A relatively simple example can be taken from the land code. S.330 of the National Land Code (the Code) relates to the lodgement of a lien holder's caveat. It allows for the lodgement of a lien-holder’s caveat “as security for a loan”. In Islamic banking, no loans are granted as in conventional banking save in the case of a qard al-hasan (a friendly (i.e. interest free) loan)3 Islamic Bankers, of course, would not normally grant interest-free loans. Their financing is done principally by means of trade transactions or what are sometimes termed as asset- based or activity-based transactions. These transactions, not being loan transactions, do not fall within s. 330 on a literal reading. So it would appear that this form of security (a lien-holders’ caveat) could not be entered for an Islamic financing transaction. But some might argue that in the case of an Islamic financing transaction the word “loan” should be read to include such a financing transaction. Whether there is merit in such an argument or not would be a matter of opinion and ultimately for a-court to decide. The point here, however, is that the Code does not, in its original version or by subsequent amendment, accommodate Islamic banking transactions in all cases.
Stamp Duty and Other Tax Provisions
Another area where considerable difficulty is experienced in everyday practice is stamp duty. The Stamp Act 1949 was amended in 1989 to insert a new s. 14A. This section provides that where a principal security secures the repayment of moneys provided under a scheme of financing made according to the Shariah, duty chargeable thereon shall be calculated on the principal amount provided by the financier.
There are many other areas (e.g. refinancing arrangements, addition al facilities granted which are to be secured by the same security, such as a house renovation facility to a customer who already has a house purchase financing facility for the same property) where problems or uncertainties still exist.
The area of real property gains………had been more precise such as providing that in the event of differences between the schools on any point, the law to be applied should be the law in accordance with, say, the Shafi’e madhab.2
On the other hand the general definition in the writers opinion highly significant, at once forward-looking and universal in its sweep. The prescribed formulation would allow for the reception and application of the law from any of the mad-hahib or even from the Shi’a branch on any issue that might be most appropriate in the given circumstances, thus making the resulting proposition of the law more widely acceptable, both within and outside
Who Can Carry on Islamic Banking Business?
Section 3(1) of the IBA states that “Islamic banking business shall not be transacted in
The Law Applicable to Islamic Banking Business
Surprisingly, the foregoing provisions are all that the IBA contains about the law that is to be applied to Islamic banking. It is astonishing that in an Act that paves the way for the establishment of Islamic banks and authorises the carrying on of Islamic banking business there is not a fuller treatment of the law that is to be applied or even broad guide lines on what the law is to be.4 This topic is dealt with in greater detail later in this paper.5
……IBA in relation to the applicable Shariah law (or the apparent deficiency in the law within the Act) is to provide the input by the establishment of a Shariah advisory council for each Islamic bank. S. 3 of the IBA makes the establishment of a Shariah Advisory body a condition for the grant of a license to an Islamic Bank.
This is an important provision which seems to have been designed to deal with the immensely intricate subject of the Islamic law that is to apply to Islamic banking transactions.
However, its real purport has not been tested in the courts as yet. But it is reasonable to conclude that, since the setting up of a Shariah advisory body is a condition for the granting of a licence, (the Act envisages a central role for that body in the sphere of the law may even be seen as a mini Parliament, entrusted with power to “en laws (by rendering advice to the bank) applicable to Islamic banking.
The statutory function of the Shariah advisory body is “to ensure that (the operations of the bank] do not involve any element which is not approved by the Religion of Islam”. What is the real legal ambit of this subsection?
Are decisions of the Shariah advisory council subject to judicial review by the courts? This is an issue of critical importance since it involves the question of the role and function of the Shariah advisory council. The IBA does not provide an answer.
But the answer that might be given by a civil court to this question could well determine the future evolution of the law of Islamic banking one way or the other.
Banking and Financial Institutions Act 1989 (BAFIA)
Section 124 (in force from 1 August 1996) of BAFIA (which applies to conventional banks) reads as follows:
(1)….Nothing in this Act or the Islamic Banking Act 1983 shall prohibit or restrict any licensed instruction from carrying on Islamic banking business or Islamic financial business, in addition to its existing licensed business, provided that the licensed institution shall consult the Bank before it carries on Islamic banking business or any Islamic financial, business.
(2) For the avoidance of doubt, it is declared that- a licensed institution shall, in respect of the Islamic banking business or Islamic financial business carried on by it, be subject to the provisions of this Act.
(3) Any licensed institution carrying on Islamic banking business, or Islamic financial business, in addition to its existing licensed business may, from time to time seek the advice of the Shariah Advisory Council established under subsection (7), on operations of its business in order to ensure that it does not involve any element which is not approved by the Religion of Islam.
(7) For the purposes of this section:
(a) There shall be established a Shariah Advisory Council which shall consist of such members, and shall have such functions, powers and duties as may be specified by the Bank to advise the Bank on the Shariah relating to Islamic banking business or Islamic financial business;
(b) “Islamic banking business” has the meaning assigned thereto under the Islamic Banking Act 1983; and
Expert Evidence
Particular mention needs to be made of the rule of evidence under which expert evidence cannot be called where the issue is one concerning local law. As was seen earlier6 Islamic law is regarded as law so this rule will apply to prevent expert evidence from being called to explain or clarify an Islamic law point to the judge.
However, in view of the peculiar position of Islamic law it is the writer’s opinion that this rule should be relaxed to allow for expert evidence to be given in court on any Islamic law issue or at least to allow for judges to be advised on such law. The areas on which such opinion may be received would have to be strictly controlled by appropriate provisions in the enabling statute and such evidence cannot in any event extend to contradicting any advice given or ruling issued by the National Shariah Advisory Council7
Alternatively, provision should be made to allow courts to seek the opinion of the National Shariah Advisory Council of particular issues in Islamic law, which would then be binding on them.
One Shariah Advisory Body — The National Shariah Advisory Council
There should be only one Shariah Advisory body (which may be called the National Shariah Advisory Council) for the whole country. This would require the merging of all existing Shariah Advisory bodies and repealing the requirement for every Islamic bank licensed under the IBA to have its own Shariah advisory council. The composition of the National Shariah Advisory Council should be broadened to include, in addition to Islamic scholars and bankers, lawyers and academicians, so that the advice of the Council may incorporate the requirements of the banking community and of the law in everyday practice and also take account of current thoughts and trends. This is necessary in order to make the advice and rulings of the National Shariah Advisory Council relevant and contemporary. It will also help to integrate Islamic banking law into the existing legal system. Any attempt to segregate Islamic banking law from the general body of laws or the dispute resolution process from the mainstream system should be avoided, as it could have the effect of sidelining Islamic law and rule gating Islamic banking to the lower rungs of the legal hierarchy.
Rulings and Advice of The National Shariah Advisory Council
The status of the rulings and advice of the National Shariah Advisory Council should be clearly defined so that the courts may not displace such rulings or advice and substitute their own view Shariah issues, as has happened before in other Islamic law matters.9 This is important to ensure an orderly development of Islamic law in the country. Differences of opinion on Shariah issues should be resolved within the National Shariah Advisory Council and their rulings should be made binding on all parties concerned.
Certification of Rulings
A system should be devised by which a certification or a stamp of approval would be endorsed on a ruling or advice made or given by the National Shariah Advisory Council, so as to remove any doubt whether any such ruling or advice was, in fact, made or given by the Council. Once such certification has been issued or a stamp of approval given, the ruling or advice should become binding for all purposes and should not be open to judicial review.
It is suggested that all banks, both Islamic and conventional, carrying on Islamic banking should jointly draw up an Islamic Banking Code set ting out the ground rules for the con duct of Islamic banking in this country. Such a Code should provide for all matters necessary for the proper and orderly conduct of Islamic banking, such as the broad basis for the calculation of profit margins, the granting of muqassah (or rebate) for early repayment or early recovery of financing and numerous other such matters that affect the manner in which Islamic banking is carried out in this country.
Conclusion
Islamic banking is well rooted in the banking system in the country, although it has not reached its full potential as yet. Great strides are being made in Islamic banking, with the support of the Government and the encouragement and guidance of Bank Negara
The legal landscape, however, is far from picturesque; indeed, it is somewhat barren. Probably when the IBA was enacted, the vision was not very clear, the path to be trod uncertain and the future unprestantive laws. This section thus gives precedence to Islamic law in this limited situation.
The question that immediately arises is, what if there are similar conflict situations in respect of other Acts and legislation or case law? Would the courts allow Islamic law to prevail (as would appear to be the right thing to do), or apply the principle of construction expressio unius est exclusio alterius (the express mention of one thing implies the exclusion of another) to hold that, since the Legislature has in s. 55 limited its scope to cover only the Companies Act, in other situations where there are conflicts between Islamic law, and other Acts or laws or even principles of common law, Islamic law is not necessarily to prevail? That would indeed be tragic but the courts may have no other option. This situation whether arising as a result of an oversight or otherwise needs to be immediately rectified.
— To be continued
1. IBA, s. 1(2)
2. The vast majority of Muslims in
3. As will be seen later, conventional banks can also carry on Islamic banking business, infra, page 4. So the real prohibition would appear to be using the appellation “Islamic bank” in its name, s. 2 IBA.
4. Compare, for example, the Contracts Act 1950 which contains elaborate provisions on the law of contract.
5. Infra, page 5, et seq.
6. See page3, para 2.3 supra.
7. By sources I do not mean the primary sources, the Quran. Hadis and Sunnah, Ijma and Qiyas but authoritative works on the subject from which applicable principles can be derived.
8. However, as yet there is no formal mode or certification to indicate that a document or principle has been approved by a Shariah advisory council.
9. There are two court systems operating in
