CHAPTER 8

In Malaysia, a dual judiciary system is adopted whereby civil court co-exists with
Shariah Court. Thus, there must be a clear stand as to which court shall have the
jurisdiction over Islamic banking disputes as both courts derive their power and
jurisdiction from statutes. Ideally, since Shariah court applies Islamic law and
principles, the jurisdiction of Islamic banking disputes should be under Shariah Court.
However, in most of the countries, commercial issues such as banking matters are not
within the jurisdiction of Shariah court.
The administration of justice is a federal matter and civil courts therefore fall
under federal authority, and they are Federal Court, the Court of Appeal, the High
Courts (Malaya and Borneo), where both are co-ordinate jurisdiction and status, and
subordinate courts are set up under the Federal Constitution. The Federal Court and
the Court of Appeal have jurisdiction throughout the Federation.
On the other hand, Shariah court comprises of Shariah Subordinate Court,
Shariah High Court and Shariah Court of Appeal. Each states in Malaysia has a
different administration of Islamic law Enactments and Shariah Courts are set up
under these administration.
List I of 9th Schedule of Federal Constitution, which is the Federal List
provides for the matters which the civil court have jurisdiction on. Under the power of
the federal government, List I clearly vests the establishment of the court of justice.
Some of the matters which the civil court have jurisdiction on are contracts such as
partnership, agency and banking facilities such as negotiable instrument, bill of
exchange, cheques, promissory notes, foreign exchange and others.
Malaysia practices constitutional supremacy, thus the Federal Constitution is the
supreme law of our country. Article 3(1) of the constitution states that Islam is the
religion of the federation. However, according to Article 74(2), matters pertaining to
persons professing the religion of Islam are placed under the jurisdiction of the states
and not the federal. Thus, while Islamic laws have jurisdiction, they are subjected to
limitations as specified in the List II (State List) of 9th Schedule. According to
Mahmud Saedon (1998), if the law enacted by the State Legislature is contrary to the
Constitution, it would be rendered void as construed in Art.4(1) of FC. Thus this
shows that the jurisdiction of the state to enact laws relating to Islam is limited.
Article 121(1) of the Federal Constitution provides for the establishment of the
civil court with its powers and jurisdiction to be conferred by federal laws while
Paragraph 1 of List II of the Ninth Schedule of the Federal Constitution grants
the power to the State Legislature to pass laws for the constitution, organisation and
procedure of Shariah Court. This provision empowers government to establish
Shariah Court whereby the matters that Shariah Courts deal with involves personal
and family laws of persons prefessing the religion of Islam, Islamic law of succession,
betrothal, marriage, divorce, dower, maintenance, adoption, legitimacy, and other
matters as provided in Paragraph 1 of List II of the Ninth Schedule of the Federal
Constitution. This shows that the Shariah Court does not have any jurisdiction in
respect to offences stated in Federal List.
According to Mahmud Saedon (1998), the Islamic law can only be applied in
the narrow sense, that is, it must only pertain to personal and family laws, upon
Muslims only and under the limited jurisdiction as what has been construed in the
Federal Constitution. This corresponds with the matters stipulated in Para 1 of List
II.
The Parliament has made constitutional amendment in year 1988 by introducing
Article 121(1A) to the Federal Constitution due to the existence of dual court system,
as there are conflict of jurisdiction between the Shariah Court and the civil court
which had occurred in a number of cases prior to the amendment. This amendment
stipulates that both the High Courts shall have no jurisdiction in respect to any matter
within the jurisdiction of the Shariah court. The purpose of this amendment was to
prevent the High Court from exercising its powers of judicial review over decisions of
the Shariah court, however this did not take away the jurisdiction of High Court if the
matter does not fall within the jurisdiction of Shariah Court.
However, there was an issue as to whether Islamic banking and finance (IBF)
should fall under the jurisdiction of Shariah Court or civil court. This is because
although IBF is subjected to Shariah Law, but it is also governed by federal laws
passed by Parliament considering that ‘finance’ falls under Item 7 of Federal List of
9th Schedule of FC. This issue was first brought up in Bank Islam Malaysia Bhd v
Adnan bin Omar & Ors, where the defendant raised a preliminary objection stating
that since the plaintiff is an Islamic bank, the civil court has no jurisdiction to hear the
case based on Art.121(1A) of FC. However, NH Chan overruled the preliminary
objection and stated that List I (Federal List) provides for matters which the
Parliament may make the law which includes banking, and also stated that List II
(State List) stipulates that Shariah Courts shall have jurisdiction only over persons
professing the religion of Islam. Since plaintiff is a body corporate, and does not have
a religion, it cannot be subjected to the jurisdiction of Shariah Court.
This is because there is no specific provisions in Federal Constitution which
provides for IBF. Even the State List of 9th Schedule which provides for the matters
which the Shariah Court has jurisdiction on, did not provide anything for IBF.
However, it did stated that Shariah Court has jurisdiction over matter which involves
Islamic Law, and this is open to interpretation. As such, arguably it may include
matters relating to Islamic finance. However, Item 7 of Federal List of 9 th Schedule
has expressly stated that matters related to finance falls under the federal jurisdiction.
Thus, any disputes relating to Islamic financial transactions will be tried in Civil
Courts and not the Shari’ah Court.
In this case, Abdul Hamid JCA reasoned the judgement stating that the disputes
about IBF not only involves Islamic Law but also involves other statutes like National
Land Code, Companies Act, Contracts Act and so on, where the Shariah Court has no
jurisdiction over these laws and the Shariah Court judges are not competent enough to
deal with these laws. He also stated that power of enforcement and remedies available
in the Shariah Court are limited because there could be non-Muslims involved in
Islamic banking transaction as IBF is not only confined to Muslims. Since Shariah
Court has no jurisdiction over non-Muslims based on Para 1 of State List, Shariah
Court cannot deal with IBF cases. Shariah Courts also cannot impose fine more than
RM5000 in criminal offences, thus this shows it has a limited power in dealing IBF
case.
In Mohd Alias Ibrahim v RHB Bank Bhd & Anor, the court held that civil
courts has jurisdiction over banking transactions based on Islamic principles and the
the court reasoned the judgement by stating that finance, trade, commerce and
industry matters falls within the ambit of Federal List in List I of 9 th Schedule of
FC.
Similarly, in Bank Kerjasama Rakyat Malaysia Bhd v EMCEE Corporation
Sdn Bhd, the court held that the civil courts has jurisdiction over IBF cases and this is
because Shariah Courts are State courts independent of each other and there are 14
Shariah Appellate Courts in the country, whereby this structure could bring confusion
in the law if the courts give contradictory judgments. Unlike this structure, civil courts
have only one Court of Appeal and one Federal Court, thus there could be no
confusion in the judgment.
 Since IBF cases are being dealt in civil courts, this leads to another issue as to
whether Islamic Laws are applicable in these cases. Islamic Banking Act 1983 and
Takaful Act 1984 also do not provide anything that states Shariah Court has
jurisdiction over IBF cases. Since Islamic financial system does not have a
comprehensive law for it to operate, based on S.5(a) and S.3 of Civil Law Act 1956,
the court may use English Law if there is no provision of law on matter such as issues
relating to banks and banking. In Bank Islam Malaysia Bhd v Pasaraya Peladang,
the court stated that although the case involves a facility under Islamic Banking
System, National Land Code 1965 and Rules of High Court 1980 was applied.
According to Norhashimah (2003), this also has led to the principles of stare decisis
where the decision of superior court has a binding effect on the lower courts. In
Mayban Berhad (MBB) v Marilyn Ho Siok Lin, the judge stated that the court is
bound by principle of stare decisis and thus applied civil law in this case.
Therefore, it is now trite that civil court have jurisdiction over IBF cases.
However this does not mean that the civil court is flawless in dealing with IBF cases.
Islamic banking and finance (IBF) is a special area of law which requires the judges
to be competent in Islamic Law, but this is lacking in our civil court system.
Based on case law, judges in civil court to a certain extent do not have the
competence to deal with Shariah matters as they are not trained in Islamic Law and
thus are not in the position to ascertain the law. This justifies why CBMA requires
courts to refer to SAC for its ruling relating to Shariah financial matters and the
rulings made to be binding on the court. In Arab Malaysian Merchant Bank Bhd v
Silver Concept Sdn Bhd, the learned judge himself stated that not every presiding
judge in the civil court is a Muslim and even if the judge is a Muslim, the Muslim
judge may not be sufficiently equipped to deal with Shariah matters. Thus this creates
a big question as to whether Islamic finance cases should be dealt in Shariah Courts.
The next legal issue is the interpretation of Islamic finance contracts with
conventional contracts. In Tinta Press Sdn Bhd v Bank Islam (M) Bhd, the contract
used by the parties was al-Ijarah contract, however court interpreted it as lease
contract, where these 2 contracts are not similar in character. The court also referred
to English Law instead of Islamic Law, even though the contract used was al-ijarah
contract. Similarly in Bank Islam Malaysia Bhd v Adnan Bin Omar and Affin
Bank Bhd v Zulkifli Abdullah, the court interpreted Bay ‘Bithaman’ Ajil (BBA)
contract as a loan. Loan is prohibited in Islam as it involves usury while BBA contract
is allowed as it is an agreed profit margin. Interpreting BBA contract as loan would
render the contract to be void from Shariah perspective. IBs offer capital through
BBA which is a sale with deferred sale price and this is known as financing rather
than loan. By doing this, the court would rather emphasise on the interest of the
contract, whereas BBA actually uses the principle of profit. This shows that the civil
courts did not interpret the contracts based on Shariah principles, but rather
interpreted them by referring to contracts that exists under conventional banking
system. In Bank Islam Malaysia Bhd v Lim Kok Hoe & Anor and Other Appeals,
the High Court held that BBA was contrary to Islam because only one school of law
under Islamic Law. However, Court of Appeal ruled that BBA contract and
conventional loan agreement is not the same but the law governing these contracts are
the same which is contract law and same principle should be applied in deciding these
cases.
The next issue is the claim of the total profit before the end of tenure. Since BBA
is a purchase contract through pending sale where customer has to pay on instalments,
problem arises when contract is terminated half way by reason of default on monthly
payments as it invokes an issue on whether the customer has to pay only the purchase
price or pay the whole selling price including the profit until the expiration of the
agreement. Civil courts considers that requiring the customer to pay the purchase
price is high and contrary to Shariah principles. In Malayan Banking Bhd v Ya’kup
Oje & Malili, the court held that the repayment amount stipulated in BBA contract
was excessive and unfair when compared with conventional banking. Similary in
Arab-Malaysian Finance Bhd v Taman Ihsan Jaya Sdn Bhd & Ors, Seri Kota
Bukit Cheraka Co Ltd (Third Party) and Other Cases, the court stated that BBA
contract is contrary to Islam as the profits in this contract had elements of usury
similar to conventional bank loan but in reality, BBA is a contract of sale, rather than
loan. Unlike conventional loans, the purchase price and profits are set and agreed
under BBA contract and thus there are no uncertainty in BBA contract compared to
conventional loans where the interest rate changes time to time. Under BBA contract,
the customer pays for the selling price instead of paying interest.
Another legal issue is regarding the functions of SAC. SAC is established under
S.51(1) of Central Bank of Malaysia Act 2009 (CBMA) which states that SAC will
be the authority for the ascertainment of Islamic financial businesses. S.52 of CBMA
provides the functions of SAC, which is to ascertain Islamic financial matters and
issue a ruling upon reference made to it, to advise the BNM, to provide advice to any
IFIs, and other functions which may be determined by the Bank. S.56(1) also states
that if there is any proceedings before any court or arbitrator concerning Islamic
financial business, then the court or arbitrator must take in to consideration any
rulings of SAC that was published, or refer such question to SAC for its ruling. The
issue is to what extent the ruling of SAC is accepted in civil court. In Affin Bank Bhd
v Zulkifli Abdullah, on the issue of whether the bank could claim money from the
sales price in a BBA contract when the defendant failed to pay the fee in due time, the
court gave judgement without referring this matter to SAC. In Arab-Malaysian
Finance Bhd v Taman Ihsan Jaya Sdn Bhd & Ors, Seri Kota Bukit Cheraka Co
Ltd (Third Party) and Other Cases, the court disregarded SAC’s ruling which
states that the BBA contract that was alleged to be contradicting with Islamic
principles, is valid. This is because only one school of thought approves BBA contract
while the other schools did not, thus court concluded that BBA contracts are contrary
to Islamic principles. The judge had failed to interpret the BBA contract as according
to the legal definition of ‘Islamic banking business’ as provided in S.2 IBA 1983 and
S.124 (7) (c) BAFIA 1989 which states that it should not involve any element which
is not approved by Islam. Instead, the judge added another element stating that the
contract must not contain elements that are not approved by other schools of thoughts.
However in JRI Resources Sdn Bhd v Kuwait Finance House (M) Bhd, the
Federal Court held that the rulings of SAC is binding on the court.
In conclusion, since Shariah Court does not have any jurisdiction over IBF cases
and as such there are many legal issues when the civil courts decides IBF cases, the
present legal framework should be amended to enable competent judges who have
knowledge in Islamic Law to deal with IBF cases to avoid any potential conflicts.
The next legal issue is that there is double standard on IFIs, which results from
the existence of dual taxation system which is imposed on IBs when paying the
corporate tax and zakat as provided in IBA 1983 and BAFIA 1989 while the
conventional banks only have to pay corporate tax.
Thus, Islamic banking should be given rebates as what has been given to Tabung Haji
through the Tabung Haji Act to avoid double taxation (Nik Norzrul, Mohamad Ridza
and Megat Hizaini, 2003).
Even individuals who pay zakat are given rebates in income tax payments as set out in
Section 6A (3) of the Income Tax Act 1967 (Norhashimah, 1996)
On a different note, the Constitution which gives power to the Civil Courts to try
cases of Islamic finance also seems to cast aside the role of Shari’ah judges and
lawyers.
This should not happen because the interpretation of Islamic laws should be done by
members in the field rather than civil judges and lawyers who often refer to the civil
sources rather that Islamic ones.