Raus Sharif JCA (delivering judgment of the court)

INTRODUCTION

On 18 July 2008, the Kuala Lumpur High Court delivered a common judgment for 12 cases concerning Islamic financing which sent shock waves to the Islamic banking industry. The learned judge declared that the Bai Bithaman Ajil (‘BBA’) contract, a financial instrument in Islamic financing, which had been in existence and practised in this country for the past 25 years was contrary to the religion of Islam.

The plaintiff in the respective 12 cases was Bank Islam Malaysia Berhad (‘BIMB’). BIMB is an Islamic bank licensed under the Islamic Banking Act 1983 and thus authorise to carry on Islamic banking business. The defendants were BIMB’s customers.

What had happened was this. Prior to the delivering of the common judgment, the learned judge had instructed counsel appearing in the 12 cases which were pending before him, to file their respective written submissions.

The written submissions were duly filed but counsel were not called upon to appear before the learned judge to make oral submissions or provide clarification of their written submissions. From the written submissions the common judgment for the 12 cases was delivered by the learned judge.

In the common judgment, the learned judge did not deal with the particular facts of the individual cases. What he had done was to discuss and make decisions regarding, in the learned judge’s own words ‘the basic principles concerning Islamic financing’. At the end of it, he concluded that the BBA contracts were contrary to basic principles of Islam.

In his ruling, the learned judge had grouped the BBA contracts into two categories: those where there was a novation agreement and those where there was none. In those where there was a novation agreement he further subdivided it with two subcategories, those where the financing had expired and those where it is still ongoing. For those where the financing period had expired, the claim by BIMB was allowed in full. For those where the financing period is still ongoing and had not expired, he ruled that the amount claim was excessive and unfair. He applied the ‘equitable’ interpretation of the sale price as he had interpreted in his earlier judgment in the case ofAffin Bank Bhd v Zulkifli Abdullah

What had happened in Affin Bank Bhd v Zulkifli Abdullah was this. Zulkifli Abdullah obtained a secured housing loan of RM394,172.06 from the Affin Bank Bhd under the BBA in 1997. Zulkifli Abdullah defaulted the loan in 2002 after paying RM33,454.19 to the bank. Affin Bank Bhd then claimed from Zulkifli Abdullah the full sale price of RM958,909.21, inclusive of the plaintiff’s profit margin for the full term of the loan. Affin Bank Bhd also applied for an order for sale of the changed property. Zulkifli however challenged the amount claimed. The learned judge held:

(a)If the customer is required to pay the profit for the full tenure, he is entitled to have the benefit of the full tenure. It follows that it would be inconsistent with his right to the full tenure if he could be denied the tenure and yet be required to pay the bank’s profit margin for the full tenure. To allow the bank to also be able to earn for the unexpired tenure of the facility, means the bank is able to earn a profit twice upon the same sum at the same time.

(b)The profit margin that continued to be charged on the unexpired part of the tenure cannot be actual profit. It was clearly unearned profit. It contradicted the principle of Al-Bai Bithaman Ajil as to the profit margin that the provider was entitled to. Obviously, if the profit had not been earned it was not profit, and should not be claimed under the Al-Bai Bithaman Ajil facility.

(c)The profit margin could be calculated and derived with certainty. Even if the tenure was shortened, the profit margin could be recalculated with equal certainty. The total due on the date of the judgment was RM616,080.99 and after crediting the defendant with all the payments he has made of