The Development Of Islamic Banking Juridical And Practical Issues - Is The Law Equipped?

Part one of an abridged and amended version of a paper presented by the writer at the 11th Malaysian Law Conference held in Kuala Lumpur, Malaysia in November 2001. The paper looks at Islamic banking as it is practised in Malaysia and discusses some of the deficiencies in the law applicable to Islamic banking. As disputes in Islamic banking are referred to the civil courts (modelled on the English system) for adjudication, the issue of conflicts between the civil laws and Islamic law that might arise are also considered. The writer makes various proposals for amendments to the existing laws in their application to Islamic banking

Islamic Banking in Malaysia

Islamic banking, introduced into the Malaysian banking system in 1983, was made possible by the passing of the Islamic Banking Act 1983 (Act 276) (IBA), which came into force on 10 March 1983 and applies through out Malaysia.

The IBA is a unique piece of legislation providing for the setting up and licensing of “Islamic banks”. It is unique in the sense that probably for the first time an Act of Parliament has been enacted to deal specifically with Islamic banking. The writer is not aware of any similar legislation in any other jurisdiction following the common law system.

Another aspect of Islamic banking in Malaysia worthy of mention is that the dispute resolution in Islamic banking cases comes within the jurisdiction of the civil courts (and not under the Shariah court system, as some might expect, which apply the civil court procedures to such cases.

Scope of the Paper

This paper discusses the development of Islamic banking in Malaysia since its introduction from a legal viewpoint. It seeks to highlight some shortcomings, problems and issues in the legal framework in a constructive way and makes some proposals to overcome them.

ISLAMIC BANKING BY ISLAMIC BANKS

Islamic Banks

As of now, only one bank has been licensed under the IBA and that is Bank Islam Malaysia Berhad (Bank Islam). It is expected that another bank will soon get its Islamic banking license.

What is an Islamic Bank and What is Islamic Banking Business?

Section 2 defines “Islamic Bank” as “any company which carries on Islamic banking business and holds a valid licence and “Islamic banking business" as “banking business whose aims and operations do not involve any element which is not approved by the Religion of Islam”. The term “banking business” itself is not defined and the IBA does not stipulate how that term is to be understood in the context of Islamic banking.

The definition of “Islamic banking business” in the IBA appears to be simple; but, in the writer’s view, it is not so. What meaning is to be given, for example, to the expression “any element which is not approved by the Religion of Islam”?

Seen from this point of view the tax is not free from problems either, where Islamic banking transactions are concerned. Whilst certain amendments have been made to the Real Property Gains Tax Act 1976, these are considered not comprehensive enough to deal with problems that arise from time to time.

Rules of the Court

The Rules of the High Court 1980 and the Subordinate Courts Rules 1980 were drafted in the year shown in their titles. This was before Islamic banking was introduced into this country and, naturally, the peculiarities of claims made and actions filed under Islamic financing were not taken into account. But the rules have not been amended since to provide for these peculiarities­­­⁴

This became clearly evident in the case of Bank Islam Malaysia Berhad v Adnan Bin Omar⁵, another ABBA financing matter.

Dangerous Living

Lawyers at Risk

The foregoing instances illustrate the type of dangerous living that lawyers practising Islamic law in this country have to undergo in arguing cases in the civil courts. But their luck may not always hold and the danger may become real that an Islamic banking transaction (perfectly valid under the Shariah) may be held to be unenforceable or void because the civil law has not been equipped to handle it. That would be a legal tragedy.

Judges’ Dilemma (or Trilemma)

Another danger zone may be considered — uncertainty in the law and a lack of specification as to the law applicable. The Shariah imposes certain requirements for a contract to be valid under it. But these requirements may not all be the same under all the schools of jurisprudence of Islam or under the civil law. So it is possible for a contract to be valid under the tenets of one madhab of the Shariah and not under another madhab or the civil law. If the validity of such a contract falls to be determined by a civil court, how should the court decide it?

To what sources would a judge deciding the case refer? And if there are conflicting opinions in the Shariah, which one should he adopt? If there is a conflict between Islamic law and the civil laws applicable to the matter, which should take precedence? These are all questions to which there are no ready answers.

A situation such as that described above would be a real legal dilemma for a judge or, more appropriately, a trilemma!

It cannot be over-emphasised that there must be answers in the law to the types of questions raised above. These can only be provided by legislation and that must be done in all hast they are long overdue.

The Way Forward

The Law is Not in Step With Practice

Islamic banking is well entrenched in the banking system of the country and is growing at a healthy rate. It is the writer’s view, as demonstrated in the discussion above, that the same cannot be said of the law relating to Islamic banking. There are many grey areas and uncertainties in the law. If left unattended they could pose grave problems to Islamic banking. This inadequate state of affairs in the law relating to Islamic banking must be given immediate attention.