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Industry players mixed on High Court judgment on BBA

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Points of Essence:

  • BBA as one of the Islamic finance products designed for home financing is the most contentious product being subject to strict scrutiny by the Malaysian judiciary resulting in varied judgments. Lately, not in favor of the Islamic financial institutions. The latest case ruled that the sale element in the BBA was not a bona fide sale but merely a financing facility, thus in conflict of the Islamic Banking Act 1984.
  • The industry had downplayed the impact of the latest case amid fear that the recent Malaysian court ruling may have impacted the Islamic financial industry in the country. Refusing to restructure the BBA product, the banks maintain their right to claim the money owed by their customers.This is risky considering the likelihood of more similar cases brought to court, with defaulters plead inconsistencies with the Shariah injunctions just to avoid payment to the financial institutions.

by Ellina Badri

KUALA LUMPUR: Industry players are mixed on the impact of a recent High Court ruling that the application of Al-Bai’ Bithaman Ajil (BBA) as an Islamic house financing facility is contrary to the Islamic Banking Act 1983.

Last month, High Court Judge Datuk Abdul Wahab Patail, in a collective judgment for 11 cases involving Bank Islam Malaysia Bhd and Arab-Malaysian Finance Bhd as plaintiffs, had ruled the sale element in the BBA was “not a bona fide sale”.

An industry player told The Edge Financial Daily that the judgment would have no impact on the Islamic banking industry, as it did not affect the banks’ ability to claim money owed by customers.

“My guys are doing a detailed analysis of the judgment, but as far as we’re concerned, it will have no impact whatsoever on the industry, as banks can still claim the money owed by their customers,” the industry player said, disagreeing with the court judgment.

He said the Islamic Banking Act 1983 highlighted that transactions should be carried out according to Islamic principles, and hence the application of BBA by banks, which was not contradictory to Islamic principles, was not contrary to the Act.

“We will not have to restructure our BBA product,” he added.

Monash University Malaysia school of business, director of banking and finance, Professor Bala Shanmugam, however, expected banks to restructure their BBA products following the High Court ruling.

He added that the many interpretations of the application of syariah principles required banks to be innovative while faced with the challenge of competing with conventional banking.

Meanwhile, an industry observer said while Abdul Wahab had made a good point, the solution prescribed was questionable.

In his judgment, Abdul Wahab had said: “This court holds that where the bank purchased directly from its customer and sold back to the customer with deferred payment at a higher price in total, the sale is not a bona fide sale, but a financing transaction, and the profit portion of such Al-Bai’ Bithaman Ajil facility rendered the facility contrary to the Islamic Banking Act 1983 or the Banking And Financial Institutions Act 1989, as the case may be.”

He also said under Section 66 of the Contracts Act 1950, the plaintiffs were entitled to return the original facility amount they had extended.

“Notwithstanding that the properties may, where no title had been issued, have been assigned absolutely to the plaintiffs, by virtue of the fact the assignment was as security, it is equitable that the plaintiffs must seek to obtain a price as close to, if not more than, the market price as possible, and account for the proceeds to the respective defendants,” Abdul Wahab said.


Note: See here for another report.

Written by Suapi Shaffaii

September 16, 2008 at 8:21 pm

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