SAH! KONTRAK BAI BITHAMAN AJIL MEMANG SAH
DALAM MAHKAMAH RAYUAN MALAYSIA
(BIDANG KUASA RAYUAN)
RAYUAN SIVIL NO. W-02-957-2008
ANTARA
BANK ISLAM MALAYSIA BERHAD
(NO. SYARIKAT: 98127-X) … PERAYU
DAN
1. GHAZALI BIN SHAMSUDDIN
2. MOKHTAR BIN SHAMSUDIN
3. KAMARUDIN BIN SAMSUDIN … RESPONDENRESPONDEN
Coram: Raus Sharif, J.C.A.
Abdull Hamid Embong, J.C.A.
Ahmad Maarop, J.C.A.
JUDGMENT OF THE COURT
1. On 18 July 2008, the Kuala Lumpur High Court delivered a
common judgment for 12 cases concerning Islamic financing
which sent shock waves to the Islamic banking industry. The
learned Judge declared that the Bai Bithaman Ajil (“BBA”)
contract, a financial instrument in Islamic financing, which had
been in existence and practised in this country for the past 25
years was contrary to the Religion of Islam.
2. The plaintiff in the respective 12 cases was Bank Islam
Malaysia Berhad (“BIMB”). BIMB is an Islamic bank licensed
under the Islamic Banking Act 1983 and thus authorised to
carry on Islamic banking business. The defendants were
BIMB’s customers.
3. What had happened was this. Prior to the delivering of the
common judgment, the learned Judge had instructed counsel
appearing in the 12 cases which were pending before him, to
file their respective written submissions.
4. The written submissions were duly filed but counsel were not
called upon to appear before the learned Judge to make oral
submissions or provide clarification of their written submissions.
From the written submissions the common judgment for the 12
cases was delivered by the learned Judge.
5. In the common judgment, the learned Judge did not deal with
the particular facts of the individual cases. What he had done
was to discuss and make decisions regarding, in the learned
judge’s own words ‘the basic principles concerning Islamic
financing’. At the end of it, he concluded that the BBA contracts
were contrary to basic principles of Islam.
6. In his ruling, the learned Judge had grouped the BBA contracts
into two categories: those where there was a novation
agreement and those where there was none. In those where
there was a novation agreement he further subdivided it with
two sub-categories: those where the financing had expired and
those where it is still ongoing. For those where the financing
period had expired, the claim by BIMB was allowed in full. For
those where the financing period is still ongoing and had not
expired, he ruled that the amount claim was excessive and
unfair. He applied the ‘equitable’ interpretation of the sale price
as he had interpreted in his earlier judgment in the case of
Affin Bank Bhd. v Zulkifli Abdullah [2006] 1 CLJ 438.
7. What had happened in Affin Bank Bhd. v Zulkifli Abdullah
(Supra) was this. Zulkifli Abdullah obtained a secured housing
loan of RM394,172.06 from the Affin Bank Bhd under the BBA
in 1997. Zulkifli Abdullah defaulted the loan in 2002 after
paying RM33,454.19 to the bank. Affin Bank Bhd then claimed
from Zulkifli Abdullah the full sale price of RM958,909.21,
inclusive of the plaintiff’s profit margin for the full term of the
loan. Affin Bank Bhd also applied for an order for sale of the
changed property. Zulkifli however challenged the amount
claimed. The learned Judge held:
(1) If the customer is required to pay the profit for
the full tenure, he is entitled to have the
benefit of the full tenure. It follows that it
would be inconsistent with his right to the full
tenure if he could be denied the tenure and
yet be required to pay the bank’s profit margin
for the full tenure. To allow the bank to also
be able to earn for the unexpired tenure of the
facility, means the bank is able to earn a profit
twice upon the same sum at the same time.
(2) The profit margin that continued to be charged
on the unexpired part of the tenure cannot be
actual profit. It was clearly unearned profit. It
contradicted the principle of Al-Bai Bithaman
Ajil as to the profit margin that the provider
was entitled to. Obviously, if the profit had not
been earned it was not profit, and should not
be claimed under the Al-Bai Bithaman Ajil
facility.
(3) The profit margin could be calculated and
derived with certainty. Even if the tenure was
shortened, the profit margin could be
recalculated with equal certainty. The total
due on the date of the judgment was
RM616,080.99 and after crediting the
defendant with all the payments he has made
of RM33,454.19, the balance due on the date
of judgment was RM582,626.80.
(4) Once it was established that there had been a
default, then unless there was cause to the
contrary, the order for sale must be given
since a charge is an ad rem right to dispose of
the security to recover a secured debt.
8. The learned Judge then proceeded to determine the actual
amount due to the plaintiff in the following manner:
“Balance Due 29 December 2005
According to the calculation placed before the court
for the bank, the bank profit at the agreed profit rate
of 9% per annum on RM394,172.06 is RM35,475.49
per annum or RM35,475.49/12 = RM2,956.29 per
month or on a 360 day 20 year basis as agreed,
RM98.54 per day. Between 1 November 1999 to
the date of judgment on 29 December 2005 is a
period of 74 months less 2 days. The profit, by
simple arithmetic since the payments meantime is
not very significant, for 74 months less 2 days is
RM218,767.49. As agreed the bank is also entitled
to penalty of RM3,141.44 as on today. Added to the
bank purchase price of RM349,172.06 the total due
on the date of judgment is RM616,080.99. After
crediting the defendant with all the payments he had
made RM33,454.19, the balance due on the date of
judgment is RM582,626.80. The bank is also
entitled to profit per day here after full payment at
RM2,956/30 = RM98.54.”
9. It can be seen from the case cited above that an Islamic bank
could only recover the balance of the principal of the facility
plus profit on the balance principal calculated at a daily rate
until payment.
10. The learned Judge further ruled that for those contracts, where
there was no novation agreement, the agreement was in fact a
loan agreement. And, since interest is prohibited in Islam,
BIMB could only recover the principal sum advanced pursuant
to section 66 of the Contract Act 1950.
11.Issues and Findings
12. After hearing the parties, we unanimously allowed the BIMB’s
respective appeals. We now give our reasons.
13. The 9 appeals involved BBA contracts. Thus, in order to
understand the decision and reasoning of the learned Judge, it
is necessary to set out briefly the nature and essential features
of a BBA contract.
14. A BBA contract is a financial instrument in Islamic banking. It is
the most common form of transaction being used in Islamic
banking in this country. Basically, a BBA contract is a deferred
payment sale contract. It is used to finance bank’s customers
to purchase and own properties or assets. It involves two
distinct contracts, one a Property Purchase Agreement and
also a Property Sale Agreement.
15. In a typical BBA contract, the customer will first sell the property
or asset to the bank under the Property Purchase Agreement.
The bank’s purchase price would be the amount required by the
customer. That sum is called the facility amount or the
financing amount. It is also described as the bank’s purchase
price.
16. The sale is a cash sale. The bank has to pay the purchase
price to the customer immediately upon the completion of the
documentation process. But in most cases, where a customer
had entered into a Sale and Purchase Agreement with a
developer to purchase a house, and therefore needs financing,
the bank and the customer would mutually agree that the bank
shall release the amount (the bank’s purchase price) to the
developer in stages against progress payment certificates.
17. With that purchase, the property belongs to the bank. But, the
customer is to buy it back from the bank and he will only be
able to pay the price over a period of years. The bank will sell
but the sale price will not be the same amount as the bank’s
purchase price. The sale price will include the bank’s profit on
the sale, which will later be calculated and added to the
purchase price. The total amount is now the sale price. In
effect, the bank will sell the very same property it has
purchased from the customer to him at a selling price under the
Property Sale Agreement. The customer then will pay the
bank’s selling price over a period of years by monthly
installments. At that point the customer becomes the owner of
the property again.
18. To illustrate the BBA contract, we will refer to the facts in Civil
Appeal No. W-02-918-2008. In that case the customer applied
to BIMB for a financing facility to purchase a property known as
Unit B10-3 Jenis Excelsa, Taman Universiti Indah, Fasa 111C
(“the Property”). BIMB purchased the property from the
customer pursuant to a Property Purchase Agreement dated 16
October 1996 for a purchase price of RM145,800.00. On the
same date BIMB sold the property to the customer pursuant to
a Property Sale Agreement for a sale price of RM450,954.00.
Again on the same date, the customer executed a deed of
assignment in favour of the BIMB to secure the payment of the
sale price. The sale price was to be paid by the customer by
360 monthly instalments of RM1,252.65 per month. The
customer had paid the sum of RM105,556.13 before he
defaulted in the payment of the sale price. The balance sale
price due was the sum of RM370,425.05. That was the sum
claimed by BIMB from the customer.
19. The above illustration clearly demonstrates that in a BBA
contract the sales took place immediately both pursuant to the
Property Purchase Agreement and the Property Sale
Agreement, so that when the Property Sale Agreement was
entered into, the customer becomes the owner of the property
immediately. What was deferred was the payment of the
BIMB’s selling price by the customer to the BIMB.
20. The above illustration also demonstrates that in BBA contract,
the Property Purchase Agreement and the Property Sale
Agreement completed the BBA transaction. But, invariably the
bank will require security from the customer for the payment of
the bank’s selling price. If a separate title to the property has
been issued, the customer will create a charge in favour of the
bank. If a separate title has not been issued, the customer will
execute a deed of assignment by way of security. However, it
should be noted that the charge or assignment is not part of the
BBA transaction. It is a security arrangement. Even without
the charge or assignment the BBA contract will be completed.
21. The learned Judge in his common judgment questioned the
validity and enforceability of the BBA contracts on two main
grounds. First, he found the BBA contract was ‘far more
onerous than the conventional loan with riba’ which is
prohibited and unequivocally condemned in Islam. Second, he
found that the BBA contract practised in this country is not
acceptable by all the 4 Mazhabs in Islam. He ruled that BBA
contract is only acceptable to one Mazhab, and this is not
sufficient to say that it is approved by the Religion of Islam
which is a requirement under section 2 of the Islamic Banking
Act 1983.
BBA contract ‘far more onerous than the conventional loan
with riba’
22. The learned Judge in advancing his view that the BBA contract
is ‘far more onerous than the conventional loan with riba’, used
the facts in Bank Islam Malaysia Berhad v Adnan bin Omar
[1994] 3 CLJ 735 (Adnan bin Omar), as the starting point. In
that case, the bank was also BIMB, had granted the customer a
facility amounted to RM583,000.00. It involved three
simultaneous transactions, namely:-
(i) On 2 March 1984, the customer sold to BIMB a price of
land for RM265,000.00 which sum was duly paid to him;
(ii) On the same date, BIMB resold the same piece of land to
the customer for RM583,000.00 which amount was to be
paid by the customer in 180 monthly installments;
(iii) Also on the same date, the said land was charged to
BIMB by the customer as security for the debt of
RM583,000.00.
23. Using the facts in Adnan bin Omar, the learned Judge
concluded by stating that the customer ‘who had sought and
obtained an Islamic financing facility of RM265,000.00 ended
up, when he defaulted not long after, with liability of
RM583,000.00. This, according to the learned Judge had
resulted in the customer being liable to an amount far higher
than he would have been liable to in a conventional loan with
interest. He then pointed out that if a conventional loan must
be avoided because of the prohibition of “riba” or interest,
surely the alternative must result in a consequence that is less
burdensome than a default in the conventional loan with
prohibited interest. He continued in the following words:
“But it is equally evident in this case that the result
of what is presented as the application of the Quran
principle is that the defendant became liable, upon
default at any time, to an amount that is 2.2 times
the facility he obtained. It could hardly have been
intended by these words in the Surah Al-Baqarah
that an Islamic financing facility should result in
consequences for more onerous than the
conventional loan with “riba” that is prohibited and
unequivocally condemned. One might pause and
observe that the harshness of usury is hardest upon
those who default, and much less so, if at all, upon
those fortunate enough to be able to service the
loan successfully. The Qur’an could hardly have
intended that its followers, faithfully and trustingly
seeking an Islamic compliant facility, should be
delivered to those who offer what appear to be
perfectly Islamic compliant facilities, but upon a
default, had an interpretation applied that imposes a
far more onerous liability than the conventional loan
with interest. It is difficult to conceive that the
Religion of Islam intended to discourage its
followers from the conventional loan with interest,
condemn lenders for such loans, and deliver its
followers into the bands of banks and financiers
who under sale agreements with deferred
payments, exact upon default, payments far
exceeding the liability upon default of a conventional
loan with interest. One cannot say that the Religion
of Islam is so much more concerned with form than
substance as would sustain the bank’s
interpretation of “selling price”.”
24. We have no hesitation in accepting that riba’ or interest is
prohibited in Islam. But the issue at hand is whether such
comparison between a BBA contract and conventional loan
agreement was appropriate. With respect, we do not think so.
This is because the two instruments of financing are not alike
and have different characteristics. BBA contract is a sale
agreement whereas a conventional loan agreement is a money
lending transaction. The profit in BBA contract is different from
interest arising in a conventional loan transaction. The two
transactions are diversely different and indeed diametrically
opposed.
25. Thus, the learned Judge was plainly wrong when he equated
the profit earned by BIMB as being similar to riba’ or interest.
The two cannot be similar as BBA contract is in fact a trade
transaction. It is a transaction between the customer and the
bank. In such transaction, there is a purchase agreement and
a separate sale agreement between the customer and the
bank.
26. Further, the comparison between BBA contract and
conventional loan agreement is of no relevance. It serves no
purpose as the law applicable in BBA contract is no different
from the law that is applicable in a conventional loan
agreement. Abdul Hamid JCA (as he then was) in the case of
Bank Kerjasama Rakyat Malaysia v Emcee Corporation
Sdn Bhd [2003] 1 CLJ 625, dealing with Islamic banking
facility said:
“As was mentioned at the beginning of this
judgment the facility is an Islamic banking facility.
But that does not mean that the law applicable in
this application is different from the law that is
applicable if the facility were given under the
conventional banking.
The charge is a charge under the National Land
Code. The remedy available and sought is a
remedy under the National Land Code. The
procedure is provided by the Code and Rules of the
High Court 1980. The court adjudicating it is the
High Court. So, it is the same law that is applicable,
the same order that would be, if made, and the
same principles that should be applied in deciding
the application.”
27. Similarly, the law applicable to BBA contracts is no different
from the law applicable to loan given under the conventional
banking. The law is the law of contract and the same principle
should be applied in deciding these cases. Thus, if the contract
is not vitiated by any vitiating factor recognised in law such as
fraud, coercion, undue influence, etc. the court has a duty to
defend, protect and uphold the sanctity of the contract entered
into between the parties.
28. Thus, the learned Judge in coming to the conclusion that BBA
contract is in fact a loan agreement and consequently by:
(a) replacing the sale price under the Property Purchase
Agreement with an “equitable interpretation” of the same;
and
(b) substituting the obligation of customer to pay the sale
price with a “loan amount” and “profit” computed on a
daily basis, as he expounded in Affin Bank Bhd. v Zulkifli Abdullah
(Supra), was in fact rewriting the contract for the parties. It is
trite law that the Court should not rewrite the terms of the
contract between the parties that it deems to be fair or
equitable. This principles has been clearly expressed in
numerous cases. (See Shell Malaysia Trading Sdn. Bhd. v
Lim Yee Teck & Ors [1982] 2 MLJ 181; Wong Pa Hock v
American International Assurance [2002] 2 CLJ 267; M.
Paikan v Y.P Devathanjam [1952] MLJ 58; and Charter
Reinsurance Co. Ltd. v Fagai [1996] 3 All ER 46.
BBA contract not acceptable by all the 4 Mazhabs and thus
not acceptable in the Religion of Islam
29. The learned Judge acknowledged the fact that cases involving
Islamic financing in this country remain within the Federal
Legislative jurisdiction, and such cases are brought in the Civil
Courts and not the Syariah Courts. He also acknowledged that
no legislation in the form of Islamic laws has been legislated for
trade and financing based upon Islamic principles. But the
learned Judge took issue on the definition of ‘Islamic banking
business’ in section 2 of the Islamic Banking Act 1983 which
reads:
“’Islamic banking business’ means banking
business whose aims and operations do not involve
any element which is not approved by the Religion
of Islam.”
30. The learned Judge in interpreting the above definition stated as
follows:
“If a facility is to be offered as Islamic to Muslims
generally, regardless of their mazhab, then the test
to be applied by a civil court must logically be that
there is no element not approved by the Religion of
Islam under the interpretation of any of the
recognised mazhabs. That it is acceptable to one
mazhab is not sufficient to say it is acceptable in the
Religion of Islam when it is not accepted by the
other mazhabs.”
31. With utmost respect, the learned Judge had misinterpreted the
meaning of “do not involve any element which is not approved
by the Religion of Islam”. First, under section 2 of the Islamic
Banking Act 1983, “Islamic banking business” does not mean
banking business whose aims and operations are approved by
all the four mazhabs. Secondly, we do not think the Religion of
Islam is confined to the four mazhabs alone as the sources of
Islamic law are not limited to the opinions of the four imams and
the schools of jurisprudence named after them. As we all
know, Islamic law is derived from the primary sources i.e. the
Holy Quran and the Hadith and secondary sources. There are
other secondary sources of Islamic law in addition to the
jurisprudence of the four mazhabs.
32. In this respect, it is our view that judges in civil court should not
take upon themselves to declare whether a matter is in
accordance to the Religion of Islam or otherwise. As rightly
pointed out by Suriyadi J (as he then was) in Arab-Malaysian
Merchant Bank Bhd [2005] 5 MLJ 210 that in the civil court
‘not every presiding judge is a Muslim, and even if so, may not
be sufficiently equipped to deal with matters, which ulamak take
years to comprehend’. Thus, whether the bank business is in
accordance with the Religion of Islam, it needs consideration by
eminent jurists who are properly qualified in the field of Islamic
jurisprudence.
33. This issue is in fact addressed in the Islamic Banking Act 1983.
To ensure that the operation of the banking business of an
Islamic bank is in accordance to the Religion of Islam, Section
3(5) provides that the Central Bank i.e. the Bank Negara
Malaysia shall not to recommend the grant of an Islamic
banking licence, and the Minister shall not to 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 Syariah 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.”
34. Thus, it is a requirement for any Islamic bank to establish a
Syariah advisory body to advise the bank and to ensure the
operations of its banking business do not involve any element
which is not approved by the Religion of Islam. In fact, in 2003,
a single Syariah Advisory Council was established through an
amendment of the Central Banking of Malaysia Act 1958.
Section 16B of the Central Bank of Malaysia Act 1958
established the central Syariah Advisory Council under the
aegis of Bank Negara Malaysia. With the amendment, the
single Syariah Advisory Council became “the authority for the
ascertainment of Islamic law for the purpose of Islamic banking
business, takaful business, Islamic financing business, Islamic
development financial business or any other business which is
based on Syariah principles”. Section 16B(2) of the Act
provides for the membership of the Syariah Advisory Council.
With the establishment of the single Syariah Advisory Council,
the Islamic Banking Act 1983, had been amended accordingly.
It provides as follows:
“Advice of Syariah Advisory Council
13A. (1) An Islamic bank may seek the advice of
the Syariah Advisory Council on Syariah matters
relating to its banking business and the Islamic bank
shall comply with the advice of the Syariah Advisory
Council.
(2) In this section, “Syariah Advisory Council”
means the Syariah Advisory Council established
under sub-section 16B(1) of the Central Bank of
Malaysia Act 1958.”
35. Thus, we already have the legal infrastructure to ensure that
the Islamic banking undertaken by the banks in this country
does not involve any element which is not approved by the
Religion of Islam. The court, will have to assume that the
Syariah advisory body of the individual bank and now the
Syariah Advisory Council under the aegis of Bank Negara
Malaysia, would have discharged their statutory duty to ensure
that the operation of the Islamic banks are within the ambit of
the Religion of Islam. This is more so, when the customers in
these appeals have not made any allegations that the Syariah
advisory body of BIMB or the Syariah Advisory Council
established by the Bank Negara had failed to exercise their
statutory duties. Thus, the learned Judge, with respect, should
not have taken upon himself to rule that the BBA contracts were
contrary to the Religion of Islam without having any regard to
the resolutions of the Syariah Advisory Council of the Central
Bank Malaysia and the Syariah Advisory body of BIMB on the
validity of BBA contracts.
36. In any event, the questions raised by the learned Judge on the
validity and enforceability of the BBA contracts, is not novel. It
had been raised in previous cases and had been ruled upon. In
Adnan bin Omar b Bank Islam Malaysia Berhad(unreported), the Supreme Court upheld the validity and enforceability of the BBA contract. In that case, the Supreme
Court accepted as correct and affirmed the judgment of Ranita
Hussein JC. Subsequently, the validity and the enforceability of
BBA contracts was again decided by this court in Datuk Hj. Nik
Mahmud Nik Daud v Bank Islam Malaysia Berhad [1998] 3
CLJ 605, and Bank Kerjasama Rakyat Malaysia Berhad v
Emcee Corporation Sdn Bhd (Supra).
37. In Dato’ Hj. Nik Mahmud Nik Daud, the customer argued that
the Property Purchase Agreement and the Property Sale
Agreement and the land charges based on them were null and
void. Both the High Court and the Court of Appeal disagreed
with the contention and granted the order of sale for the full
outstanding balance of the bank’s selling price. In Emcee
Corporation Sdn. Bhd., the validity and enforceability of the
BBA contract was again challenged. The High Court at
Seremban refused to grant the order for sale on the
construction of a term in the agreement. On appeal, the Court
of Appeal reversed the judgment of the High Court and granted
the order. An application for leave to appeal to the Federal
Court by the customer was refused by the Federal Court.
38. From the above cases, it is clear that the validity and
enforceability of the BBA contract had been ruled upon by the
superior courts. It is trite law that based on the doctrine of stare
decisis, a decision of a superior court is binding on all courts
below it. The importance of this principle must not be taken
lightly. In this regard, we can do no better than be guided by
the wise words of Steve Shim CJ (Sabah & Sarawak) in Tan
Heng Chew v Tan Kim Hor [2006] 2 MLJ 293:-
"It is axiomatic to state that the doctrine of stare
decisis has become the cornerstone of the common
law system practised in this country. It is
fundamental to its existence and to the rule of law.
It has attained to status of immutability”.
His Lordship further stated that:-
“Judicial hierarchy must be observed in the interest
of finality and certainty in the law and for orderly
development of legal rules as well as for the courts
and lawyers to regulate their affairs. Failure to
observe judicial precedents would create chaos and
misapprehensions in the judicial system”.
39. In light of the above the learned Judge ought to have held
himself bound by those decisions. He cannot simply ignore or
disregard the decisions of the Supreme Court or the Court of
Appeal. To do so, as pointed by Steve Shim CJ (Sabah &
Sarawak) would create chaos and misapprehensions in the
judicial system.
40. In conclusion, it is our view that the High Court judgment was
manifestly wrong and must be set-aside. Accordingly, we
allowed the 9 appeals with costs here and the court below. The
orders of the learned Judge are therefore set-aside. We
ordered the respective cases to be sent back to the High Court
to be heard on its merit. We also order that the deposits of
these appeals are to be refunded to BIMB.
Dated this 26th day of August 2009.
Raus Sharif
Judge
Court of Appeal Malaysia
Counsel for the appellant: En. Mohamed Ismail Shariff
En. Oommen Koshy
En. Mohd Arief Emran
(BIDANG KUASA RAYUAN)
RAYUAN SIVIL NO. W-02-957-2008
ANTARA
BANK ISLAM MALAYSIA BERHAD
(NO. SYARIKAT: 98127-X) … PERAYU
DAN
1. GHAZALI BIN SHAMSUDDIN
2. MOKHTAR BIN SHAMSUDIN
3. KAMARUDIN BIN SAMSUDIN … RESPONDENRESPONDEN
Coram: Raus Sharif, J.C.A.
Abdull Hamid Embong, J.C.A.
Ahmad Maarop, J.C.A.
JUDGMENT OF THE COURT
1. On 18 July 2008, the Kuala Lumpur High Court delivered a
common judgment for 12 cases concerning Islamic financing
which sent shock waves to the Islamic banking industry. The
learned Judge declared that the Bai Bithaman Ajil (“BBA”)
contract, a financial instrument in Islamic financing, which had
been in existence and practised in this country for the past 25
years was contrary to the Religion of Islam.
2. The plaintiff in the respective 12 cases was Bank Islam
Malaysia Berhad (“BIMB”). BIMB is an Islamic bank licensed
under the Islamic Banking Act 1983 and thus authorised to
carry on Islamic banking business. The defendants were
BIMB’s customers.
3. What had happened was this. Prior to the delivering of the
common judgment, the learned Judge had instructed counsel
appearing in the 12 cases which were pending before him, to
file their respective written submissions.
4. The written submissions were duly filed but counsel were not
called upon to appear before the learned Judge to make oral
submissions or provide clarification of their written submissions.
From the written submissions the common judgment for the 12
cases was delivered by the learned Judge.
5. In the common judgment, the learned Judge did not deal with
the particular facts of the individual cases. What he had done
was to discuss and make decisions regarding, in the learned
judge’s own words ‘the basic principles concerning Islamic
financing’. At the end of it, he concluded that the BBA contracts
were contrary to basic principles of Islam.
6. In his ruling, the learned Judge had grouped the BBA contracts
into two categories: those where there was a novation
agreement and those where there was none. In those where
there was a novation agreement he further subdivided it with
two sub-categories: those where the financing had expired and
those where it is still ongoing. For those where the financing
period had expired, the claim by BIMB was allowed in full. For
those where the financing period is still ongoing and had not
expired, he ruled that the amount claim was excessive and
unfair. He applied the ‘equitable’ interpretation of the sale price
as he had interpreted in his earlier judgment in the case of
Affin Bank Bhd. v Zulkifli Abdullah [2006] 1 CLJ 438.
7. What had happened in Affin Bank Bhd. v Zulkifli Abdullah
(Supra) was this. Zulkifli Abdullah obtained a secured housing
loan of RM394,172.06 from the Affin Bank Bhd under the BBA
in 1997. Zulkifli Abdullah defaulted the loan in 2002 after
paying RM33,454.19 to the bank. Affin Bank Bhd then claimed
from Zulkifli Abdullah the full sale price of RM958,909.21,
inclusive of the plaintiff’s profit margin for the full term of the
loan. Affin Bank Bhd also applied for an order for sale of the
changed property. Zulkifli however challenged the amount
claimed. The learned Judge held:
(1) If the customer is required to pay the profit for
the full tenure, he is entitled to have the
benefit of the full tenure. It follows that it
would be inconsistent with his right to the full
tenure if he could be denied the tenure and
yet be required to pay the bank’s profit margin
for the full tenure. To allow the bank to also
be able to earn for the unexpired tenure of the
facility, means the bank is able to earn a profit
twice upon the same sum at the same time.
(2) The profit margin that continued to be charged
on the unexpired part of the tenure cannot be
actual profit. It was clearly unearned profit. It
contradicted the principle of Al-Bai Bithaman
Ajil as to the profit margin that the provider
was entitled to. Obviously, if the profit had not
been earned it was not profit, and should not
be claimed under the Al-Bai Bithaman Ajil
facility.
(3) The profit margin could be calculated and
derived with certainty. Even if the tenure was
shortened, the profit margin could be
recalculated with equal certainty. The total
due on the date of the judgment was
RM616,080.99 and after crediting the
defendant with all the payments he has made
of RM33,454.19, the balance due on the date
of judgment was RM582,626.80.
(4) Once it was established that there had been a
default, then unless there was cause to the
contrary, the order for sale must be given
since a charge is an ad rem right to dispose of
the security to recover a secured debt.
8. The learned Judge then proceeded to determine the actual
amount due to the plaintiff in the following manner:
“Balance Due 29 December 2005
According to the calculation placed before the court
for the bank, the bank profit at the agreed profit rate
of 9% per annum on RM394,172.06 is RM35,475.49
per annum or RM35,475.49/12 = RM2,956.29 per
month or on a 360 day 20 year basis as agreed,
RM98.54 per day. Between 1 November 1999 to
the date of judgment on 29 December 2005 is a
period of 74 months less 2 days. The profit, by
simple arithmetic since the payments meantime is
not very significant, for 74 months less 2 days is
RM218,767.49. As agreed the bank is also entitled
to penalty of RM3,141.44 as on today. Added to the
bank purchase price of RM349,172.06 the total due
on the date of judgment is RM616,080.99. After
crediting the defendant with all the payments he had
made RM33,454.19, the balance due on the date of
judgment is RM582,626.80. The bank is also
entitled to profit per day here after full payment at
RM2,956/30 = RM98.54.”
9. It can be seen from the case cited above that an Islamic bank
could only recover the balance of the principal of the facility
plus profit on the balance principal calculated at a daily rate
until payment.
10. The learned Judge further ruled that for those contracts, where
there was no novation agreement, the agreement was in fact a
loan agreement. And, since interest is prohibited in Islam,
BIMB could only recover the principal sum advanced pursuant
to section 66 of the Contract Act 1950.
11.Issues and Findings
12. After hearing the parties, we unanimously allowed the BIMB’s
respective appeals. We now give our reasons.
13. The 9 appeals involved BBA contracts. Thus, in order to
understand the decision and reasoning of the learned Judge, it
is necessary to set out briefly the nature and essential features
of a BBA contract.
14. A BBA contract is a financial instrument in Islamic banking. It is
the most common form of transaction being used in Islamic
banking in this country. Basically, a BBA contract is a deferred
payment sale contract. It is used to finance bank’s customers
to purchase and own properties or assets. It involves two
distinct contracts, one a Property Purchase Agreement and
also a Property Sale Agreement.
15. In a typical BBA contract, the customer will first sell the property
or asset to the bank under the Property Purchase Agreement.
The bank’s purchase price would be the amount required by the
customer. That sum is called the facility amount or the
financing amount. It is also described as the bank’s purchase
price.
16. The sale is a cash sale. The bank has to pay the purchase
price to the customer immediately upon the completion of the
documentation process. But in most cases, where a customer
had entered into a Sale and Purchase Agreement with a
developer to purchase a house, and therefore needs financing,
the bank and the customer would mutually agree that the bank
shall release the amount (the bank’s purchase price) to the
developer in stages against progress payment certificates.
17. With that purchase, the property belongs to the bank. But, the
customer is to buy it back from the bank and he will only be
able to pay the price over a period of years. The bank will sell
but the sale price will not be the same amount as the bank’s
purchase price. The sale price will include the bank’s profit on
the sale, which will later be calculated and added to the
purchase price. The total amount is now the sale price. In
effect, the bank will sell the very same property it has
purchased from the customer to him at a selling price under the
Property Sale Agreement. The customer then will pay the
bank’s selling price over a period of years by monthly
installments. At that point the customer becomes the owner of
the property again.
18. To illustrate the BBA contract, we will refer to the facts in Civil
Appeal No. W-02-918-2008. In that case the customer applied
to BIMB for a financing facility to purchase a property known as
Unit B10-3 Jenis Excelsa, Taman Universiti Indah, Fasa 111C
(“the Property”). BIMB purchased the property from the
customer pursuant to a Property Purchase Agreement dated 16
October 1996 for a purchase price of RM145,800.00. On the
same date BIMB sold the property to the customer pursuant to
a Property Sale Agreement for a sale price of RM450,954.00.
Again on the same date, the customer executed a deed of
assignment in favour of the BIMB to secure the payment of the
sale price. The sale price was to be paid by the customer by
360 monthly instalments of RM1,252.65 per month. The
customer had paid the sum of RM105,556.13 before he
defaulted in the payment of the sale price. The balance sale
price due was the sum of RM370,425.05. That was the sum
claimed by BIMB from the customer.
19. The above illustration clearly demonstrates that in a BBA
contract the sales took place immediately both pursuant to the
Property Purchase Agreement and the Property Sale
Agreement, so that when the Property Sale Agreement was
entered into, the customer becomes the owner of the property
immediately. What was deferred was the payment of the
BIMB’s selling price by the customer to the BIMB.
20. The above illustration also demonstrates that in BBA contract,
the Property Purchase Agreement and the Property Sale
Agreement completed the BBA transaction. But, invariably the
bank will require security from the customer for the payment of
the bank’s selling price. If a separate title to the property has
been issued, the customer will create a charge in favour of the
bank. If a separate title has not been issued, the customer will
execute a deed of assignment by way of security. However, it
should be noted that the charge or assignment is not part of the
BBA transaction. It is a security arrangement. Even without
the charge or assignment the BBA contract will be completed.
21. The learned Judge in his common judgment questioned the
validity and enforceability of the BBA contracts on two main
grounds. First, he found the BBA contract was ‘far more
onerous than the conventional loan with riba’ which is
prohibited and unequivocally condemned in Islam. Second, he
found that the BBA contract practised in this country is not
acceptable by all the 4 Mazhabs in Islam. He ruled that BBA
contract is only acceptable to one Mazhab, and this is not
sufficient to say that it is approved by the Religion of Islam
which is a requirement under section 2 of the Islamic Banking
Act 1983.
BBA contract ‘far more onerous than the conventional loan
with riba’
22. The learned Judge in advancing his view that the BBA contract
is ‘far more onerous than the conventional loan with riba’, used
the facts in Bank Islam Malaysia Berhad v Adnan bin Omar
[1994] 3 CLJ 735 (Adnan bin Omar), as the starting point. In
that case, the bank was also BIMB, had granted the customer a
facility amounted to RM583,000.00. It involved three
simultaneous transactions, namely:-
(i) On 2 March 1984, the customer sold to BIMB a price of
land for RM265,000.00 which sum was duly paid to him;
(ii) On the same date, BIMB resold the same piece of land to
the customer for RM583,000.00 which amount was to be
paid by the customer in 180 monthly installments;
(iii) Also on the same date, the said land was charged to
BIMB by the customer as security for the debt of
RM583,000.00.
23. Using the facts in Adnan bin Omar, the learned Judge
concluded by stating that the customer ‘who had sought and
obtained an Islamic financing facility of RM265,000.00 ended
up, when he defaulted not long after, with liability of
RM583,000.00. This, according to the learned Judge had
resulted in the customer being liable to an amount far higher
than he would have been liable to in a conventional loan with
interest. He then pointed out that if a conventional loan must
be avoided because of the prohibition of “riba” or interest,
surely the alternative must result in a consequence that is less
burdensome than a default in the conventional loan with
prohibited interest. He continued in the following words:
“But it is equally evident in this case that the result
of what is presented as the application of the Quran
principle is that the defendant became liable, upon
default at any time, to an amount that is 2.2 times
the facility he obtained. It could hardly have been
intended by these words in the Surah Al-Baqarah
that an Islamic financing facility should result in
consequences for more onerous than the
conventional loan with “riba” that is prohibited and
unequivocally condemned. One might pause and
observe that the harshness of usury is hardest upon
those who default, and much less so, if at all, upon
those fortunate enough to be able to service the
loan successfully. The Qur’an could hardly have
intended that its followers, faithfully and trustingly
seeking an Islamic compliant facility, should be
delivered to those who offer what appear to be
perfectly Islamic compliant facilities, but upon a
default, had an interpretation applied that imposes a
far more onerous liability than the conventional loan
with interest. It is difficult to conceive that the
Religion of Islam intended to discourage its
followers from the conventional loan with interest,
condemn lenders for such loans, and deliver its
followers into the bands of banks and financiers
who under sale agreements with deferred
payments, exact upon default, payments far
exceeding the liability upon default of a conventional
loan with interest. One cannot say that the Religion
of Islam is so much more concerned with form than
substance as would sustain the bank’s
interpretation of “selling price”.”
24. We have no hesitation in accepting that riba’ or interest is
prohibited in Islam. But the issue at hand is whether such
comparison between a BBA contract and conventional loan
agreement was appropriate. With respect, we do not think so.
This is because the two instruments of financing are not alike
and have different characteristics. BBA contract is a sale
agreement whereas a conventional loan agreement is a money
lending transaction. The profit in BBA contract is different from
interest arising in a conventional loan transaction. The two
transactions are diversely different and indeed diametrically
opposed.
25. Thus, the learned Judge was plainly wrong when he equated
the profit earned by BIMB as being similar to riba’ or interest.
The two cannot be similar as BBA contract is in fact a trade
transaction. It is a transaction between the customer and the
bank. In such transaction, there is a purchase agreement and
a separate sale agreement between the customer and the
bank.
26. Further, the comparison between BBA contract and
conventional loan agreement is of no relevance. It serves no
purpose as the law applicable in BBA contract is no different
from the law that is applicable in a conventional loan
agreement. Abdul Hamid JCA (as he then was) in the case of
Bank Kerjasama Rakyat Malaysia v Emcee Corporation
Sdn Bhd [2003] 1 CLJ 625, dealing with Islamic banking
facility said:
“As was mentioned at the beginning of this
judgment the facility is an Islamic banking facility.
But that does not mean that the law applicable in
this application is different from the law that is
applicable if the facility were given under the
conventional banking.
The charge is a charge under the National Land
Code. The remedy available and sought is a
remedy under the National Land Code. The
procedure is provided by the Code and Rules of the
High Court 1980. The court adjudicating it is the
High Court. So, it is the same law that is applicable,
the same order that would be, if made, and the
same principles that should be applied in deciding
the application.”
27. Similarly, the law applicable to BBA contracts is no different
from the law applicable to loan given under the conventional
banking. The law is the law of contract and the same principle
should be applied in deciding these cases. Thus, if the contract
is not vitiated by any vitiating factor recognised in law such as
fraud, coercion, undue influence, etc. the court has a duty to
defend, protect and uphold the sanctity of the contract entered
into between the parties.
28. Thus, the learned Judge in coming to the conclusion that BBA
contract is in fact a loan agreement and consequently by:
(a) replacing the sale price under the Property Purchase
Agreement with an “equitable interpretation” of the same;
and
(b) substituting the obligation of customer to pay the sale
price with a “loan amount” and “profit” computed on a
daily basis, as he expounded in Affin Bank Bhd. v Zulkifli Abdullah
(Supra), was in fact rewriting the contract for the parties. It is
trite law that the Court should not rewrite the terms of the
contract between the parties that it deems to be fair or
equitable. This principles has been clearly expressed in
numerous cases. (See Shell Malaysia Trading Sdn. Bhd. v
Lim Yee Teck & Ors [1982] 2 MLJ 181; Wong Pa Hock v
American International Assurance [2002] 2 CLJ 267; M.
Paikan v Y.P Devathanjam [1952] MLJ 58; and Charter
Reinsurance Co. Ltd. v Fagai [1996] 3 All ER 46.
BBA contract not acceptable by all the 4 Mazhabs and thus
not acceptable in the Religion of Islam
29. The learned Judge acknowledged the fact that cases involving
Islamic financing in this country remain within the Federal
Legislative jurisdiction, and such cases are brought in the Civil
Courts and not the Syariah Courts. He also acknowledged that
no legislation in the form of Islamic laws has been legislated for
trade and financing based upon Islamic principles. But the
learned Judge took issue on the definition of ‘Islamic banking
business’ in section 2 of the Islamic Banking Act 1983 which
reads:
“’Islamic banking business’ means banking
business whose aims and operations do not involve
any element which is not approved by the Religion
of Islam.”
30. The learned Judge in interpreting the above definition stated as
follows:
“If a facility is to be offered as Islamic to Muslims
generally, regardless of their mazhab, then the test
to be applied by a civil court must logically be that
there is no element not approved by the Religion of
Islam under the interpretation of any of the
recognised mazhabs. That it is acceptable to one
mazhab is not sufficient to say it is acceptable in the
Religion of Islam when it is not accepted by the
other mazhabs.”
31. With utmost respect, the learned Judge had misinterpreted the
meaning of “do not involve any element which is not approved
by the Religion of Islam”. First, under section 2 of the Islamic
Banking Act 1983, “Islamic banking business” does not mean
banking business whose aims and operations are approved by
all the four mazhabs. Secondly, we do not think the Religion of
Islam is confined to the four mazhabs alone as the sources of
Islamic law are not limited to the opinions of the four imams and
the schools of jurisprudence named after them. As we all
know, Islamic law is derived from the primary sources i.e. the
Holy Quran and the Hadith and secondary sources. There are
other secondary sources of Islamic law in addition to the
jurisprudence of the four mazhabs.
32. In this respect, it is our view that judges in civil court should not
take upon themselves to declare whether a matter is in
accordance to the Religion of Islam or otherwise. As rightly
pointed out by Suriyadi J (as he then was) in Arab-Malaysian
Merchant Bank Bhd [2005] 5 MLJ 210 that in the civil court
‘not every presiding judge is a Muslim, and even if so, may not
be sufficiently equipped to deal with matters, which ulamak take
years to comprehend’. Thus, whether the bank business is in
accordance with the Religion of Islam, it needs consideration by
eminent jurists who are properly qualified in the field of Islamic
jurisprudence.
33. This issue is in fact addressed in the Islamic Banking Act 1983.
To ensure that the operation of the banking business of an
Islamic bank is in accordance to the Religion of Islam, Section
3(5) provides that the Central Bank i.e. the Bank Negara
Malaysia shall not to recommend the grant of an Islamic
banking licence, and the Minister shall not to 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 Syariah 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.”
34. Thus, it is a requirement for any Islamic bank to establish a
Syariah advisory body to advise the bank and to ensure the
operations of its banking business do not involve any element
which is not approved by the Religion of Islam. In fact, in 2003,
a single Syariah Advisory Council was established through an
amendment of the Central Banking of Malaysia Act 1958.
Section 16B of the Central Bank of Malaysia Act 1958
established the central Syariah Advisory Council under the
aegis of Bank Negara Malaysia. With the amendment, the
single Syariah Advisory Council became “the authority for the
ascertainment of Islamic law for the purpose of Islamic banking
business, takaful business, Islamic financing business, Islamic
development financial business or any other business which is
based on Syariah principles”. Section 16B(2) of the Act
provides for the membership of the Syariah Advisory Council.
With the establishment of the single Syariah Advisory Council,
the Islamic Banking Act 1983, had been amended accordingly.
It provides as follows:
“Advice of Syariah Advisory Council
13A. (1) An Islamic bank may seek the advice of
the Syariah Advisory Council on Syariah matters
relating to its banking business and the Islamic bank
shall comply with the advice of the Syariah Advisory
Council.
(2) In this section, “Syariah Advisory Council”
means the Syariah Advisory Council established
under sub-section 16B(1) of the Central Bank of
Malaysia Act 1958.”
35. Thus, we already have the legal infrastructure to ensure that
the Islamic banking undertaken by the banks in this country
does not involve any element which is not approved by the
Religion of Islam. The court, will have to assume that the
Syariah advisory body of the individual bank and now the
Syariah Advisory Council under the aegis of Bank Negara
Malaysia, would have discharged their statutory duty to ensure
that the operation of the Islamic banks are within the ambit of
the Religion of Islam. This is more so, when the customers in
these appeals have not made any allegations that the Syariah
advisory body of BIMB or the Syariah Advisory Council
established by the Bank Negara had failed to exercise their
statutory duties. Thus, the learned Judge, with respect, should
not have taken upon himself to rule that the BBA contracts were
contrary to the Religion of Islam without having any regard to
the resolutions of the Syariah Advisory Council of the Central
Bank Malaysia and the Syariah Advisory body of BIMB on the
validity of BBA contracts.
36. In any event, the questions raised by the learned Judge on the
validity and enforceability of the BBA contracts, is not novel. It
had been raised in previous cases and had been ruled upon. In
Adnan bin Omar b Bank Islam Malaysia Berhad(unreported), the Supreme Court upheld the validity and enforceability of the BBA contract. In that case, the Supreme
Court accepted as correct and affirmed the judgment of Ranita
Hussein JC. Subsequently, the validity and the enforceability of
BBA contracts was again decided by this court in Datuk Hj. Nik
Mahmud Nik Daud v Bank Islam Malaysia Berhad [1998] 3
CLJ 605, and Bank Kerjasama Rakyat Malaysia Berhad v
Emcee Corporation Sdn Bhd (Supra).
37. In Dato’ Hj. Nik Mahmud Nik Daud, the customer argued that
the Property Purchase Agreement and the Property Sale
Agreement and the land charges based on them were null and
void. Both the High Court and the Court of Appeal disagreed
with the contention and granted the order of sale for the full
outstanding balance of the bank’s selling price. In Emcee
Corporation Sdn. Bhd., the validity and enforceability of the
BBA contract was again challenged. The High Court at
Seremban refused to grant the order for sale on the
construction of a term in the agreement. On appeal, the Court
of Appeal reversed the judgment of the High Court and granted
the order. An application for leave to appeal to the Federal
Court by the customer was refused by the Federal Court.
38. From the above cases, it is clear that the validity and
enforceability of the BBA contract had been ruled upon by the
superior courts. It is trite law that based on the doctrine of stare
decisis, a decision of a superior court is binding on all courts
below it. The importance of this principle must not be taken
lightly. In this regard, we can do no better than be guided by
the wise words of Steve Shim CJ (Sabah & Sarawak) in Tan
Heng Chew v Tan Kim Hor [2006] 2 MLJ 293:-
"It is axiomatic to state that the doctrine of stare
decisis has become the cornerstone of the common
law system practised in this country. It is
fundamental to its existence and to the rule of law.
It has attained to status of immutability”.
His Lordship further stated that:-
“Judicial hierarchy must be observed in the interest
of finality and certainty in the law and for orderly
development of legal rules as well as for the courts
and lawyers to regulate their affairs. Failure to
observe judicial precedents would create chaos and
misapprehensions in the judicial system”.
39. In light of the above the learned Judge ought to have held
himself bound by those decisions. He cannot simply ignore or
disregard the decisions of the Supreme Court or the Court of
Appeal. To do so, as pointed by Steve Shim CJ (Sabah &
Sarawak) would create chaos and misapprehensions in the
judicial system.
40. In conclusion, it is our view that the High Court judgment was
manifestly wrong and must be set-aside. Accordingly, we
allowed the 9 appeals with costs here and the court below. The
orders of the learned Judge are therefore set-aside. We
ordered the respective cases to be sent back to the High Court
to be heard on its merit. We also order that the deposits of
these appeals are to be refunded to BIMB.
Dated this 26th day of August 2009.
Raus Sharif
Judge
Court of Appeal Malaysia
Counsel for the appellant: En. Mohamed Ismail Shariff
En. Oommen Koshy
En. Mohd Arief Emran
Comments