The Law

irst and foremost the law applicable to Islamic banking has to be made certain. This must include guidelines on the law applicable, the sources (authoritative texts) of Islamic banking law and the basis on which the courts should decide which one of two or more conflicting principles is to be adopted and applied. It must be clearly prescribed that where there is a conflict between Islamic law and the civil laws in relation to Islamic banking transactions, Islamic law shall prevail. The following measures, among others, need to be taken to bring the law to a stage where it can meet the requirements of modern banking:

Amendments to the Islamic Banking Act and the Banking and Financial Institutions Act. There is a real and urgent need to review and revise the IBA and s. 124 of BAFIA to clarify-the position of Islamic law in Islamic banking transactions. Some specific areas have been indicated in the preceding discussion.

Amendments to Existing Laws

There are a host of existing laws (including procedural laws) that need to be amended to make them applicable to Islamic banking. Some of these are: the Contracts Act 1950, the National Land Code 1965, the Stamp Act 1949, the Companies Act 1965, the Malay Reservations Enactment of the various States of Malaysia, The Rules of the High Court 1980 and the Subordinate Courts Rules 1980 and others. A comprehensive study of all such legislation must be made and appropriate amendments passed by Parliament. As an interim measure, a general all-embracing provision may be enacted in the IBA and BAF to deal with situations of conflict among the laws that may be applicable and uncertainty in the law.

(c) “Islamic financial business” means any financial business, the aims and operations of which do not involve any element which is not approved by the Religion of Islam.”

This section empowers conventional financial institutions to carry on Islamic banking business to the same extent as an Islamic bank, removing in the process the prohibition against the carrying on of Islamic banking business by any person not in possession of a license under the IBA.6 Indeed, the latter can do more since s. 124 (1) also authorises them to do Islamic financial business, although considering the definition of the latter term (which is identical to that of Islamic banking business), it is difficult to see what would come with in that term that is also not within the term Islamic banking business.

Apparently the same laws and rules will apply to Islamic banking business carried on by both Islamic banks and conventional banks (though it is conceivable, that in certain matters the opinions of the Sharia Advisor Councils may differ).

The Shariah Advisory Council Under S. 124

The proliferation of Shariah Advisory Councils could engender certain legal problems. What would be the position if the advice of these bodies on the same issue differ? How would a court be expect ed to resolve such differences in opinion if a matter in respect of which there are differences between these bodies reaches the civil court?

Whilst as an interim measure some inter-consultative machinery may be set up to ensure that the various advisory bodies consult one another and agree on the at to be rendered on any issue of Islamic law, it would be more appropriate if all such advisory bodies were merged into one so that there would be no opportunity for such conflicting advice to be rendered at all.

FROM WHAT SOURCES ARE THE ISLAMIC LAW TO BE DERIVED

Scope of Islamic Law to be Applied

The IBA, having authorised Islamic banks to carry on Islamic business, has not defined the Islamic law that is to be applied to Islamic banking transactions. It has not even indicated the sources7 (e.g. standard texts) from where the law may be derived. The role of the Shariah Advisory Council, important though it is, must as a matter of practicality be restricted. It cannot be expected to provide a ruling or advice on issues that arise in the daily operations of Islamic banking. The lack of guidance in the IBA as to the sources would pose a real problem to both counsel who have to present arguments in court, and to judges who have to decide cases before them.

Whilst the applicable principles for the transaction in question, and to some extent the documentation, might have been approved by the respective Shariah advisory council,8 counsel would b left very much to their own devices in preparing arguments in presenting cases in the courts. Judges, too, would be in a difficult position to decide cases without fully researched arguments by counsel and authoritative reference material to which they could refer in making decisions.

Conversely, the divergence of opinions among Islamic jurists and scholars to which different counsel might have access and which they would each urge the court to adopt might be so complex that deducing a principle of law from them might seem to be as much a deliberate decision after considerable thought as after the toss of a coin.

Civil Laws Applicable to Islamic Banking

A related problem arises from the fact that disputes arising in Islamic banking transactions are brought before the civil courts for adjudication.9 Neither the IBA nor s.124 of BAFIA exclude the application of the civil law to Islamic banking transactions. Alternatively, there is no provision in either Act stipulating that Islamic law shall apply exclusively to such transactions. Thus presumably both Islamic law and the civil laws will apply to Islamic banking transactions.10 And this has to be applied within the existing common law system of courts. This includes substantive as well as procedural laws.