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Islamic Banking: How Developed is it in Malaysia today?

Is the Law Equipped for the Development of Islamic Banking? Juridical and Practical Issues

 © Mohamed Ismail b Mohamed Shariff
Advocate & Solicitor
Director, Bank Muamalat Malaysia Bhd

11th Malaysian Law Conference
8-10 November 2001
Kuala Lumpur, Malaysia

Introduction

Islamic Banking in Malaysia

Islamic banking was introduced into the Malaysian banking system in 1983. This was made possible by the passing of the Islamic Banking Act 1983 (Act 276) (IBA). The Act came into force on 10 March 1983 and it applies throughout Malaysia.¹

The IBA is an unique piece of legislation. It provides for the setting up and licensing of "Islamic banks". It is unique in the sense that probably for the first time an Act of Parliament has been enacted to deal specifically with Islamic banking. The writer is not aware of any similar legislation in any other jurisdiction following the common law system.

There is another aspect of Islamic banking in Malaysia that is worthy of mention and that is that dispute resolution in Islamic banking cases comes within the jurisdiction of the civil courts (and not under the Syariah court system, as some might expect), which apply the civil court procedures to such cases.

Scope of the Paper

This paper discusses the development of Islamic banking in Malaysia since its introduction from a legal viewpoint. It seeks to highlight some shortcomings, problems and issues in the legal framework in a constructive way and makes some proposals to overcome them.

Islamic Banking by Islamic Banks

Islamic Banks

As of now, only one bank has been licensed under the IBA and that is Bank Islam Malaysia Berhad (Bank Islam). It is expected that another bank would soon get its Islamic banking licence.

The IBA is a mercifully brief Act, containing 60 sections divided into 8 parts. Brevity, however, is no guarantee of clarity or simplicity. Unfortunately, the IBA contains very little of the law relating to Islamic banking. Certain sections of the Act give rise to some legally interesting (and intriguing) issues.

What is an Islamic Bank and what is Islamic Banking Business

Section 2 defines "Islamic Bank" as "any company which carries on Islamic banking business and holds a valid licence..." and "Islamic banking business" as "banking business whose aims and operations do not involve any element which is not approved by the Religion of Islam". The term "banking business" itself is not defined and the IBA does not stipulate how that term is to be understood in the context of Islamic banking. This term is given a definition in the Banking and Financial Institutions Act, 1989 (Act 276)² (BAFIA) as follows:

"banking business" means -

(a) the business of -

(i) receiving deposits on current account, deposit account, savings account or other similar account;
(ii) paying or collecting cheques drawn by or paid in by customers; and
(iii) provision of finance;

(b) such other business as the Bank (Bank Negara), with
the approval of the Minister, may prescribe.

This definition is broad and neutral enough to apply to Islamic banking business and could have been usefully adopted as a definition of banking business in the term "Islamic banking business" in the IBA. But this is not the case.

The definition of "Islamic banking business" in the IBA appears to be simple; but, in the writer's view, it is not so. What meaning is to be given, for example, to the expression "any element which is not approved by the Religion of Islam"? There are two main branches in Islam³, namely the Sunni branch and the Shi'a branch. Within the Sunni branch there are four Madhahib⁴, the Shafi'e, the Hanafi, the Maliki and the Hanbali schools. Jurisprudential opinions among the four schools and the Shi'a branch vary on many aspects of the law. In the light of this, when the IBA talks of "any element which is not approved by the Religion of Islam" it is not evident, in the event of there being differences in opinion on the law applicable in respect of any particular matter, the law of which madhab or branch is to be applied? Again, if a particular principle of law is approved by two or three madhahib and not by the others, is the said principle to be regarded as approved by the Religion of Islam or otherwise? The definition of Islamic banking business does not help in this respect. Seen from this point of view the wording may seem to be too general. It might be thought that the law would be more certain if the definition had been more precise, such as providing that in the event of differences between the schools on any point, the law to be applied is the law in accordance with, say, the Shafi'e madhab⁵.

On the other hand, the general definition is, in the writer's opinion, highly significant, at once forward looking and universal in its sweep. The prescribed formulation would allow for the reception and application of the law from any of the madhahib or even from the Shi'a branch on any issue that may be most appropriate in the given circumstances, thus making the resulting proposition of the law more widely acceptable, both within and outside Malaysia.

The Act by not defining "banking business" has either left it to be implied by the courts that the meaning of the term is to be the same as that applied in conventional banking or, alternatively, left the term to acquire a meaning by custom and usage over the years.

Who can carry on Islamic Banking Business?

Section 3(1) of the IBA states that "Islamic banking business shall not be transacted in Malaysia except by a company which is in possession of a licence in writing from the Minister authorising it to do so". So, it appears only an Islamic bank can do Islamic banking business. This is, in fact, not so.⁶

The Law Applicable to Islamic Banking Business

Surprisingly, the foregoing provisions are all that the IBA contains about the law that is to be applied to Islamic banking. It is astonishing that in an Act that paves the way for the establishment of Islamic banks and authorises the carrying on of Islamic banking business there is not a fuller treatment of the law that is to be applied or even broad guidelines on what the law is to be⁷. This topic is dealt with in greater detail later in this paper.⁸

Syariah Advisory Body

It would seem that the scheme of the IBA in relation to the law (or the apparent deficiency in the law within the Act) is to provide the input by the establishment of a Syariah advisory council for each Islamic bank. S. 3(5)(b) of IBA provides that the Central Bank (i.e. Bank Negara Malaysia) shall not recommend the grant of a licence, and the Minister shall not grant a licence, unless he is satisfied:

"(b) that there is, in the articles of association of the bank concerned, provision for the establishment of a Syar'iah advisory body to advise the bank on the operations of its banking business in order to ensure that they do not involve any element which is not approved by the Religion of Islam".

This is an important provision which seems to have been designed to deal with the immensely intricate subject of the Islamic law that is to apply to Islamic banking transactions. However, its real purport has not been tested in the courts as yet. But it is reasonable to conclude that, since the setting up of a Syariah advisory body is a condition precedent for the granting of a license, the Act envisages a central role for that body in the sphere of the law. It may even be seen as a mini Parliament, entrusted with power to "enact" laws (by rendering advice to the bank) applicable to Islamic banking.

The statutory function of the Syariah advisory body is "to ensure that [the operations of the bank] do not involve any element which is not approved by the Religion of Islam". What is the real legal ambit of this subsection? What would be the legal standing in a court of law of the advice rendered by the council to the bank in its operations? To take an example, if a particular document used in banking transactions by an Islamic bank has been approved by its Syariah advisory council, can it then be challenged in court as being contrary to Syariah? Can the court find such a document to be not in accordance with the Syariah? If it does so, what is the effect of that finding on the decision of the Syariah advisory council, indeed on the council itself?

Put another way, are decisions of the Syariah advisory council subject to judicial review by the courts? This is an issue of critical importance since it involves the question of the role and function of the Syariah advisory council. The IBA does not provide an answer. But the answer that might be given by a civil court to this question could well determine the future evolution of the law of Islamic banking one way or the other.

Islamic Banking by Conventional Banks & Financial Insitutions

BAFIA

Section 124 (in force from 1 August 1996) of BAFIA reads as follows:

"124. (1) Except as provided in Section 33⁹, nothing in this Act or the Islamic Banking Act 1983 shall prohibit or restrict any licensed institution from carrying on Islamic banking business or Islamic financial business, in addition to its existing licensed business, provided that the licensed institution shall consult the Bank before it carries on Islamic banking business or any Islamic financial business.

(2) For the avoidance of doubt, it is declared that a licensed institution shall, in respect of the Islamic banking business or Islamic financial business carried on by it, be subject to the provisions of this Act.

(3) Any licensed institution carrying on Islamic banking business or Islamic financial business, in addition to its existing licensed business may, from time to time seek the advice of the Syariah Advisory Council established under subsection (7), on the operations of its business in order to ensure that it does not involve any element which is not approved by the Religion of Islam.

(4) Any licensed institution carrying on Islamic banking business or Islamic financial business shall comply with any written directions relating to the Islamic banking business or any other Islamic financial business, carried on by such licensed institution, issued from time to time by the Bank, in consultation with the Syariah Advisory Council.

(5) Any licensed institution carrying on Islamic banking business or Islamic financial business shall be deemed to be not an Islamic bank.

(6) This Act shall not apply to an Islamic bank.

(7) For the purposes of this section -

(a) there shall be established a Syariah Advisory Council which shall consist of such members, and shall have such functions, powers and duties as may be specified by the Bank to advise the Bank on the Syariah relating to Islamic banking business or Islamic financial business;

(b) "Islamic banking business" has the meaning assigned thereto under the Islamic Banking Act 1983; and

(c) "Islamic financial business" means any financial business, the aims and operations of which, do not involve any element which is not approved by the Religion of Islam."

This section empowers conventional financial institutions to carry on Islamic banking business to the same extent as an Islamic bank, removing in the process the prohibition against the carrying on of Islamic banking business by any person not in possession of a license under the IBA¹⁰. This is the result of the definition of "Islamic banking business" in BAFIA which adopts the definition of that term in IBA, so that whatever banking business an Islamic bank (e.g., Bank Islam) can do, a conventional bank can also do. Indeed, the latter can do more, since s. 124 (1) also authorises them to do Islamic financial business, although considering the definition of the latter term (which is identical to that of Islamic banking business) it is difficult to see what would come within that term that is also not within the term Islamic banking business.

Apparently the same laws and rules will apply to Islamic banking business carried on by both Islamic banks and conventional banks (though it is conceivable that in certain matters the opinions of the Syariah Advisory Councils may differ).

The Syariah Advisory Council Under S. 124

S. 124 (7) provides for the establishment of a Syariah Advisory Council "to advise the Bank (i.e. Bank Negara) on the Syariah relating to Islamic banking business or Islamic financial business". By virtue of s. 124 (4), every conventional bank carrying on Islamic banking business "shall comply with any written directions relating to the Islamic banking business or any other Islamic financial business, carried on by such licensed institution, issued from time to time by the Bank, in consultation with the Syariah Advisory Council". Now, it will be recalled that one of the requirements of an Islamic Bank is to have an in-house Syar'iah advisory body "to advise the bank on the operations of its banking business". Besides these two councils, there is also a Syariah advisory body set up to advise the Securities Commission. The proliferation of Syariah Advisory Councils could engender certain legal problems. What would be the position if the advices of these bodies on the same issue differ? How would a court be expected to resolve such differences in opinion if a matter in respect of which there are differences between these bodies reaches the court?

Such conflicts of opinion are not unforeseeable. And they should be avoided before they arise. Whilst as an interim measure some inter-consultative machinery may be set up to ensure that the various advisory bodies consult one another and agree on the advice to be rendered on any issue of Islamic law, it would be more appropriate if all such advisory bodies are merged into one so that there would be no opportunity for such conflicting advice to be rendered at all. This question is explored in greater detail later in this paper.

From what Sources are Islamic Law to be Derived?

Scope of Islamic Law to be Applied

As was seen above, the IBA, having authorised Islamic banks to carry on Islamic banking business, has not defined the Islamic law that is to be applied to Islamic banking transactions. It has not even indicated the sources¹¹ (e.g. standard texts) from where the law may be derived. The role of the Syariah Advisory Council,¹² important though it is, must as a matter of practicality be restricted. It cannot be expected to provide a ruling or advice on issues that arise in the daily operations of Islamic banking. The lack of guidance in the IBA as to the sources would pose a real problem to both counsel who have to present arguments in court and to judges who have to decide cases before them. Whilst the applicable principles for the transaction in question and to some extent the documentation might have been approved by the respective Syariah advisory council, counsel are left very much to their own devices in preparing arguments in presenting cases in the courts. Judges, too, would be in a difficult position to decide cases without fully researched arguments by counsel and authoritative reference material to which they can refer in making decisions. Conversely, the divergence of opinions among Islamic jurists and scholars to which different counsel might have access and which they will each urge the court to adopt may be so complex that deducing a principle of law might seem to be as much a deliberate decision after considerable thought as the toss of a coin.

There is no guidance in the Acts even for a starting point for research on particular issues that may arise in an action in Court. Considering the fact that differences of opinion among Islamic jurists abound, the choice of the applicable law is wide indeed. Different parties can justifiably argue for particular principles to be applied to the case at hand. That is to be expected. But how is a judge to decide which principle he should apply? This problem is further compounded by the fact that Islamic (or Muslim) law is regarded as part of the law of the land¹³ and as such expert evidence cannot be adduced as to the Islamic law applicable on any issue.

Civil Laws Applicable to Islamic Banking

A related problem arises from the fact that disputes arising in Islamic banking transactions are brought before the civil courts for adjudication¹⁴. Neither the IBA nor s.124 of BAFIA exclude the application of the civil law to Islamic banking transactions¹⁵. Alternatively, there is no provision in either Act stipulating that Islamic law shall apply exclusively to such transactions. Thus presumably both Islamic law and the civil laws will apply to Islamic banking transactions. And this has to be applied within the existing common law system of courts. This includes substantive as well as procedural laws. Much of those laws and procedures having been in existence before Islamic banking was introduced in this country, they naturally were not drafted or designed with Islamic principles in mind or to facilitate the application of Islamic law. This raises different problems in enforcing Islamic law-based transactions in the civil courts which are discussed later in this paper.

Which Law is to Prevail in Islamic Banking Transactions?

At this juncture s. 55 of the IBA may be considered. It reads as follows:

"55 Application of other laws

An Islamic bank which is incorporated under the Companies Act 1965 shall be subject to the provisions of that Act as well as the provisions of this Act, save that where there is any conflict or inconsistency between the provisions of that Act and the provisions of this Act the provisions of this Act shall prevail."

This section is taken from s. 122(1) of BAFIA. The purport of s. 122 (1) is clear; it is intended to resolve conflicts that may arise between the provisions of the Companies Act and BAFIA in relation to companies that are conventional banks.

But when transposed to the IBA, the effect of s. 55 could be far-reaching because of the definition of Islamic banking business in s. 2 of IBA. It could in effect displace the Companies Act in Islamic banking transactions where there is a conflict between that Act and Islamic law. The conflict may extend beyond formal or Syariah matters to other substantive laws. This is because that section talks of a conflict between the provisions of the Companies Act, 1965 ("the Companies Act") and of the Islamic Banking Act, and one of the provisions of the latter Act is that a bank licensed under that Act can only carry on Islamic banking business, the scope of which has been discussed above. By virtue of the definition of Islamic banking business, if any provision of the Companies Act can be shown to be "not approved by the Religion of Islam" (i.e. in conflict with the tenets of Islam or the principles of Islamic law) then the latter must prevail. This section thus gives precedence to Islamic law in this limited situation.

The question that immediately arises is, what if there are similar conflict situations in respect of other Acts and legislation or case law? Would the courts allow Islamic law to prevail (as would appear to be the right thing to do), or apply the principle of construction expressio unius est exclusio alterius (the express mention of one thing implies the exclusion of another) to hold that, since the Legislature has in s. 55 limited its scope to cover only the Companies Act, in other situations where there are conflicts between Islamic law and other Acts or laws or even principles of common law, Islamic law is not necessarily to prevail. That would indeed be tragic but the courts may have no other option. This situation whether arising as a result of an oversight or otherwise needs to be immediately rectified.

The position would be the same in relation to Islamic banking business carried on by conventional banks. This effect is brought about by the definition of Islamic banking business in s. 124 of BAFIA, which adopts the definition in the IBA.

The Present State of the Law

The Law is not Fully Equipped

It is the writer's opinion that unfortunately the law as it stands today is not fully equipped to deal with Islamic banking law issues that have arisen and those that may arise in the future. Many laws need to be amended to make them accommodate Islamic banking principles. Whilst it is beyond the scope of this paper to delve into all of those shortcomings, some of them will be discussed here to illustrate the types of problems that are likely to arise. It may be instructive to first consider the general approach hitherto adopted by the civil courts towards Islamic law and the opinion of Islamic scholars. This is exemplified by the Commissioner for Religious Affairs, Trengganu & Ors v Tengku Mariam¹⁶. In that case the issue before the court was the validity of a wakaf¹⁷. The Mufti¹⁸ of Terengganu had earlier issued a fetua declaring the wakaf to be valid. The matter was later taken to the civil court and in his judgment declaring the wakaf to be invalid this is what the Judge said:

"I have given this matter considerable thought and am of the view that even if it had been this court which had sought the fetua, the court yet retains unfettered discretion as to how much of such fetua it should accept, and may decline to be bound by it. I can find nothing in the (Administration of Islamic Law) Enactment which has affected the power of the court to propound Islamic law, which power I now propose to exercise."

This exercise of jurisdiction over a Syariah issue, though it might have been correct from the perspective of civil law, would not be comforting from a Syariah point of view because a civil court judge has overruled a formal ruling of a religious authority and substituted it with his opinion on the matter.

Law Relating to Islamic Banking

The law relating to Islamic banking is, in the writer's view, undefined, insufficient and lagging behind the market. Many Islamic banking products have been developed and put on the market and large numbers of transactions have been concluded. But the law (such as there is) has stood still, so to speak. Whenever legal issues arose in developing the product or in drafting the relevant documents the parties involved had attempted to deal with them in the best manner possible in the circumstances, with advice from their counsel and their Syariah advisors. But then counsel are constrained in their advice, for in many instances the law cannot be ascertained to an acceptable degree of certainty. As an example, the Islamic transaction known as Bai Al-Inah¹⁹ may be considered. There are views for and against its validity in Malaysia. Some financial institutions have implemented this form of financing transaction because their in-house Syariah advisors have approved them. Other institutions have not, for the opposite reason. This is but one example of differences in view relating to the Syariah acceptability of an Islamic banking product in the market. Many such examples may be given. This kind of divergence in opinions may actually hinder the development of Islamic banking law as lawyers, bankers and their customers are left to wonder which is in fact the correct view.

Situations of Conflict

There is also another type of difference: that of conflict between the Syariah and conventional laws. The type of conflict that can arise in this situation is illustrated by the case of Dato' Nik Mahmud Bin Daud v Bank Islam Malaysia Berhad²⁰. That was a case involving an Al-Bai Bithaman Ajil (ABBA) transaction. The customer applied to the bank for a facility which the bank agreed to grant under the ABBA principle. Under this principle, the customer sells a property that he owns to the bank at a price, which is usually the amount of facility that he needs, pursuant to a Property Purchase Agreement (PPA). The bank will pay the Purchase Price (PP) to the customer who thus obtains the facility that he requires. The bank, immediately after the purchase, sells the property back to the customer at a price, which is the bank's purchase price plus its profit for the period for which the sale price is deferred, pursuant to a Property Sale Agreement (PSA). The customer will agree to repay the Sale Price (SP) in instalments over an agreed period of time. As security for the repayment of the SP the owner will create a charge over the land, as in a conventional loan transaction. Many thousands of such transactions have been done, and continue to be done, under this principle.

But in the case under discussion there was a difference. The land was Malay reservation land, gazetted as such under the Kelantan Malay Reservations Enactment, 1930 (KMRE). The legal effect of such a classification is that the land cannot be sold or transferred, etc. to a person who is not a Malay²¹. All dealings or disposals in favour of a non-Malay are null and void²². A transfer, etc. to a non-Malay may only be done with the approval of the State Ruler-in-Council.

The KMRE, however, allows non-Malay entities, such as banks, to have their names entered in Schedule D to the Enactment, which would then entitle them to take charges over Malay Reservation lands for loan or other facilities granted by them to the owner. Such charges have for long been registered in favour of banks.

In the instant case, the bank involved was Bank Islam Malaysia Berhad (Bank Islam), whose name was entered in Schedule D, thus authorising it to take charges over such lands. However, the financing in this case being Islamic, no loan was given as a conventional bank would have done. Instead a facility under the ABBA principle was granted. This, as noted above, required the customer to first sell the land to the bank and for the bank to immediately re-sell the land back to the customer.

The customer filed an application in the High Court asking for a declaration, inter alia, that the PPA, the PSA and the charge created over the land in question in favour of the Bank were null and void. The basis for the application was that the land being Malay reservation land and the bank not being a Malay and there being no approval from the Ruler-in-Council for the sale of the land to the bank, the sale was contrary to ss. 7 & 12 of the KMRE.

It was not disputed that there was no approval from the Ruler-in-Council or that the bank was not Malay. The real issue was one of apparent conflict between a civil law (i.e. the KMRE) and Islamic law. Counsel for the bank submitted that there really was no conflict or, if there was a conflict, it could be resolved harmoniously. It was urged on the judge that the Court should consider the social purposes of both the KMRE and the IBA and consider whether the social purpose of the first was violated by the entering into of the PPA and conversely whether the court would be advancing the social purpose embodied in the IBA if it declared the transaction null and void by reason of what must be a technical but inconsequential infringement, if the court did find that there was a technical infringement, of the KMRE.

The argument for the bank rested mainly on the ground that the transaction was essentially a financing transaction and not a sale and purchase transaction, that the financing transaction under the ABBA principle required a sale and an immediate re-sale and that it was not intended to transfer title to the land pursuant to the National Land Code to the bank in a manner contrary to the KMRE.

In a reserved judgement the judge discussed at length the provisions of the KMRE, particularly ss. 7 & 12 thereof and came to the conclusion that the execution of the PPA had not transgressed the provisions of ss. 7 & 12 since there was no dealing or an attempt to deal in the said lands within the meaning of those sections. He therefore held the transaction to be valid. Upon appeal to the Court of Appeal by the customer, the appellate court unanimously dismissed the appeal.

The decision came as a big relief to the bank but it was a close one. It was fortunate that a way was found in that case to read the two pieces of legislation harmoniously. One wonders what the position would have been if the conflict could not have been resolved in that manner.

This case highlighted a stark reality: that there is no provision in the law at present that could be called in aid to protect the validity of an Islamic banking transaction.

Other Civil Laws

National Land Code

A relatively simple example can be taken from the land code. S.330 of the National Land Code (the Code) relates to the lodgement of a lien- holder's caveat. It allows for the lodgement of a lien-holder's caveat "as security for a loan". In Islamic banking, no loans are granted as in conventional banking save in the case of a qard al-hasan (a friendly (i.e. interest-free) loan). Islamic bankers, of course, would not relish the giving of interest-free loans²³. Their financing is done principally by means of trade transactions or what are sometimes termed as asset-based or activity-based transactions. These transactions not being loan transactions do not fall within s. 330 on a literal reading. So it would appear that this form of security (a lien-holders caveat) couldn't be entered for an Islamic financing transaction. But some might argue that in the case of an Islamic financing transaction the word "loan" should be read to include such a financing transaction. Whether there is merit in such an argument or not would be a matter of opinion and ultimately for a court to decide. The point here, however, is that the Code does not, in its original version or by subsequent amendment, accommodate Islamic banking transactions in all cases.

Stamp Duty And Other Tax Provisions

Another area where considerable difficulty is experienced in everyday practice is stamp duty. The Stamp Act 1949 was amended in 1989 to insert a new s. 14A. This section provides that where a principal security secures the repayment of moneys provided under a scheme of financing made according to the Syariah, duty chargeable thereon shall be calculated on the principal amount provided by the financier. What this means in an ABBA transaction²⁴, for example, is that in that form of transaction the stamp duty will be payable on the Purchase Price (which is in effect the facility amount) and not the Sale Price. (The Sale Price being higher than the Purchase Price stamp duty calculated on the Sale Price will be greater.) But this deals with only one aspect of stamp duty implications in Syariah financing. There are many other areas (e.g. refinancing arrangements, additional facilities granted which are to be secured by the same security, such as a house renovation facility to a customer who already has a house purchase financing facility for the same property) where problems or uncertainties still exist.

The area of real property gains tax is not free from problems either where Islamic banking transactions are concerned. Whilst certain amendments have been made to the Real Property Gains Tax Act 1976 those are considered not comprehensive enough to deal with problems that arise from time to time.

Rules Of The Court

The Rules of the High Court 1980 and the Subordinate Courts Rules 1980 were drafted in the years shown in their titles. This was before Islamic banking was introduced in this country and naturally the peculiarities of claims made and actions filed under Islamic financing were not taken into account. But the rules have not been amended since to provide for these peculiarities²⁵.

This became clearly evident in the case of Bank Islam Malaysia Berhad v Adnan Bin Omar²⁶, another ABBA financing matter. The case involved an application by the bank upon default by the customer for an order for sale under Order 83 of the Rules of the High Court 1980 pursuant to a land charge created by the customer in favour of the bank. Objections were raised on behalf of the customer that the application and affidavits filed in support of the application did not comply with the Rules of the High Court which required, among others, the amount of "advance" made by the bank, the interest paid and "a day's interest" to be stated in the affidavit in support of the application. In a conventional loan transaction the amount of advance will be the loan amount but in an ABBA transaction the "amount of advance" would be different from that in a conventional loan transaction; that would be the Sale Price. Objection was raised on the ground that that was not the amount that was advanced by the bank. As regards interest there is, of course, no question of it in an ABBA transaction. Be that as it may, there was some merit in the objections raised by the customer but fortunately in that case the relevant Order²⁷ in the Rules had the words "except where the court in any case or class otherwise directs" in the preambular part of rule 3(3). The judicial commissioner relied on those words to exercise her discretion to allow a certain flexibility in the requirements of that provision in the case before her and overruled the objections and granted the order for sale. As in the case of Dato' Nik Mahmud Bin Daud discussed earlier, the decision in the instant case was a close call, saved by the exception provision in the Rules on which the court relied.

Dangerous Living

Lawyers at Risk

The foregoing instances illustrate the type of dangerous living that lawyers practising Islamic law in this country have to undergo in arguing cases in the civil courts. But the luck may not always hold and the danger may become real and an Islamic banking transaction (perfectly valid under the Syariah) may be held to be unenforceable or void because the civil law was not equipped to handle it. That would be a legal tragedy.

Judges' Dilemma (or Trilemma)

Another danger zone may be considered - uncertainty in the law and a lack of specification as to the law applicable. The Syariah imposes certain requirements for a contract to be valid under it. But these requirements may not all be the same under all the schools of jurisprudence of Islam or under the civil law. So it is possible for a contract to be valid under the tenets of one madhab of the Syariah and not under another madhab or the civil law. If the validity of such a contract falls to be determined by a civil court how should the court decide it? To what sources would a judge deciding the case refer? And if there are conflicting opinions in the Syariah which one should he adopt? If there is a conflict between Islamic law and the civil laws applicable to the matter, which should take precedence? These are all questions to which there are no ready answers.

A situation may well occur where identical issues come before two or more different judges and, in the absence of guidance in the law, they could conceivably and correctly come to different decisions depending on which of the differing views in the Syariah on the matter at hand they choose to adopt. And unless there are express provisions in the civil law excluding the application of civil law principles to Syariah contracts or prescribing, where there is a conflict, that Islamic law shall prevail, the judges may find themselves bound to apply those principles to such contracts and to declare them void if the conditions are not met. And that would be a legal calamity. This would be in addition to the problem they would face if they have to decide which of the opposing Syariah opinions should be applied to the case before them.

A situation such as that described above would be a real legal dilemma for a judge or, more appropriately, a trilemma!

It cannot be over-emphasised that there must be answers in the law to the types of questions raised above. These can only be provided by legislation and that must be done in all haste; they are long overdue.

The Way Forward

The Law is not in Step with Practice

Islamic banking is well entrenched in the banking system of the country and is growing at a healthy rate. It is the writer's view, as demonstrated in the discussion above, that the same cannot be said of the law relating to Islamic banking. There are many grey areas and uncertainties in the law. If left unattended they could pose grave problems to Islamic banking. This inadequate state of affairs in the law relating to Islamic banking must be given immediate attention.

The law

First and foremost the law applicable to Islamic banking has to be made certain. This must include guidelines on the law applicable, the sources (authoritative texts) of Islamic banking law and the basis on which the courts should decide which one of two or more conflicting principles is to be adopted and applied. It must be clearly prescribed that where there is a conflict between Islamic law and the civil laws in relation to Islamic banking transactions, Islamic law shall prevail. The following measures, among others, need to be taken to bring the law to a stage where it can meet the requirements of modern banking:

Amendments to Islamic Banking Act and the Banking and Financial Institutions Act

There is a real and urgent need to review and revise the IBA and s. 124 of BAFIA to clarify the position of Islamic law in Islamic banking transactions. Some specific areas have been indicated in the preceding discussion.

Amendments to Existing Laws

There are a host of existing laws (including procedural laws) that need to be amended to make them applicable to Islamic banking. Some of these are: the Contracts Act 1950, the National Land Code 1965, the Stamp Act 1949, the Companies Act 1965, the Malay Reservations Enactment of the various States of Malaysia, The Rules of the High Court 1980 and the Subordinate Courts Rules 1980 and others. A comprehensive study of all such legislation must be made and appropriate amendments passed by Parliament. As an interim measure, a general all-embracing provision may be enacted in the IBA and BAFIA to deal with situations of conflict among the laws that may be applicable and uncertainty in the law.

Expert Evidence

Particular mention needs to be made of the rule of evidence under which expert evidence cannot be called where the issue is one concerning local law. As was seen earlier²⁸, Islamic law is regarded as local law so this rule will apply to prevent expert evidence from being called to explain or clarify an Islamic law point to the jugde. However, in view of the peculiar position of Islamic law it is the writer's opinion that this rule should be relaxed to allow for expert evidence to be given in court on any Islamic law issue or at least to allow for judges to be advised on such law. The areas on which such opinion may be received would have to be strictly controlled by appropriate provisions in the enabling statute and such evidence cannot in any event extend to contradicting any advice given or ruling issued by the National Syariah Advisory Council.²⁹

Alternatively, provision should be made to allow courts to seek the opinion of the National Syariah Advisory Council³⁰ on particular issues in Islamic law, which would then be binding on them.

One Syariah Advisory Body - the National Syariah Advisory Council

There should be only one Syariah Advisory body (which may be called the National Syariah Advisory Council) for the whole country. This would require the merging of all existing Syariah Advisory bodies and repealing the requirement for every Islamic bank licensed under the IBA to have its own Syariah advisory council. The composition of the National Syariah Advisory Council should be broadened to include, in addition to Islamic scholars and jurists, bankers, lawyers and academicians so that the advice of the Council could incorporate the requirements of the banking community and of the law in everyday practice and also take account of current thoughts and trends. This is necessary in order to make the advice and rulings of the National Syariah Advisory Council relevant and contemporary. This will also help to integrate Islamic banking law into the existing legal system. Any attempt to segregate Islamic banking law from the general body of laws or the dispute resolution process from the mainstream system should be avoided as that could have the effect of sidelining Islamic law and relegating Islamic banking to the lower rungs of the legal hierarchy.

Rulings and Advice of the National Syariah Advisory Council

The status of the rulings and advice of the National Syariah Advisory Council should be clearly defined so that the courts would not displace such rulings or advice and substitute their own views on Syariah issues, as has happened before in other Islamic law matters³¹. This is important to ensure an orderly development of Islamic law in the country. Differences of opinion on Syariah issues should be resolved within the National Syariah Advisory Council and their rulings should be made binding on all parties concerned.

Certification of Rulings

A system should be devised by which a certification or a stamp of approval would be endorsed on a ruling or advice made or given by the National Syariah Advisory Council so as to remove any doubt whether any such ruling or advice was in fact made or given by the Council. Once such certification has been issued or a stamp of approval given the ruling or advice shall become binding for all purposes and shall not be open to judicial review.

Islamic Banking Code

In this country there are not only Islamic banks that carry on Islamic banking business but almost all conventional banks also offer Islamic banking services. It was briefly noted that there are differences in the practices of these banks and in in the products that they offer. Such differences should be welcome if they are not of a fundamental character but are designed to attract customers by offering better services or terms. But if these differences are founded on conflicting opinions on the Syariah they would not be conducive to the development of Islamic banking as the same could cause confusion among the public and chaos in the legal sector.

It is suggested that all banks, both Islamic and conventional, carrying on Islamic banking should jointly draw up an Islamic Banking Code that would set out the ground rules for the conduct of Islamic banking in this country. Such a Code should provide for all matters necessary for the proper and orderly conduct of Islamic banking, such as the broad basis for the calculation of profit margins, the granting of muqassah (or rebate) for early repayment or early recovery of financing and numerous other such matters that affect the manner in which Islamic banking is carried out in this country.

Conclusion

Islamic banking is well rooted in the banking system in the country though it has not reached its full potential as yet. Great strides are being made in Islamic banking, with the support of the Government and the encouragement and guidance of Bank Negara, to ensure that Islamic banking becomes a truly viable alternative banking system in this country. Initial scepticism about Islamic banking, and its inherent ability to meet the demands of the modern-day sophisticated banking industry, has all but disappeared. There is greater understanding and appreciation about Islamic banking now than when it was introduced some 18 years ago.

The legal landscape, however, is far from picturesque; indeed it is somewhat barren. Probably when the IBA was enacted the vision was not very clear, the path to be tread uncertain and the future then unpredictable. With the passage of time and the benefit of experience over the years in seeing the practical implementation and workings of the Islamic banking system, the way forward has become more clearly defined. The areas where new laws have to be enacted, existing law revised and consequential amendments made to other applicable laws and procedures have come into focus. What needs to be done is the refinement and putting in place of the necessary legal infrastructure, both the substantive laws and procedures.

The urgency for this to be done is keenly felt by the Islamic banking industry - the practitioners, bankers, lawyers and customers alike. It is a not situation where the courts and judges can fill the lacuna in the law. Their function, as has often been said, is to interpret and apply the law, not to enact or legislate. Enacting laws is the domain of the Legislature through the Executive. Legislative action is imperative in the areas discussed above and, no doubt, many others so that the legal foundation of Islamic banking law that now rests on a somewhat uncertain and tenuous, even tentative, base can be implanted on firmer ground. It is hoped that the relevant authorities will take the necessary action urgently.