NEWSLETTER

VOL 7 NO 4.0 DECEMBER 2008

KDN NO. PP 12544/10/2008

CASE NOTE

Arab-Malaysian Finance Berhad v Taman Ihsan Jaya Sdn

Bhd & Ors1 and 11 other suits
IN THIS ARTICLE, FIONA SEQUERAH EXAMINES THE COURTS DECISION IN RELATION TO THE ALBAI BITHAMAN AJIL FACILITY ON THE AMOUNT A CUSTOMER SHOULD PAY IN THE EVENT OF A
DEFAULT IN PAYMENT.
Earlier decisions
The issue of what amount a customer should pay under an Al-Bai Bithaman Ajil facility in the event of
that customers default has long plagued the banking industry, but was assumed to have been
settled with the decision of Abdul Wahab Patail J in Affin Bank Bhd v Zulkifli bin Abdullah2 (Affin
Case), which was followed in at least two other High Court cases namely, Malayan Banking Bhd v
Marilyn Ho Siok Lin3 (the Marilyn Case) and Malayan Banking Bhd v Yakup bin Oje & Anor4
(the Yakup Case).
In each of these High Court decisions, the bank concerned was only allowed to claim its sale price less
the unearned profit, that is, profit for the unexpired tenure of the facility, as it would have been
inequitable for the bank to claim the agreed profit based on an agreed profit rate for the entire tenure
of the facility, in consideration of the fact that the customer would not have had the benefit of the full
tenure. Although each decision was decided on different bases (both the Marilyn Case and the
Yakup Case were related to construction of the Sarawak Land Code), the court in each case,
nevertheless based its decision on principles of equity and justice when construing the Al-Bai
Bithaman facility documents, to ensure that the claimants were not unjustly enriched in the name of
the religion of Islam.

Decision in the Arab-Malaysian Finance Berhad v Taman Ihsan Jaya Sdn Bhd & Ors and 11
other suits (Judgment dated 18 July 2008)
It therefore came as somewhat of a surprise when Abdul Wahab Patail J, in Arab-Malaysian Finance,
held that there are preliminary issues to consider prior to ascertaining the quantum of the selling
price claimed by a plaintiff bank, which issues had not been raised in the earlier decisions. Firstly a
civil court under whose jurisdiction Islamic financing falls must ensure that there is no element of that
financing which is not approved by the religion of Islam, namely, that the interpretation applied be
acceptable to all mazhabs5. It was therefore crucial in each of those 12 suits for the court to determine
whether or not each of the Al-Bai Bithaman transactions before it was, by nature, a loan or a sale. In
making that distinction, the court had to ensure that it considered not just the form but the
substance of that transaction.
The court then went on to examine the documents used in the Al-Bai Bithaman transactions before it.
In each transaction, the defendants had purchased a property from a third party vendor and had paid
an initial sum. Thereafter, the defendants had obtained Islamic facilities, in particular, Al-Bai Bithaman
facilities, from the plaintiff banks amounting to the balance purchase price payable to the third party

vendor. The defendants were then required to sell the property to the plaintiff bank for a price
equivalent to the balance purchase price payable to the third party vendor, pursuant to the terms of a
property purchase agreement (Purchase Agreement), and the plaintiff bank, pursuant to a property
sale agreement (Sale Agreement), immediately sold the property in question back to the
defendants for an amount payable in an agreed number of instalments for a particular tenure, which
when aggregated, amounted to the plaintiff banks selling price. The defendants then created a
charge over, or assigned their rights (the Charge) in respect of the property in favour of the plaintiff
bank, as security for their respective obligations under the Sale Agreement.
The court held that the absence of the third party vendors involvement in the Al-Bai Bithaman
transaction, coupled with the type of documents entered into between the parties, namely the letter
of offer, the Purchase Agreement, the Sale Agreement and the Charge, vested the transaction with
the characteristics of a loan, as opposed to that of a sale and purchase transaction. It was critical, in
the courts view, for there to be a bona fide sale of the property from the bank to its customer, that is,
for the bank to be a genuine seller of the property for the purposes of ensuring that it was acceptable
under the religion of Islam. The court took the view that such transaction would have been
acceptable under the religion of Islam had there been a novation to the plaintiff bank of the original
sale and purchase agreement entered into between the defendants and the third party vendor, to
facilitate the plaintiff bank stepping into the shoes of the defendants, to directly purchase the
property from the third party vendor.
This not being the case, the court held that the Al-Bai Bithaman transaction before it, although
intended to be construed as a sale transaction, was instead a financing facility. It looked beyond the
strict reading of the words of the contractual documents read together and held that the Al-Bai
Bithaman transaction had been entered into by the plaintiff bank for profit, and that such profit, in
the absence of a genuine sale, was prohibited as riba. Even if the contractual documents could be
read independently to avoid being tainted by allegations of usury, so as to satisfy the beliefs of some
mazhabs, the court held that for the purposes of the Islamic Banking Act 1983, the Banking and
Financial Institutions Act 1989 and the Federal Constitution where the term religion of Islam is used,
that meant that the construction of the documents had to be acceptable to all mazhabs, regardless of
whether or not they were read as separate and independent documents.
Hence, on that basis, the court held that as the Al-Bai Bithaman transactions before it were not bona
fide sale transactions, and as the profit claimed by the plaintiff banks contravened the Islamic Banking
Act 1983 or the Banking and Financial Institutions Act 1989, as the case may be, the Sale Agreement
was therefore void, and the plaintiff banks could not claim the selling price. Instead, they were only
entitled, as against the defendants, to seek restitution of the balance purchase price, which was the
amount of the facility extended to the defendants by virtue of the Purchase Agreement.

Conclusion
The decision in Arab-Malaysian Finance has serious ramifications for the banking industry. It
appears to suggest that a bank providing Islamic facilities under the Al-Bai Bithaman principle, must
purchase the property to be financed directly from the vendor of the property, must step into the
shoes of its customer as the purchaser, and adopt all the latters obligations under the sale and
purchase agreement with the vendor, in order for the bank to become a genuine seller of the
property under the Al-Bai Bithaman transaction. Only then would the profit payable as part of the
banks selling price be acceptable to the religion of Islam, and based on this decision, be upheld by a
court of law, although the quantum of the selling price would still remain to be determined in
accordance with the Affin Case.
The decision in Arab-Malaysian Finance is pending appeal.

FIONA SEQUERAH
FINANCIAL SERVICES PRACTICE GROUP

Arab-Malaysian Finance Berhad v Taman Ihsan Jaya Sdn Bhd & Ors and 11 other suits

For further information concerning Islamic Financing, please contact

Christina S.C. Kow
christina@shearndelamore.com
Tee Joe Lei
joelei@shearndelamore.com

(Suit No. D4-22A-067-2003)

[2006] 3 MLJ 67
3
[2006] 7 MLJ 249
4
[2007] 6 MLJ 389
5
Madhhab or Mazhab is an Arabic term that refers to an Islamic school of thought, or fiqh (religious jurisprudence).
2

Arab-Malaysian Finance Berhad v Taman Ihsan Jaya Sdn Bhd & Ors and 11 other suits