[2015] 3 MLJ
Shariah compliance is what distinguishes conventional banking and finance

practises from Islamic banking and finance. It is thus crucial that Shariah is
complied with at all stages of a transaction. At the enforcement stage, the
evolution of cases in the courts reveal that judges have grappled with Shariah
compliance and have usually decided on their own whether the contract has
breached Shariah, without reference to the resolutions or to the expert opinion
of the SAC. This trend is slowly changing as more judges are referring to the
resolutions of the SAC. Post the CBMA 2009, the courts have been referring
questions to the SAC as well, however the answers by the SAC have yet to be
recorded in a standardised manner.
This research recommends that the role of the SAC should be extended in
two ways; firstly the SAC should have the mandate to go further than just
ascertaining Islamic law. The SAC should also determine whether a contract
has been practised in a Shariah compliant manner, in this way Shariah
compliance will be ensured by those who have knowledge on how Shariah
should be applied in practise. Secondly, the SAC should not only be confined
to give advice to BNM and IFIs but should also be accessible to other persons
who need clarification on Shariah matters such as lawyers, customers, and
parties to a dispute. To extend the role of the SAC, ss 55(2) and 57 should be
amended. Section 55(2) should be amended to include other persons who can
seek the advice of the SAC apart from IFIs. Section 57 should be amended to
take away the binding effect of the advice of the SAC. In this way, the judge
would have a choice whether to follow the advice of the SAC and questions of
constitutionality, or the court usurping the functions of the court, would not
arise. This research also recommends that expert opinion should be confined to
the SAC only when disputes arise in the court and that the resolutions of the
SAC are published regularly so that they can be a source of reference to the
courts, arbitrators, lawyers and parties to the dispute.
Reference
Abdullah, Apnizan, and Hakimah Yaacob 'The Trend of Legal Suits Involving
Islamic Financial Transactions in Malaysia: Evidence from the Reported
Cases.' In ISRA Research Paper, Research Paper No 48, 2013.
Ali, Engku Rabiah Adawiah Engku 'Constraints and Opportunities in
Harmonization of Civil Law and Shariah in the Islamic Financial Services
Industry.' [2008] 4 MLJ i:
Azahari, Fakihah 'Islamic Banking: Perspectives on Recent Case
Development.' [2009] 1 MLJ xci.
//mlja/2015/Vol3/mlja2015_3_00002
[2015] 3 MLJ

lix
BNM. Manual Rujukan Mahkamah Dan Penimbang Tara Kepada Majlis

Penasihat Syariah Bank Negara Malaysia Di Bawah Seksyen 51 Dan Seksyen
56 Akta Bank Negara Malaysia 2009 2014, accessed 31 October 2014;
Available
at
http://www.bnm.gov.my/index.
php?ch=7&pg=1038&ac=419&bb=file1.
Shariah Advisory Council of Bank Negara (Sac) 154th Meeting 2014,
accessed 11 February 2014; Available at http://www.bnm.gov.my/index.
php?ch=en_about&pg=en_sac_updates&ac=439.
Hassan, Rusni, Agus Triyanta, and Adnan Yusoff 'Shariah Compliance
Process in Malaysian Islamic Banking ' Malayan Law Journal Articles 5th Ed
(2011).
Izani, Izahairani. The Role of the Shariah Advisory Council in Islamic
Banking Disputes in Malaysia Shern Delamore & Co, 2014, accessed 18
January 2015; Available at http://www.shearndelamore.com/assets/templates/
images/pdf/2014/NewletterSD_March%202014.pdf.
Laldin, Muhamad Akram. 'The Principles of Compensation and Penalty
Charges in Dealing with Loan Default in Islamic Finance.' In Contemporary
Issues in Islamic Finance: Deliberation at the International Shariah Scholars
Dialogue 2006 Ed BNM. Kuala Lumpur: BNM, 2008.
Markom, Ruzian, Sharina Ali Pitchay, Zinatul Ashiqin Zainol, Anita Abdul
Rahim, and Rooshida Merican Abdul Rahim Merican 'Adjudication of Islamic
Banking and Finance Cases in the Civil Courts of Malaysia.' European Journal
of Law and Economics 6, No 1 (2013).
Miskam, Surianom, Noor Aimi Mohamad Puad, and Nurauliani Jamlus
Rafdi. 'Reference to the Shari'ah Advisory Council in Islamic Finance:
Preliminary Analysis on Civil Court Decisions.' In Proceeding of the Social
SciencesResearchICSSR2014.KotaKinanbaluSabah:http://WorldConferences.
net, 2014.
Mohamad, Abdul Hamid, and Adnan Trakic. 'The Shariah Advisory
Council's Role in Resolving Islamic Banking Disputes in Malaysia: A Model to
Follow?' Isra Research Paper 47 (2012).
Mohamed, Ashgar Ali Ali. 'Al-Bai' Bithaman Ajil - Its Consistency with the
Religion of Islam: With Special Reference to Arab-Malaysian Finance Bhd V
Taman Ihsan Jaya Sdn Bhd & Ors and Other Cases.' [2008] 6 MLJ xiv.
//mlja/2015/Vol3/mlja2015_3_00002
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[2015] 3 MLJ
Thani, Nik Norzul, Mohamed Ridza Abdullah, and Megat Hiziani Hassan.
Law and Practice of Islamic Banking and Finance. 2nd Ed. Petaling Jaya Sweet
& Maxwell Asia, 2010.
* The author would like to express her gratitude to Logan Cochrane for his
comments on an earlier version of this paper, and Fadzilah Pilus for the
information provided in the cases of Arab-Malaysian Merchant Bank Bhd v.
Silver Concept Sdn Bhd.
** Consultant at Wisdom Management Consultancy Sdn Bhd. She can be
contracted at drsherin@wisdommc.com or sherinkunhibava@yahoo.com.

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JOBNAME: No Job Name PAGE: 1 SESS: 21 OUTPUT: Sat Jul 4 16:00:47 2015

Ensuring Shariah Compliance At The Courts And The

ENSURING SHARIAH COMPLIANCE AT THE COURTS

Malayan Law Journal

Ensuring Shariah Compliance At The Courts And The

Malayan Law Journal

according to the documents attached and the affidavit evidence. The

Ensuring Shariah Compliance At The Courts And The

the Islamic financial industry by ensuring its continued progress by upholding

Malayan Law Journal

Mohamad and Trakic: 3.

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such combination shall not result in guaranteeing the investment

Malayan Law Journal

Thus greater emphasis on the accuracy and availability of rulings should be

Ensuring Shariah Compliance At The Courts And The

Arab-Malaysian Merchant Bank Bhd v Silver Concept Sdn Bhd [2005]

Arab-Malaysian Merchant Bank Bhd v Silver Concept Sdn Bhd [2008]

Arab-Malaysian merchant Bank Bhd v Silver Concept Sdn Bhd [2010]

Malayan Law Journal

Ensuring Shariah Compliance At The Courts And The

13 [2005] MLJU 201; [2006] 8 CLJ 17, para 18.

Malayan Law Journal

15 [2005] MLJU 201; [2006] 8 CLJ 17, para 34.

Ensuring Shariah Compliance At The Courts And The

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Ensuring Shariah Compliance At The Courts And The

21 [2007] 6 MLJ 389, pp417417; [2007] 5 CLJ 311, pp 351353

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Ensuring Shariah Compliance At The Courts And The

24 Ibid at para 30.

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It is opined that this judgment is significant because the judge distinguishes

Ensuring Shariah Compliance At The Courts And The

Thirdly, the court of Appeal disagreed with J Abdul Wahab Patails

Malayan Law Journal

Ensuring Shariah Compliance At The Courts And The

Datuk J Rohana sent an enquiry to the SAC as to whether a ruling on the

Malayan Law Journal

29 See Mohamad and Trakic: 29.

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amount of unearned profit as practiced by Islamic banks.

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the provisions of ss 56 & 57 of the CBMA 2009.30 Due to the significance of

Ensuring Shariah Compliance At The Courts And The

The judge stated at pp 683684 on the role of the SAC:

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Ensuring Shariah Compliance At The Courts And The

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Ensuring Shariah Compliance At The Courts And The

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40 [2012] 7 MLJ 597 at p 602.

Ensuring Shariah Compliance At The Courts And The

Ibid at 609 paras 28 and 29.

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45 [2013] 3 MLJ 269 at p 277; [2012] 1 LNS 634 at p 1011

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46 See above note 14.

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Ensuring Shariah Compliance At The Courts And The

50 See above note 14.

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Ensuring Shariah Compliance At The Courts And The