Title: MALAYAN BANKING BHD V. YA’KUP OJE & ANOR  5 CLJ 311: A Profound and Insightful Judgment on the Fundamentals of Islamic Banking.
By: Yasmin Norhazleena Bahari Bt Md Noor Lecturer, Faculty of Syariah & Law Universiti Sains Islam Malaysia.
Abstract: This paper highlights a profound and insightful judgment on the fundamentals of Islamic Banking. This paper brings to light the interesting features of the judgment which includes the power of the judge to set aside a grossly unfair Islamic contract, the differences between the secular and Islamic economic systems, the prerequisites of an Islamic transaction, the Islamic worldview, the duty of Islamic Banks, a commentary on Bai Bithaman Ajil, the concept of justice in Islam and the duty of judges presiding Islamic Banking cases. It is vital that this judgment be appreciated, followed and accorded lofty recognition as it consecrates Islamic Banking by putting forth Islamic worldview as the foundation of Islamic Banking and exalts Islam as it should rightly be venerated.
Paper: MALAYAN BANKING BHD V. YA’KUP OJE & ANOR  5 CLJ 311 :A Profound and Insightful Judgment on the Fundamentals of Islamic Banking.
History of Islamic Banking in Malaysia
The Islamic banking phenomenon in Malaysia practically emerged in the 1960s. The birth of Islamic banking in Malaysia was influenced by both external and internal factors. The external factors include the establishment of Islamic banks in the Middle East in the mid-1970s coupled with the establishment of the Islamic Development Bank in Saudi Arabia.
On the other hand, internal developments including the establishment of the Pilgrims Fund Board in 1963 and the calls from Malaysian Muslims for the need to establish an Islamic bank have prompted the government to respond accordingly. The first Islamic bank established in the country was Bank Islam Malaysia Berhad (BIMB) which commenced operations on 1 July 1983. Bank Negara’s Objective and Requirement of Islamic Banking. The long-term objective of Bank Negara Malaysia (BNM) is to create an efficient, progressive and comprehensive Islamic financial system that contributes significantly to the effectiveness and efficiency of the Malaysian financial sector.
However, similar to any banking system, an Islamic banking system requires three vital elements to qualify as a strong and resilient system, which are: • a large number of global players; • a broad variety of instruments; and • a comprehensive financial infrastructure.
In addition, the foundations of an Islamic banking system must also reflect the socio-economic justice and values in Islam, as well as must be Islamic in both substance and form. (Emphasis is mine) Products and services in Islamic Banking In terms of products and services, there are more than 100 Islamic financial products and services which are currently offered by the banks using various Islamic concepts such as Mudharabah, Musyarakah, Murabahah, Bai’ Bithaman Ajil (Bai’ Muajjal), Ijarah, Qard, Istisna’ and Ijarah Thumma Bai’. Malaysian banks have been applying three basic concepts, namely, Bai’ Bithaman Ajil, Bai Inah (sell and buy back contract) and Bai Ad Dayn (debt trading contract).
Criticisms levelled at Islamic Banking Contracts
Bai’ Bithaman Ajil (BBA), Bai Inah and Bai Ad Dayn constitute over 80 percent of the Islamic Banking portfolio and these contracts are not favoured by Islamic practitioners outside our shores. The BBA contract is not accepted in many countries as a valid Islamic contract. But in Malaysia it has been approved by the various shariah councils and has been recognized and affirmed by the courts in Malaysia including by the (then) Supreme Court in 1995 in the appeal case of Bank Islam Malaysia Bhd v Adnan bin Omar  3 CLJ 735 (HC).
The BBA contract was introduced in 1983 as it mirrors the conventional fixed-rate loan structure and it is the easiest to structure to fit the local regulatory framework (with little changes to the stamp duty and taxation treatment). The BBA structure has its drawback and being a fixed-rate term structure, it is susceptible to an increasing rate scenario. Local players have attempted to structure the contract to fit all forms of business requirements and they have attempted to structure the contract to fit all forms of business and they have also modified the contract to make it flexible by introducing a “flexi” BBA structure. The “flexi” BBA structure was heavily criticized by foreign bankers as it seems to have two contracts in one which is highly debatable among the Syariah scholars.
Another criticism being levelled at a particular BBA contract in the case Affin Bank Bhd v. Zulkifli Abdullah  1 CLJ 438 is, a defaulting borrower under a Riba-ridden loan is far better off than a borrower in default of payment who borrows under the BBA loan facility because under that particular BBA contract even after the subject security had been auctioned at full market value there remains still a very substantial sum still owing to the bank. In contrast, according to His Lordship David Wong Dak Wah JC, “In a conventional bank loan, the borrower will only be required to pay an amount outstanding as at the date of the recovery of the loan, which is the date of the sale of the charged property.”
His Lordship Abdul Wahab Patail J in Affin Bank Bhd v. Zulkifli Abdullah  1 CLJ 438 is of the view that unearned profit demanded by the plaintiff (Bank) according to the BBA contract in that case contradicts the principle of Al-Bai Bithaman Ajil as to the profit margin that the provider was entitled to. His Lordship David Wong Dak Wah JC also alludes that the BBA contract in the case Malayan Banking Bhd v. Marilyn Ho Siok Lin  3 CLJ 796 is tainted by unjust enrichment.
Regardless of the criticisms leveled at BBA contracts, this loan facility is used for “financing the acquisition of assets where the payment usually is based on installment basis. The payable period is longer compared to Murabahah facility payment. BBA contract is the most popular and is being used by the bank to provide medium and long term financing for customers to acquire items such as landed property, houses, motor vehicle and office equipment. Project and contract financing, tour and education package financing also use BBA contract in their transactions.”
What should be the foundation and key elements of the Islamic Banking practice in Malaysia?
Premised on the criticism that BBA contract is not accepted in many countries as a valid Islamic contract as well as the aforementioned views that BBA contract is tarnished by unjust enrichment and the lender’s (unfair) demand for unearned profit, this paper strives to highlight a court judgment which provides the fundamental precepts of Islamic Banking.
Insightful judgment in Islamic Banking
On 31st August 2007, His Lordship Hamid Sultan Abu Backer JC delivered a very detailed, profound and insightful judgment on what should be the essential elements inherent in Islamic Banking practice in Malaysia. The essence of his judgment is the following: A judge is empowered to set aside a contract when the fact discloses gross unfairness on one of the parties. His Lordship referred to an article by Habib Rahman bin Seni Mohideen Affin Bank Bhd v. Zulkifli Abdullah – Shariah Perspective who wrote the following: “The court as guardian of justice can interfere in the contract between the banks and its customers on the principle of ‘Adl Wa Ehsan (justice and equity). It is revealed in the Al Quran 16:90 ‘God commands justice and fair dealing’. The court may readjust the contractual obligations judicially if the parties are unable to find an amicable settlement. There are various legal maxims which are applicable in financial transactions such as: No harm may either be inflicted or reciprocated. Necessities allow actions which would otherwise be prohibited. Harm must be removed. If a contract between the contracting parties becomes an instrument of injustice, a judge cannot ignore the unfairness and insist on strict adherence to the letter of contract. Hence, a judge is empowered to set aside a contract when the fact discloses gross unfairness on one of the parties as Islamic system is a just and equitable system that promotes close relationship between the banks and the customers based on cooperation and equitable sharing of risks and rewards.”
According to His Lordship, the article “shows maturity, addresses the current issues which tarnishes the image of Islamic Banking System and proposes ways and means to achieve growth and success in Islamic Banking within the spirit and intent of Syariah law as opposed to some articles written by writers who assert in a mischievous manner that under the Syariah if “you agree you must pay”, without balancing the argument in favour of the debtor.”
The judge’s observation is timely based on the criticisms levelled at Islamic Banking contracts not being Islamic raised earlier. Islamic Banks are only traders or venture capitalists. His Lordship went on to say that in respect of Habib Rahman’s article, “Islamic Banks are only traders or venture capitalists. As any traders or venture capitalists, they are subject to the laws of the country and obliged to trade within the norms of their trading license. There is nothing sacrosanct about the service they provide.
Courts have to ensure that nobody exploits the public by dubious methods and propagate justification through formulas and concepts with which the public is not well acquainted currently. It is the constitutional obligation of the courts to ensure that at all material times, justice prevails in the right perspective, both for Islamic Banks as well as consumers.
In this respect, the courts must not reduce the status of Syariah banks to charitable institutions but ensure and respect that they are trading institutions entitled to earn profits out of their investment and only in exceptional circumstance such as where there is default to adjust their profits according to the facts and justice of the case as required under the Syariah principles and practice.”
There must be risks in Islamic commercial transaction
His Lordship states that taking risks is inherent in Islamic commercial transactions. His Lordship elucidates by saying the following: “In crude terms, one cannot borrow the Islamic label for obtaining benefits only but must balance it with justifiable burden, for the Syariah in the strictest term has propagated in all trading activities that there must be risk involved. “No risk no gain” is an entrenched concept in Islamic commercial transactions. If there is no risk, such transaction may infringe on the riba rule. Islamic Administration of justice will never permit trader or venture capitalists to strip the loin cloth of the borrowers.”
Islamic commercial transaction being subject to Quranic injunctions to act with justice and equity
Another noteworthy point addressed by His Lordship is on Islamic Banking Agreement being binding on both parties based on Quranic injunctions. His Lordship stated that: “At the outset, I wish to assert that articles written by purported scholars who in the affirmative sense stress that the Quranic injunctions requires parties to be bound by the agreement and in consequence the BBA (Bai Bithaman Ajil) must be honoured ie, “you agreed to pay you must pay” such syllogism, is hogwash within the framework of Islamic Jurisprudence. When parties enter into an Islamic commercial transaction, it is always subject to Quranic injunctions to act with justice and equity….
Differences between the secular and Islamic systems.
His Lordship also highlighted the differences between the secular and Islamic systems which are the following:
1. “Under the secular system, contracts can be framed reducing all risks and earn a profit by way of interest. Under the Syariah Administration of justice, such legal trick and scholarly arguments to perpetuate injustice will not be entertained.”
2. “The secular economic principles address the problem of consumption, production and distribution. In contrast, Islamic economic principles forecast on the manner to eradicate poverty. Equitable distribution is one of its goals. Islam views that inequity is created by mass exploitation of resources to obtain maximum profit. Principles of Islamic commercial transaction are nurtured to check exploitation, inequities and the creation of economic imbalances in society.” Process of secularization of the Christian/Western civilization His Lordship further displayed his mastery in the history of western civilization by highlighting the process of secularization of the Christian/Western civilization. His Lordship referred to Eliade (Encyclopedia of Religious 12, 1987) which states the following: “… this dichotomy between the religious and the remainder of human life is a western product and concern … This distinction between the sacred and the profane, between religion and other aspects of human endeavour is a result of the process of secularization that has been the experience of Christian/Western civilization especially since the 17th century.”
Separation from religion in worldly pursuits does not exist in Islam.
His Lordship highlights the western concept of separating religion from worldly pursuits and endeavour because His Lordship brings to light that such separation from religion in worldly pursuits does not exist in Islam. His Lordship refers to an article entitled “Islam, The Islamic Worldview, And Islamic Economics.” which states: “In Islam, it is this dichotomy and separation of “religion” from other aspects of life that is contradictory, incoherent, and meaningless.
Islam as a way of life
His Lordship further refers to the aforementioned article about Islam being a way of life and not being limited to personal rituals and faith/dogma.
The judgment is the following:
“For “religion” in Islam, as understood by Islamic scholars and based on its own sources of knowledge, cannot be equated with the concept of religion as understood in the west today. The significance, relevance and centrality of Islam to Muslims is not bound by a time period in “human evolution” but has values, standards and criteria which are absolute. Religion is not a “human creation” of, and for, “infantile man,” but is a representation of a “way of life” for all times. The term used to denote “religion” in the Holy Qur’an is din and does not limit itself to the personal rituals and faith/dogma as usually understood by the term religion. As mentioned by Watt (1979: 34), the term din refers more to a: … Whole way of life …covers both the private and public/societal lives of man, it permeates the whole fabric of society, and includes theological dogma, forms of worship, political theory and a detailed code of conduct, including even matters which the European would classify as hygiene, or etiquette …”
Bearing in mind that Islam is a way of life and not limited to performing prayers and fasting, commercial dealings and business transactions must be conducted in line with Islamic precepts. Islamic Banking transactions are to conform with Islamic worldview According to His Lordship, “When parties enter into an Islamic commercial transaction, it is always subject to Quranic injunctions to act with justice and equity and there is a need for the parties entering into such commercial dealing to respect Islamic worldview on such transaction;” His Lordship further says that: “To understand Islamic principles of commercial transaction, it is essential to understand Islam, its worldview and Islamic economics, in relation to commercial transaction.”
Moreover, His Lordship states the following: “All Islamic transaction is subject to Islamic worldview and has to be developed according to a methodology that is founded upon this worldview. Islamic law has developed various principles applicable to commercial transaction to eliminate exploitation in business transaction and to eradicate unjust enrichment. The most striking principles are seen in respect of riba and gharar. It will appear that these principles have never been advocated by Islamic Banks operating its business here or there are no fatwas directing Islamic Banks to comply with the related Qur’anic injunctions or Islamic worldview. A borrower under Islamic commercial transaction cannot in the true sense be a subject of insolvency proceedings under the Syariah law or practice.”
In addition, His Lordship says: “Whatever transaction, whether it is commercial or private or whatever decision, whether political or private, there is a duty imposed on all Muslims to come to a just conclusion, within the tenets of Quranic injunctions and Islamic worldview.”
It is also noteworthy to highlight that His Lordship states the following:
“Islamic contract relating to commercial transactions is not only subject to the terms of the contract but must be decided subject to the Qur’anic injunctions and/or Islamic worldview as the case may be. The Court should refer to experts on Islam or Syariah Advisory Council in order to understand Islamic worldview According to His Lordship, since “Islamic contract relating to commercial transactions is not only subject to the terms of the contract but must be decided subject to the Qur’anic injunctions and/or Islamic worldview as the case may be. For this very purpose, the court can on their own motion decide the issue or alternatively call experts to give their views, pursuant to section 45 of the Evidence Act 1950 or pose the necessary questions to the Syariah Advisory Council for their views.” Bai Bithaman Ajil (BBA) transaction is susceptible to misuse. His Lordship referred to the Pakistan Supreme Court’s historic judgment on interest with respect to the validity of BBA transactions. His Lordship observes the following: “The Pakistan Supreme Court, in the historic judgment on interest stated above, has held that Murabahah and/or BBA transactions (sale by deferred payment), when used as a mode of trade financing, is a borderline transaction with interest-bearing loan. The court stated that unless the basic requirements for its legal validity under the Syariah are strictly complied with, it might amount to interest-bearing loan. Further, the Supreme Court took the view that the Murabahah and/or BBA concept is susceptible to misuse and is not an ideal financing system and should only be used where Musharaka and Mudarabah, a concept of financing (partnership or equity financing), are not applicable. Our courts here have not ventured into the validity of such instruments in detail, as was done in Pakistan.”
Excess profit must not be made in the name of Islamic principles.
His Lordship highlighted that in Affin Bank Bhd “the court in allowing the order for sale reduced the amount of profit. In Malayan Banking Bhd the court refused to grant the balance of the sale price amounting to RM928,589.12 for the facility sum of RM500,000.”
According to His Lordship: “Both of these judgments under the secular law has rightly attempted to act within the parameters of justice and equity to attain a just result and to ensure that excess profit is not made in the name of Islamic principles. Even at common law, the doctrine of equity is often raised to mitigate the harshness of contractual obligation in limited circumstances.”
In order to promote transparency and equity, Islamic Banks should openly state their policy and rates of rebate without stipulating such policy and rates in BBA agreements. His Lordship states that in order to promote transparency and equity, Islamic Banks should openly state their policy and rates of rebate without stipulating such policy and rates in BBA agreements. His Lordship states the following: “I accept the fact that as matter of practice, most of the Islamic Banks do exercise their discretion and give a rebate, thereby keeping with the true spirit and intent of justice and equity under the Syariah law.
Further, Islamic law of commercial transactions will not permit the bank to state the rebate for default under the BBA as Islamic law of contract, though it may appear to be similar to the secular law, is not the same. The Syariah law does not generally permit conditional contract, contract upon a contract etc., the principles and practice of which I will elaborate at an opportune moment. However, this does not mean that Islamic Banks cannot openly state their policy and rates of rebate without encapsulating in BBA agreements. This will promote transparency and equity.” Justice in Islam is much higher than justice under man-made law His Lordship also elucidates the concept of justice in Islam which is much higher than justice under man-made law.
According to His Lordship: “Central to the concept of Islam is Justice. All transactions whether it is judicial, political, commercial or private etc. are subject to this concept.” Furthermore His Lordship continues by saying: “Learned author, Ahmad Qadri (1982) aptly summarizes the concept of justice by stating that justice in Islam is much higher than the so called distributive and remedial justice of Aristotle, the natural justice of the Anglo-American Common Law, the formal justice of the Roman Law, or any other man-made law. Moreover, he says that it searches out the innermost motives of man, because he has to act as in the presence of God, to Whom all things, acts, and motives are known. It is trite that Islam is against all kinds of injustices and warns the wrongdoers. Support for this proposition can be found in many of the verses in the Holy Qur’an.”
His Lordship further states that “the concept of justice in Islam is seen to be Supreme. Without justice, Islamic virtues cannot be successfully applied and practiced.” Judges must deliver substantive justice. His Lordship also brings to light the duty of judges presiding Islamic Banking cases to deliver substantive justice. According to His Lordship: “In the Qur’an (an-Nisaa: 58), it is asserted that: God doth command you to render your Trusts to those to whom they are due; and when ye judge between man and man, that ye judge with justice: verily how excellent is the teaching which he giveth you! For God is He who heareth and seeth all things. Further, the Qur’an (an-Nisaa: 105) says: We have sent down to thee the Book in truth, that thou mightiest judge between men, as guided by God: so be not (used) as an advocate by those who betray their trust. From the above verses it can be argued that substantive justice is of paramount importance and must be delivered by the judge to the litigant. In the eye of Allah, a person who judges and fails to deliver substantive justice will be in breach of the Islamic Injunctions as promulgated in the Holy Qur’an.”
In addition His Lordship adds the following: “…a Muslim adjudicator is bound by Islamic Injunctions and is duty bound to deliver substantive justice. A judge within the context of the Qur’an and Hadith can be said to be in dereliction of judicial duty if he fails to hear a case on its merits and/or dismisses a case for non-compliance of rules, without condoning the non-compliance or fails to order the litigant to comply with the rules before hearing the matter on merits.” His Lordship also avers that a Muslim adjudicator (judge) must not only comply with the positive laws but the judicial ethos necessarily needed to comply with the Islamic Injunctions.
Commentary on the case by an Academician
Associate Professor Dr Abdul Rani bin Kamarudin in his article, “Istihsan As The Basis Of Shariah Compliacy In Bai Bithaman Ajil End Financing With Special Reference To The Case of Malayan Banking Bhd v Ya’kup Bin Oje & Anor  6 MLJ 389” highlights that His Lordship Hamid Sultan Abu Backer JC held that both judgments of Affin Bank Bhd v Zulkifli bin Abdullah  3 MLJ 67, and Malayan Banking Bhd v Marilyn Ho Siok Lin  7 MLJ 249 , under the secular law has rightly attempted to act within the parameters of justice and equity to attain a just result and to ensure that excess profit is not made in name of Islamic principles.
According to Associate Professor Dr Abdul Rani, “Even at common law, the learned Judicial Commissioner reiterated that the doctrine of equity is often raised to mitigate the harshness of contractual obligation in limited circumstances. The learned Judicial Commissioner is of the view that under Shariah, equity is the fulcrum of justice. Without equity, justice cannot be administered, and, justice and equity must be read conjunctively and not disjunctively. In support, the learned Judicial Commissioner quoted the Quranic verse from surah al-Maidah: verse 42 which reads: If though judge, judge in equity between them for Allah loveth those who judge in equity.”
Associate Professor Abdul Rani further adds, “The learned Judicial Commissioner pointed out that the court must, therefore, be vigilant to arrest traders or venture capitalists from exploiting Islamic principles at the expense of the consumers. This is a constitutional duty and is not alien to Islamic concept.” Associate Professor Abdul Rani also holds the view that Istihsan which promotes human interests and justice should be the basis of Syariah Compliance of BBA transactions.
In a nutshell, the following are His Lordship’s observations on Islamic Banking in Malaysia as well as His Lordship’s suggestions:
• A judge is empowered to set aside a contract when the fact discloses gross unfairness on one of the parties.
• Islamic Banks are only traders or venture capitalists.
• There must be risks in Islamic commercial transactions.
• An Islamic commercial transaction is being subject to Quranic injunctions to act with justice and equity.
• Under the secular system, contracts can be framed reducing all risks and earn a profit by way of interest. Under the Syariah Administration of justice, such legal trick and scholarly arguments to perpetuate injustice will not be entertained.
• The secular economic principles address the problem of consumption, production and distribution. In contrast, Islamic economic principles forecast on the manner to eradicate poverty.
• Separation from religion in worldly pursuits does not exist in Islam.
• Islamic Banking transactions are to conform with Islamic worldview.
• The Court should refer to experts on Islam or the Syariah Advisory Council in order to understand Islamic worldview.
• Islam is a way of life.
• Bai Bithaman Ajil (BBA) transaction is susceptible to misuse.
• Excess profit must not be made in the name of Islamic principles.
• In order to promote transparency and equity, Islamic Banks should openly state their policy and rates of rebate without stipulating such policy and rates in BBA agreements.
• Justice in Islam is much higher than justice under man-made laws.
• Judges must deliver substantive justice.
His Lordship Hamid Sultan Abu Backer JC’s judgment mentioned above is indeed a profound and insightful one. His Lordship had conducted a thorough research on what Islamic Banking in Malaysia should embody in line with BNM’s requirement that “the foundations of an Islamic banking system must also reflect the socio-economic justice and values in Islam, as well as must be Islamic in both substance and form”.
Indeed His Lordship’s judgment succeeds in consecrating Islamic Banking by putting forth Islamic worldview as the foundation of Islamic Banking and exalting Islam as it should rightly be venerated. It is hoped that a detailed study on Islamic Banking practices like that in Pakistan can be conducted in Malaysia so that we can do justice to Islam itself and not allow Islamic Banking be soiled and desecrated by unjust practices.
2. Jasani Abdullah, Convergence in Bank Sector, Business Times, December 14 2005, B13.
3. Mohamed Ismail bin Mohamed Shariff, The Affin Bank Case: Is Islamic Banking Just Conventional Banking in a Green Garb?  3 MLJ cli
4. Hamid Sultan Abu Backer, Janab’s Key to Practical Conveyancing, Land Law and Islamic Banking, 2003 Kuala Lumpur: Janab (M) Sdn Bhd
5. Associate Professor Dr Abdul Rani bin Kamarudin, “Istihsan As The Basis Of Shariah Compliacy In Bai Bithaman Ajil End Financing With Special Reference To The Case of Malayan Banking Bhd v Ya’kup Bin Oje & Anor  6 MLJ 389”  6 MLJ lxxvi.
6. Affin Bank Bhd v. Zulkifli Abdullah  1 CLJ 438
7. Malayan Banking Bhd v. Marilyn Ho Siok Lin  3 CLJ 796