Legal Aspects of Islamic Banking and Finance
ISF 3209
Kulliyyah of Economics and Management Sciences
Case Review:
Arab-Malaysian Finance Bhd v. Taman Ihsan Jaya Sdn Bhd & Anor [2009]
Prepared by:
Nur Nazlina bt. Awliya Mohamed
1812660
Section 1
Lecturer’s name:
Nurdianawati Irwani bt. Abdullah
19th November 2021
Citation:
Arab-Malaysian Finance Bhd v Taman Ihsan Jaya Sdn Bhd & Ors [2008] 5 MLJ 631
Facts of the case:
In this case, a property from a third party had already been purchased by the defendants by
paying part of the price. Later, they were approached by the plaintiffs (bank) for a facility to
complete their purchase. It was required by the plaintiffs that the defendant must sell the
property he bought earlier from the third party to the plaintiffs (bank) for that balance of the
purchase price, in accordance with the terms of the bank's property purchase agreement
(‘PPA’). Then, the plaintiffs (bank) sold back that property to the defendant under the bank’s
property sale agreement (‘PSA’), whereby the defendants agreed to pay an agreed amount of
monthly instalments. The defendants were required to execute charge or assignment of the
property to the plaintiff as a collateral. The total amount of the agreed monthly instalments
added up to the bank’s selling price as practiced by the plaintiffs is under the transaction
known as Bai-Bithman Ajil (BBA). The defendant ended up being defaulted in the payment
of the selling price made by the bank. As a consequence, the bank applied for an order for the
sale of the property. This is where the issue arises whereby the correct interpretation to be
given to the agreed selling price under BBA contract and also necessary to consider the role
of the civil court when resolving cases that involve Islamic financing. The defendants argued
that the transaction herein comprising a letter of offer, property purchase agreement (PPA),
property sale agreement (PSA) and the charge of the assignment actually transparently turned
into a financing facility.
Issues of the case:
1. Whether the contract is involved in riba’ or not?
2. Whether the defendants need to be charged with the original price of repayment or
not?
3. Whether the transaction is considered injustice in Islam?
4. Whether the transaction is considered as financing or not?
Decision of the court:
The profit earned from the BBA contract in this case is unlawful in the religion of Islam. The
court acknowledged that any additional amount from the BBA contract deferred payment is
interest unless it is a bona fide sale. Moreover, the excessive amount will lead to burdening
the defendants even more and it is contradict to the main objective of Islam. Therefore, the
court held by ordering a sale by public auction of the charged properties with costs to be
taxed.
Principles of the case:
The role of civil court in Islamic Financing related matters.
When it comes to dealing with cases involving Islamic financing facilities, the civil court will
serve strictly as a civil court and will not act as a Sharia Court. Moreover, civil courts also
will not apply Islamic law according to the interpretations and beliefs of specific madhabs as
it is the function of Sharia Court.
Under Section 256 of the National Land Code and made under Order 83 of the Rules of the
High Court 1980, plaintiffs are required to demonstrate under Rule 3 Actions for possession
or payment. Order 83 instructs that where money or possession is claimed, the plaintiff must
show by affidavit the circumstances under which the right arose and show the amount of
advance, amount of repayment, amount of instalments in arrears as at date of summons and
date of affidavit and amount remaining. The principle is based on the judgement in Bank
Kerjasama Rakyat Malaysia Bhd v Emcee Corp Sdn Bhd [2003] 2 MLJ 408 CA held that the
law applicable in the Islamic Financing facilities is different from the law that is applied in
the conventional banking’s facilities. It is under the charge of National Land Code.
It is also based on principle based on the decision made in Affin Bank Bhd v Zulkifli bin
Abdullah where the defendant was not able to perform his obligations under the terms of the
facility provided and there was no issue on questioning of any element that is prohibited in
Islam. However, when seeking way far higher amount than the liability in a conventional loan
have raised the question whether the ‘selling price’ that an Islamic bank interpret contains
any prohibited elements in Islam. The same thing happened in our case too where an
interpretation of elements that are prohibited in Islam has as well as interpretation of BBA
contract need to be extracted. Thus, the element must be recognised all four mazhabs in order
to be approved in religion of Islam.
Commentary:
In my opinion, I agree with the judgement made by the court on this issue because we should
remember that the facility offered by the Islamic banks must first not be contradict to the
religion of Islam. Islamic bank products should not just be unique and different from the
conventional loan but must serve the main purpose of the Islam. In this case, the court held
that the bank purchased the property directly from the customer and then sold it back to the
same customer at a higher price with deferred payment. According to the court, such a sale is
not a bona fide sale but a financing transaction. From what I can observe, this is not a BBA
contract but a Bay Al-Inah contract which is a contentious sale.
However, this judgement has made a big impact on Islamic banking industry during the time
when this case was decided because most of the Islamic Financial products in Malaysia are
based on the BBA contract. Therefore, I believe that the BBA contract must not stop its
existence because it is one of the most used facilities in Malaysia but as long as the product is
Shariah Compliant and utilised in a proper way. So what the bank can do is that instead of
purchasing the particular property from the customer, they should buy it from the third party
itself (the original owner of the property). Furthermore, when it comes to deriving an Islamic
Law, references must be first made from the Holy Quran and Sunnah, not just merely the
madhabs' opinions. To conclude, the court should not equalise the Islamic financing to
conventional loan.