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ABSTRACT
A closer look at the recent Malaysian judicial decisions in Islamic finance cases shows that the power of the courts to adjudicate Islamic finance disputes has been diminished. The main cause of this seems to be the enactment of sections 56 and 57 of the Central Bank of Malaysia Act 2009, which mandated the courts to not only delegate the ascertainment of Shari’ah issues pertaining to Islamic finance to the designated Shari’ah Advisory Council (SAC), but also to accept and apply its rulings. This article examines the constitutionality of both sections with special reference to the recent decision in JRI Resources Sdn Bhd v Kuwait Finance House (Malaysia) Bhd [2019] 5 CLJ 569, in which the Federal Court upheld their validity by a slim majority of 5 to 4. The article offers alternatives that are both constitutional and receptive to the SAC’s role in the resolution of Islamic finance disputes.
Acknowledgements
The author is very grateful to anonymous referees for their comments on the earlier draft of this article.
Notes
1 The word ‘Shari’ah’ throughout the article is synonymous with ‘Islamic law’. It needs to be noted, however, that Shari’ah has a wider meaning in Islamic jurisprudence. It literally means ‘the way’, referring to the Muslim’s way of life. See Yusuf Talal DeLorenzo and Michael JT McMillen, ‘Law and Islamic Finance: An Interactive Analysis’ in Simon Archer and Rifaat Ahmed Abdel Karim (eds), Islamic Finance: The Regulatory Challenge (John Wiley and Sons 2007) 136.
2 Islamic Financial Services Act 2013 (IFSA), ss 18(1) and 28(1), (5).
3 See Adnan Trakic, ‘Shari’ah Governance Framework for Islamic Financial Institutions: With Reference to Malaysia’ in Adnan Trakic and Hanifah Haydar Ali Tajuddin (eds), Islamic Banking and Finance: Principles, Instruments and Operations (2nd edn, Current Law Journal 2016).
4 See the website of the Central Bank of Malaysia: ‘Shariah Advisory Council’ <www.bnm.gov.my/index.php?ch=en_about&pg=en_thebank&ac=439&lang=en> accessed 28 August 2019.
5 A Shari’ah non-compliant Islamic finance contract could be considered as illegal and, as such, null and void under s 24 of the Malaysian Contracts Act 1950.
6 The ‘lawyer’s construct’ phrase was used by Morison J in Shamil Bank of Bahrain v Beximco Pharmaceuticals Limited and others [2003] EWHC 2118 (Comm) (High Court of England and Wales) [40] to describe the Shari’ah non-compliance defence which, in that case, was unsuccessful.
7 Central Bank of Malaysia Act 2009, s 56(1) states:
Where in any proceedings relating to Islamic financial business before any court or arbitrator any question arises concerning a Shariah matter, the court or the arbitrator, as the case may be, shall (a) take into consideration any published rulings of the Shariah Advisory Council; or (b) refer such question to the Shariah Advisory Council for its ruling.
8 The basic structure doctrine has been recognized as Malaysian law by the Federal Court in Semenyih Jaya Sdn Bhd v Pentadbir Tanah Hulu Langat [2017] 3 MLJ 561 (Federal Court of Malaysia (FCM)) and Indira Gandhi a/p Mutho v Peangarah Jabatan Agama Islam Perak & Ors [2018] 1 MLJ 545 (FCM). Both cases are discussed in a later section of the paper.
9 [2019] 5 CLJ 569 (FCM).
10 FMT Reporters, ‘Indira Gandhi Verdict Has Far Reaching Implications, Says Ex-Judge’ FMT News (31 January 2018) <www.freemalaysiatoday.com/category/nation/2018/01/31/indira-gandhi-verdict-has-far-reaching-implications-says-ex-judge/> accessed 16 August 2019. See also Shad Saleem Faruqi, ‘Restoring Constitutional Supremacy’ The Star (15 February 2018) <www.thestar.com.my/opinion/columnists/reflecting-on-the-law/2018/02/15/restoring-constitutional-supremacy-the-federal-constitutions-core-values-are-not-words-in-the-sand-t> accessed 16 August 2019; Wilson Tze Vern Tay, ‘Basic Structure Revisited: The Case of Semenyih Jaya and the Defence of Fundamental Constitutional Principles in Malaysia’ (2019) 14 Asian Journal of Comparative Law 113.
11 Hereinafter referred to as the Federal Constitution.
12 See an open letter addressed by the former Chief Justice of Malaysia, Tun Abdul Hamid Mohamad, to all members of the Malaysian Parliament, entitled ‘Federal Court Has Encroached the Jurisdiction of Parliament (Proposed Amendment of Article 159 of The Federal Constitution)’ (26 July 2019) <tunabdulhamid.my/index.php/speech-papers-lectures/item/945-open-letter-to-all-members-of-parliament> accessed 16 August 2019.
13 List I of the Ninth Schedule of the Federal Constitution contains matters on which the Federal Parliament may legislate and, by extension, on which the civil courts may adjudicate, while List II thereof lists matters on which the State Legislative Assemblies may legislate and Shari’ah courts adjudicate.
14 Federal Constitution, art 121(1A).
15 Federal Constitution, List I of the Ninth Schedule, items 7 and 8.
16 The jurisdiction is mostly over the personal matters of Muslims, such as marriage, divorce, custody, and inheritance. The jurisdiction also extends to a few Islamic law offences in relation to morality and faith. See List II of the Ninth Schedule of the Federal Constitution.
17 In Bank Islam Malaysia Bhd v Adnan Omar [1994] 3 CLJ 735 (High Court of Malaya (HCM)) the High Court held that an Islamic bank, as a corporate entity, did not have a religion and, as such, could not fallunder the jurisdiction of the Shari’ah court.
18 For more details on the treatment of Shari’ah issues in Islamic finance contracts by the civil courts and the role of the Muamalat Division of the High Court, see Tun Abdul Hamid Mohamad and Adnan Trakic, ‘The Shari’ah Advisory Council’s Role in Resolving Islamic Banking Disputes in Malaysia: A Model to Follow?’ (2012) ISRA Research Paper 47/2012 <www.semanticscholar.org/paper/THE-SHAR%C3%94%C3%91AH-ADVISORY-COUNCIL'S-ROLE-IN-RESOLVING-A-Abdul-Mohamad/8afe6b1bec8ee569676a605f03cdb45ac159780a> accessed 15 June 2020.
19 [2006] 1 CLJ 438 (HCM).
20 [2006] 7 MLJ 249 (HCM).
21 [2007] 6 MLJ 389 (HCM).
22 Bai Bithaman Ajil is a financing arrangement whereby the financier purchases the asset which the customer desires and then sells it to the customer on a deferred basis at a fixed price which includes the profit margin. This arrangement used to be popular in Malaysia for home financing schemes. The way it worked was that the customer who had signed the sale and purchase agreement with the developer, and thereby acquired beneficial ownership of the desired property, would sell the property to the financing bank for lump sum, and then immediately after that buy back the property from the bank on a deferred basis at a fixed price which includes the bank’s profit margin. The arrangement has been criticised by both Shari’ah scholars and jurists (including some judges) for resembling conventional loans with interest. See, Mohammad Yusuf Saleem, ‘Islamic Contracts for Financing (Part 2)’ in Adnan Trakic and Hanifah Haydar Ali Tajuddin (eds), Islamic Banking and Finance: Principles, Instruments and Operations (2nd edn, Current Law Journal 2016).
23 See Abdul Hamid Mohamad and Adnan Trakic, ‘Application and Development of Ibra’ in Islamic Banking in Malaysia’ [2013] The Law Review 26.
24 The Central Bank of Malaysia Act 1958 has since been repealed by the Central Bank of Malaysia Act 2009.
25 Section 16(B) stated that the court ‘may’ refer Shari’ah questions to the SAC for its ruling.
26 Section 16(B) provided that the court ‘shall take into consideration’ the ruling if made upon such a reference.
27 [2009] 1 CLJ 419 (HCM).
28 ibid 447.
29 [2009] 6 CLJ 22 (Court of Appeal of Malaysia (CAM)).
30 ibid 39 (emphasis added).
31 Part VII, entitled ‘Islamic Financial Business’ was added in the new CBMA. Chapter I of Part VII is entitled ‘Shari’ah Advisory Council’ and it includes ss 51–58.
32 [2011] 4 CLJ 654 (HCM).
33 Federal Constitution, art 121(1).
34 Mohd Alias Ibrahim (n 32) 677.
35 ibid 682–84.
36 See section 3.1 below.
37 [2012] 3 CLJ 249 (HCM).
38 [2013] 1 CLJ 436 (CAM) 444.
39 ibid 445.
40 JRI Resources (n 9).
41 Ijarah muntahiah bitamlik is a financing arrangement whereby the financier purchases and leases out the asset to the customer for an agreed fee with an option at the end of the leasing period for the customer to acquire the ownership of the asset.
42 JRI Resources (n 9) 594 (emphasis added).
43 ibid 595.
44 ibid 596.
45 Another point worth considering is whether such an indemnity clause could be struck out by the courts on the grounds of substantive unfairness. See Adnan Trakic, ‘Unfairness in Islamic Finance Contracts: The Malaysian Case’ (2018) 29 Journal of Banking and Finance Law and Practice 294.
46 The actual letter was written in Malay language and was included by the High Court in its written decision in Kuwait Finance House (Malaysia) Bhd v JRI Resources Sdn Bhd and Ors [2016] 10 CLJ 435 (HCM). The Federal Court reproduced in its written grounds the version of the letter translated in English.
47 Federal Constitution, art 128(2) provides the Federal Court with the jurisdiction to decide a constitutional question that may arise in any proceedings before another court. The Courts of Judicature Act 1964, s 84 provides the High Court with the power to stay the proceedings where a constitutional question has been raised and refer it in a form of a special case to the Federal Court for determination.
48 JRI Resources (n 9) 592.
49 A former Chief Justice of Malaysia, Tun Abdul Hamid Mohamed, mentioned that Mohd Zawawi Salleh’s judgment in CIMB Islamic Bank Bhd v LCL Corp Bhd & Anor [2011] 7 CLJ 594 (HCM) was ‘perhaps the best judgment of a Malaysian court on Islamic banking to date’. See Mohamad and Trakic (n 23) 38.
50 Federal Constitution, art 74.
51 Federal Constitution, the Ninth Schedule, List I, item 4(k).
52 Banking and finance, including Islamic banking and finance, is mentioned under List I, item 7 of the Federal Constitution’s Ninth Schedule. Hence, the laws which regulate the banking and finance industry, such as Central Bank of Malaysia Act 2009 and Islamic Financial Services Act 2013, are federal laws.
53 See Cambridge Dictionary <dictionary.cambridge.org/> accessed 27 August 2019.
54 JRI Resources (n 9) 598.
55 ibid 610.
56 Mohd Alias Ibrahim (n 32).
57 [2013] 3 MLJ 269 (CAM).
58 Central Bank of Malaysia Act 2009, s 52.
59 It needs to be noted that, from an Islamic point of view, the word ‘ruling’ typically refers to ‘fatwa’, which is defined as ‘a response given by a qualified scholar (ie a mufti) to a particular issue put to him by a person or a group of persons or an organisation’. See Mohammad Hashim Kamali, ‘Moderation in Fatwa and Ijtihad: Juristic and Historical Perspectives’ (2016) 7 Islam and Civilisational Renewal 303, 303. As a general rule, a fatwa is non-binding whereas a ‘ruling’, in the civil court context, refers to a judicial decision which is binding. This could be the reason behind the confusion. Since Islamic banking and finance falls under the jurisdiction of the civil courts, the word ‘ruling’ ought to be interpreted and understood in the civil court’s context.
60 JRI Resources (n 9) 610.
61 It is interesting to note that even though Malay is an official language in Malaysia, the original and authoritative version of the Federal Constitution is written in English.
62 AIR 1973 SC 146 (Supreme Court of India (SCI)).
63 [1977] 2 MLJ 187 (FCM).
64 ibid 193.
65 [1980] 1 MLJ 70 (FCM).
66 [2007] 6 CLJ 341 (FCM).
67 Federal Constitution, art 121(1) was amended in 1988 to replace the part that stated: ‘the judicial power of the Federation shall be vested in two High Courts of co-ordinate jurisdiction and status’ with the following sentence: ‘There shall be two High Courts of co-ordinate jurisdiction and status … the High Court and inferior courts shall have such jurisdiction and powers as may be conferred by or under federal law’. For more details, see Andrew Harding, The Constitution of Malaysia: A Contextual Analysis (Hart Publishing 2012) 202–05 and Richard SK Foo, ‘Malaysia—Death of a Separate Constitutional Judicial Power’ [2010] Singapore Journal of Legal Studies 227.
68 Federal Constitution, art 39 states that the executive power is vested in the Yang di-Pertuan Agong who, according to art 40, shall act in accordance with the advice given by the Cabinet or a Minister acting under the general authority of the Cabinet.
69 See the Court of Appeal judgment in Kok Wah Kuan v Public Prosecutor [2007] 5 MLJ 174 (CAM) 182.
70 Kok Wah Kuan (FCM) (n 66) 352–53. In 2018, on his website, Tun Abdul Hamid Mohamad, however, made it clear that his personal view is that ‘in the first place, the amendment should not have been made’. See Tun Abdul Hamid Mohamad, ‘Please Return Judicial Power to the Courts’ <tunabdulhamid.my/index.php/speech-papers-lectures/item/898-please-return-“judicial-power”-to-the-courts> accessed 28 August 2019.
71 Kok Wah Kuan (FCM) (n 66) 355.
72 ibid 359.
73 [2010] 2 MLJ 333 (FCM).
74 Richard Malanjum CJ (Sabah and Sarawak) and Zulkefly FCJ, the other two judges in this case, concurred with the judgment of Gopal Sri Ram FCJ.
75 Sivarasah Rasiah (n 73) 342.
76 Semenyih Jaya (n 8).
77 Indira Gandhi (n 8).
78 See Tun Abdul Hamid Mohamad, ‘No Judge is a Parliament’ New Straits Times (15 June 2017) <www.nst.com.my/opinion/columnists/2017/06/249016/no-judge-parliament> accessed 28 August 2019.
79 The judgments that Tun Abdul Hamid said could have been referred to in Sivarasa Rasiah are the Federal Court judgment in Phang Chin Hock (n 65) and the Singaporean High Court decision in Teo Soh Lung v Minister of Home Affairs and Ors [1989] 2 MLJ 449.
80 JRI Resources (n 9) 611.
81 The applicant relied on the decision of the High Court of Australia in Mellifont v Attorney General (Queensland) [1991] HCA 53 in which the court observed that in order to ascertain if a power is judicial in nature, it needs to be seen whether its exercise is an integral part of the process of determining the rights and obligations of the parties in the dispute.
82 Mohd Zawawi Salleh FCJ also relied on the Mellifont case and said: ‘The Australian High Court itself recognizes in the judgment that it is the combination of the attributes that makes it the exercise of judicial power and not any single one or other of them’: JRI Resources (n 9) 615.
83 The court referred to Huddart, Parker & Co Proprietary Ltd v Moorehead [1909] HCA 36; Rola Co (Australia) Pty Ltd v The Commonwealth [1944] HCA 17; Reg v Davison [1954] HCA 46; and Palmer v Ayres [2017] HCA 5.
84 JRI Resources (n 9) 655.
85 ibid 656.
86 ibid 615. See also Semenyih Jaya (n 8) 595–96.
87 ibid 628.
88 ibid 629.
89 ibid 657.
90 See Sir David Hughes Parry, The Sanctity of Contracts in English Law (Stevens & Sons Limited 1959) 1–18.
91 See, for example, Phua Corp Sdn Bhd v Newacres Sdn Bhd [1992] 3 CLJ (Rep) 274 (HCM); Dr Zarida Hambali and Ors v University Kebangsaan Malaysia (HCM, 30 April 2009).
92 See Adnan Trakic, ‘The Inequality of Bargaining Power: Does Malaysia Need This Doctrine?’ (2016) 17 Australian Journal of Asian Law 1.
93 The Consumer Protection Act 1999 (Malaysia), Part IIIA, entitled ‘Unfair Contract Terms’, explains when a contract or its term would be considered substantively unfair. For more details, see Adnan Trakic, ‘Statutory Protection of Malaysian Consumers Against Unfair Contract Terms: Has Enough Been Done?’ (2015) 44 Common Law World Review 203.
94 See Trakic, ‘Unfairness in Islamic Finance Contracts’ (n 45).
95 JRI Resources (n 9) 659.
96 See Wong Swee Chin v Public Prosecutor [1981] 1 MLJ 212 (FCM) 214 (Raja Azlan Shah CJ). See also Aishath Muneeza, ‘Application of Law of Evidence to Islamic Banking with Special Reference to Malaysia’ (2017) 10 International Journal of Islamic and Middle Eastern Finance and Management 503, 511.
97 JRI Resources (n 9) 659.
98 Islamic Financial Services Act 2013, s 29(1) empowers the CBM to specify standards on Shari’ah matters. See also Engku Rabiah Adawiah Engku Ali and Umar A Oseni, ‘Towards an Effective Legal and Regulatory Framework for Islamic Financial Institutions: Major Initiatives of the Central Bank of Malaysia’ (2017) 59 International Journal of Law and Management 652, 658–61.
99 Islamic Financial Services Act 2013, s 29(3) requires that every institution, its director, chief executive officer, senior officer or a member of a Shari’ah Committee shall at all times comply with the standards specified by the CBM. Failure to do so is an offence punishable with imprisonment for a term not exceeding eight years or a fine not exceeding 25 million ringgit or both (s 29(6)).
100 See, for example, the Court of Appeal decision in FLH LCT Services Sdn Bhd & Anor v Malaysian Debt Ventures Bhd [2016] 1 MLJ 248 (CAM). See also the recent High Court decisions in Bank Kerjasama Rakyat Malaysia Bhd v MME Reality & Management Sdn Bhd [2018] 6 CLJ 381 (HCM) and Sigur Ros Sdn Bhd v Maybank Islamic Berhad [2018] 1 LNS 220 (HCM).
101 JRI Resources (n 9) 678–79.
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Adnan Trakic
Adnan Trakic is a Senior Lecturer in Law at Monash University Malaysia.