Saturday, February 20, 2010

Commendable Act but its no saviour

Commendable Act but its no saviour


The Central Bank Act 2009 was gazetted on September 3 2009 to replace and repeal the Central Bank of Malaysia Act 1958. The Act create international history as being the first Central Banking Legislation anywhere in the world to openly declare a nation is operating under a dual financial system, conventional and Islamic. Although acknowledged as the country with the most advance and comprehensive Islamic banking and finance legislation, local players understand the complexity, and I daresay, helplessness of the situation they sometimes find themselves in.
Thrown into the deep end with a barely adequate Islamic Banking Act in 1983, the Islamic bankers, lawyers, and other practitioners were expected to survive on their own, fight for new rules as the case may be, and generally steer the path forward for Islamic Finance with the condition that it comply both with Syariah and every single piece of civil law! One doesn’t need a degree in comparative laws to appreciate the enormity, or as some people argue, the impossibility, of this task. As envisaged in the Quran, Islamic banking is supposed to operate as sole and single system in a riba free environment operating within an Islamic economy, governed by Syariah laws. The Revelations certainly do not coincide with an Islamic banking system, enveloped and impacted by a well entrenched riba competitor system, operating within an interest driven economy, within man made laws. Since 1983 the Malaysian judges found themselves as the bastion of hope to defend the ideals and ambitions of an Islamic banking system they hardly comprehend themselves. Premised on the checkered history of trial and error, Islamic banking law began to be built on the growth of case laws which sometimes take a turn for the worse. Praise be to Allah we invariably find ourselves being steered back on course midstream after many anxious moments in choppy waters; many mindful of the fact that the boat we’re in were built on questionable specifications in the first place! Into this context was born the Central Bank Act 2009 that many hope will solve all problems encountered so far with an unspoken wish that it will actually remove all.

Is the Central Bank Act 2009 the long awaited saviour? Before we analyse the Act we need to identify the major outstanding issues of Islamic banking practices that cries out to be addressed:

1) Operating in a civil law environment where Shariah issues may not be appropriately and adequately addressed, should Islamic banking be taken out of the realms of Civil Courts
and placed where it rightly belongs, the Shariah Courts?

2) Procedural laws such as the Rules of the High Court that does not accommodate the existence of Islamic Banking. Example i) Court forms that require Islamic banks to specify the ‘principal’ and ‘interest’ of their facilities
ii) Embarrassing automatic awards of 8% p.a. default interest from date of default to date of judgement by judges to all successful litigants.

3) No legislation that makes it compulsory for Courts to refer Syariah issues to Syariah experts leaving it to sole discretion of judges to may or may not consult Syariah experts as they see fit.

4) Conflicts of Islamic banking legislations with other legislations, which one rules?

5) The National Syariah Advisory Council at the Central Bank being the assumed supreme authority to determine Islamic banking laws being then by wording of legislation be made subservient to the supervision and regulation of the Central Bank.

6) The legal treatment of Ibra’ or rebate in an Islamic debt financing facility which iconised the incompatibility of Syariah nuances with certainty as required by civil law.

7) Formal Islamic finance education of judges and litigating and drafting lawyers, much lamented for lack thereof, but not imminently addressed as required.

8) Consideration for Alternative Dispute Resolution for Islamic banking cases in view of its alien nature to civil courts.

The above are just some of the major issues facing Islamic banking practices presently. Let’s now examined whether the new Central Bank Act 2009 has accommodated all Islamic banking wishes.

1) The Central Bank Act 2009 (CBA ’09) did not touch the realm of jurisdiction for Islamic Banking cases; they remain firmly within the ambit of civil courts. As a Central Bank Act it may not be the platform to change Federal and State Lists in the Constitution however the import of the Act reaffirms that Islamic Banking is going to stay firmly on the Federal List. This then begs the question on when the Syariah capabilities and Islamic banking knowledge of Judges and the legal fraternity is going to be addressed. With Islamic banking cases firmly to be dealt with by civil courts it is incumbent the civil court officials be adequately trained. The problem is not going to go away by ignoring it.

On the same footing when are Procedural laws going to be amended wholesale to accommodate the existence of Islamic banking? A lot of judicial time and effort are being wasted on matters that can be easily resolved with long overdue amendments to Procedural laws.

2) In one area which CBA ‘09 dealt with head on was with the inadequacy of the previous legislation in not making it compulsory for Judges to refer Syariah issues to Shariah experts. Section 56 of the new CBA ’09 appears to have resolved this problem by requiring the Court (and arbitrator) to take into consideration any published rulings of the Shariah Advisory Council of BNM. However a Muslim bred in unspoken respect and obedience to fatwas find the phrase ‘take into consideration’ quite discomforting. Section 56 is a clear improvement over the previous legislation or lack thereof, but it certainly does not say that the rule is binding on the judge! He is asked to “take it into consideration”. Religious nuances aside, what if a Judge “takes into consideration” an SAC Syariah ruling, decides it is not appropriate for his judicial decision, and makes a decision which in terms of the Islamic Banking Act (IBA) turns out to be against the Religion of Islam?!
Does not the IBA define Islamic Banking Business as any banking business that does not go against the Religion of Islam?!

Whilst it is all very well to declare in Section 51 that the SAC is the supreme authority in ascertaining Islamic Financial law, Section 55 then goes on to say that the Judge is actually the ultimate arbiter. So that fits into the lamentable context that Shariah law is not supreme in this country but how then do you reconcile a judicial decision which is ultra vires a democratically passed Act of Parliament, namely the Islamic Banking Act?!

The position however is a bit clearer on new issues which have not been deliberated on by the SAC; upon making a reference to it under Section 56, the court is then bound by the ruling as ruled under Section 57.

3) Conflicts between Islamic Banking legislations and other legislations were not addressed by the CBA ’09. The status quo remains; only against the Companies Act, Islamic Banking legislations win by virtue of Section 55 of the IBA which makes the Companies Act subservient to it. Against all other legislations there remains the deafening silence; the challenge, and in the same breath, the abyss faced by all Islamic Banking players. We’d hope that the field in not wanting to be ultra vires the Islamic Banking Act, as outlined above, will be a comfort of sorts to us, though really, more forthright legislative defense would still be the preferred choice against such a porous dyke.

4) The offending phrase in the previous legislation putting the National Shariah Advisory Council under the purview of BNM appears to have been left out. In addition to the deletion we have for what it’s worth Section 51 (2) which says the SAC may determine its own procedures. Dare we draw comfort that the SAC is no longer by wording of legislation made subservient to a body which should not, and I daresay, would not want, to be, its supervisor, i.e. the BNM?

5) Ibra’ or rebate of an early settled Islamic debt financing facility has always exemplified the uncomfortable juxtaposition of Syariah nuances with the certainties as required by civil law. Shariah advisers has always been loathe to approve rebate clauses in Islamic Sale and Purchase Agreements for fear of indicating a multiplicity of prices in an Islamic buy and sell akad which demands the declaration of only one price. This quirk of Syariah demand has led to banks demanding defaulters settle the full selling price in mid term defaults when it is clearly not due. Islamic banks that know the correct procedure will then make an undertaking in their Statement of Claim to rebate to the defaulter any amount not due to them. This practice is resorted to by Islamic Banks who knows that the date of settlement could be years after the date of judgement. So rather than go to court again to ask for an additional sum it is clearly so much easier to ask for the full Selling Price which they are entitled to, and rebate all amounts not due to them. Some court submissions however for reasons unknown, were made without the undertaking to rebate in the Statement of claim. We have only just got out of the choppy waters we found ourselves in as a result of the now infamous case of Affin Bank vs Zulkifli Abdullah (2005) where the plaintiff bank did not make the said undertaking to rebate leading the judge to declare Islamic Banking exorbitant, and subsequently by an unfortunate turn of events for the same judge to declare that all such Islamic debt financing facilities as non-Shariah compliant. Only a rallying appeal to the Court of Appeal overturned the decision leading to a collective sigh of relief for the embattled Islamic banking industry.
The BNM Syariah Advisory Council at its meeting on 24th April 2002 approved the inclusion of such an Ibra or rebate clause in Sale Agreeents based on the objective of maslahah and the analogy or qiyas of dha’ wa taajjal. Perhaps via Section 56 and 57 of the CBA 2009 when Syariah rulings of the SAC may no longer be ignored by courts this issue will be put to rest once and for all.

6) Lastly, although arbitration is mentioned under section 56 and 57 no declared bias is made in its favour as compared to settlements via Court. Perhaps this is not entirely unacceptable as only through bloody court battles can case laws be built and precedent Islamic banking law be established.


The CBA 09 is clearly not the knight in shining armour expected by some. Clearly the authorities have decided to postpone all major battles to a latter day. However its hand is shown in the manner of testing of waters. We commend them for the bold declaration of a dual financial system and the legislative requirement that the judiciary may no longer ignore SAC rulings. Apart from that, the CBA ‘09 can hardly be said to have resolved all outstanding issues in Islamic banking practices. With the baton of leadership in their hands we sincerely hope the relevant authorities are mindful of the landscape of the battlefield we find ourselves in, for no war can ever be won without such vision. We need generals who see the battlefields clearly and an army that is well trained, disciplined and committed. For did not Allah say we are at war with riba?

Note on the Writer.
Muhammad Zahid Abdul Aziz has almost 20 years of experience in Islamic Banking and Finance. Starting with Bank Islam Malaysia Bhd in 1990 he quickly made his mark as a Sukuk pioneer in Malaysia. He left Bank Islam in 2000 to form an Islamic Capital Market Consultancy in Kuala Lumpur called Muamalah Financial Consulting. In mid 2006 he left for Riyadh as Resident Sukuk Consultant to Bank AlBilad, Saudi Arabia's second Islamic Bank. At the end of March 2009 he returned to Malaysia to resume his position at Muamalah Financial Consulting. He is presently also a postgraduate student in Islamic Finance at the International Islamic University Malaysia and at other times a renowned international lecturer in Islamic Capital Market and similar subjects.The views are of course his own.

Note : The edited version appears in the TheEdge Malaysia week of February 22-28 2010.

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