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Ismail: ‘Time for banks to study BBA further’

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Points of Essence:

  • There have been concerns on the implication of the recent judicial pronouncements on the BBA financing facility in Malaysia, thusfar, two related seminars were organized by ZICO and Skrine, respectively. ZICO and Skrine are among the biggest legal firms in Malaysia. During the seminars, Islamic banking practitioners called for alternative financing methods such as musharakah mutanaqqisah and the ijarah muntahiyyah bit tamleek to avoid the repercussions of the current judgment against the BBA.

By Habhajan Singh
The recent High Court judgments on Al-Bai’ Bithaman Ajil (BBA) will have serious implications if it is held by the higher courts as representing the correct view in law of the BBA transaction, says a local lawyer familiar with Islamic finance transactions.

Lawyer Mohamed Ismail Shariff, who recently joined as a partner at a local law firm, Skrine & Co, said that the effects of the July 18 written judgments by High Court judge Justice Datuk Abdul Wahab Patail will reverberate across the Islamic financing industry in Malaysia.

However, Mohamed Ismail, who has been appointed by Bank Islam Malaysia Bhd as lead the counsel for the appeal against the High Court judgment, is confident that the higher courts will decide otherwise.

“The goodness of the judgment that was discussed here is not in its actual decision but more in the terms of the alarm it has caused among the local Islamic banks.

“That alarm should serve as a wake-up call and propel Islamic banks towards a more dynamic and proactive approach aimed at the greater excellence in all aspects of Islamic banking and practice,” he told participants at the Islamic Banking and Finance Institute Malaysia (Ibfim) seminar on Tuesday in relation to the impact of Justice Abdul Wahab’s ruling.

This is the second seminar on the topic in weeks. Last week, Zaid Ibrahim & Co, Malaysia’s largest law firm, had organised another session. In a 54-page judgement, in the Arab-Malaysian Finance Bhd vs Taman Ihsan Jaya Sdn Bhd and other cases, Justice Abdul Wahab ruled that the application of the BBA contracts before the court were contrary to the Islamic Banking Act 1983 (Iba).

He noted that the sale element in the BBA is “not a bona fide sale”, bringing into question the profit portion of the facility.

In the written judgement, the judge ruled that since some BBA contracts were structurally faulty, defaulters need not pay more than the original financing amount that they received, depriving banks of the profit they would have otherwise booked from the transaction.

Bankers fear that this judgement could mean that current BBA financing clients would only need to pay the facility amount and would escape from paying the profit portion.

In relation to the BBA contract, Rafe said the contemporary BBA is based on the classical murabaha contract (which is a simple supplier’s credit sale, for example, when a customer buys a radio on credit terms). Mohamed Ismail said this is an opportunity for the banks to study the BBA contract critically to determine its suitability as a home financing contract.

In his conclusion, Mohamed Ismail noted that there are earlier cases on BBA transactions that have recognised them as valid and therefore allowing banks to claim the outstanding balance of the sale price, subject, of course, to the granting of the ibra by the bank for an early recovery or settlement.
“With respect, the present judgment runs counter to those judgments,” he said, adding that the present judgment, being a High Court judgment, is not binding on other High Court judges.

“There are still two tiers available in the appeal process, the Court of Appeal and the Federal Court. It is my respectful opinion that the judgment will be reversed on appeal,” he said.

Ismail also took the opportunity to highlight that there are other modes of financing, such as the musharakah mutanaqqisah and the ijarah muntahiyyah bit tamleek, which can be explored, studied and modified as it may be necessary to cater to the housing market.

(By Habhajan Singh, The Malaysian Reserve, Oct 24, 2008, Page 9)

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Written by Suapi Shaffaii

October 26, 2008 at 6:13 am

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