ISLAMIC BANKING AND TAKAFUL | SHAS 3358

SECTION 1
ANALYSIS OF AN ISLAMIC BANKING CASE:
PAN NORTHERN AIR SERVICES SDN BHD VS MAYBANK
ISLAMIC BERHAD AND ANOTHER APPEAL [2021] 3 MLJ 408

SUBMITTED TO:
DR SAFINAR BT SALLEH

SUBMITTED BY:
NAME MATRIC NUMBER

AHMAD TAUFIQ BIN KHAIRUDDIN 1810403

SAYED MOHD SYUKRI BIN SAYED MOHD NOOR 1818709
SHUKRI AHMAD IKRAM BIN ABDUL HAMID 1813403
MUHAMMAD SUHAIL BIN SHARIFFUDIN 1828801
 TABLE OF CONTENT
Ser Content Pages
1. Introduction 2
2. Main Body
i. Fact of the Case 2-3
ii. Relevant Shariah Concept 3-4
iii. Illustration of the Islamic Banking Financing Facility
Involved on Ta'widh. 4-5
iv. Issues 5
v. Decision 5-7
vi. Rationale 7-8

vii. Commentaries 8

3. Conclusion 9
4. Bibliography 10

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1.0 INTRODUCTION
The case that will be discussed in this paper is Pan Northern Air Services Sdn. Bhd. v
Maybank Islamic Bhd and Another Appeal [2021] 3 MLJ 408, the case was decided by Abdul
Karim, Lee Swee Seng, and Nantha Balan of the Court of Appeal in Putrajaya on December 11,
2020. The issue arises about the operation materialized through financing transactions
undertaken between the financier and the customer. Both parties are expected to observe
specific obligations stipulated under the financing contract.
The objective of this paper is to analyses the correct Ta’widh rate that is chargeable
under an Islamic banking financing facility, which was paid after the default of the payment of
instalments but before the maturity date of the financing facility; and to investigate a Shariah
question is raised, should the trial court refer the matter to the Shariah Advisory Council (SAC)
or is it entitled to look at available rulings of the SAC and decide accordingly.
The method used in this research is the qualitative method which focuses on collecting
information through research. Among the methods used in library research in which the data is
collected from textbooks and academic journals. Other than that, the information is also gained
through case analysis whereby the main platform used is LexisNexis to extract the concept of
the correct Ta’widh rate that is chargeable under an Islamic banking financing facility, which was
paid after the default of the payment of instalments but before the maturity date of the financing
facility; and the Shariah question is raised, should the trial court refer the matter to the Shariah
Advisory Council (SAC) or is it entitled to look at available rulings of the SAC and decide
accordingly which the main case that is referred to in discussing the above issues on case of
Pan Northern Air Services Sdn Bhd vs Maybank Islamic Berhad. Besides that, the researchers
also analyze the cases and scrutinize the principles used by the court while deciding the case
as well as referring to the principles formulated in the older cases with the newer case.
For the outline of the paper, this essay is about an analysis of the case between Pan
Northern Air Service and Maybank Islamic Sdn Bhd. This case is about an analysis of Ta’widh
by finding the correct rate that is chargeable under an Islamic banking facility. There are 2
fundamental issues discussed in this case which are the correct Ta’widh rate and the necessity
to refer the SAC whenever a shariah question is raised. After that, we provide the relevant
shariah concept discussed in this case also its illustration. Then, we provide the judgment of the
case and discuss them by providing our own comments. Our analysis will conclude with a
summary of the matters discussed in this case.

2.0 MAIN BODY

2.1 Fact of the Case
Pan Northern Air Services Sdn Bhd (‘the borrower’) was granted a RM41.016m
Islamic financing facility by Maybank Islamic Bhd (‘the bank’) to finance the Borrower’s
performance of a contract for the Government of Malaysia (‘the GoM’). Under the facility,
the borrower signed five separate Al-Bai Bithaman Ajil (‘BBA’) agreements with the
bank, each of which contained an asset sale agreement. Section 9.32 in the asset sale
agreements provided that if the borrower defaulted in any of its repayment obligations, it

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had to pay the bank compensation (‘Ta’widh’) at the rate of 1%pa on the overdue
payments from the date of default until the date the amount was paid. The section also
provided that the bank was entitled to vary the Ta’widh rate upon giving written notice of
variation to the borrower.
GoM’s premature termination of its contract with the borrower caused the latter to
be unable to meet its repayment obligations under the BBA agreements causing the
bank to terminate and recall the same well before their maturity date. The bank
appointed receivers and managers for the borrower and considered taking execution
proceedings against the borrower’s securities but, on the borrower’s request, decided to
grant it time to arbitrate its dispute with the GoM. As soon as the arbitration ended in the
borrower’s favour, it sought to settle its debt with the bank and enquired about the total
amount outstanding under the BBA agreements. The bank informed the borrower that it
had to pay RM42.045m — after a sum of RM1m in Ta’widh had been waived — failing
which the waiver would be revoked and the borrower would be liable for the full sum
owing under the BBA agreements. Finding the bank’s response to its request for details
and statement of accounts on the amount owing to be unsatisfactory, the borrower
nevertheless complied with the deadline for payment by paying the full sum demanded
by the bank subject to the borrower’s right to question and ascertain the actual amount
payable by way of Ta’widh and Ibra’ and to obtain a refund of any excess paid.
The bank accepted the payment on the borrower’s terms. The borrower
subsequently discovered that instead of charging the contractually agreed Ta’widh rate
of 1%pa, the bank had imposed other different rates including the Islamic Interbank
Money Market (‘IIMM’) rate published by Bank Negara Malaysia. The borrower then
sued the bank for a refund of the excess Ta’widh that it had paid. The bank
counterclaimed for payment of the RM1m discount that it had given the borrower in the
event the borrower succeeded in its claim. The High Court dismissed both the
counterclaim and the borrower’s claim holding that the bank had charged the proper
Ta’widh amount as it was entitled to follow the Bank Negara Malaysia (‘BNM’) Guideline
1998 on the matter and to impose a rate more than the contractually agreed 1%pa.
The court also held that since the parties had achieved a compromise or accord
and satisfaction, the borrower was estopped from challenging or reclaiming any part of
the settlement monies. The borrower appealed against the decision while the bank
appealed for a consequential order that if the borrower’s appeal was successful, it
should be repaid the RM1m Ta’widh discount it had given the borrower. At the appeal
hearing, the bank argued, inter alia, that the borrower’s claim — filed in 2017 — was
time-barred under s 6(1)(a) of the Limitation Act 1953 since its cause of action accrued
when Ta’widh was first charged on 1 May 2008 when the borrower breached the BBA
agreements.

2.2 Relevant Shariah Concepts

Ta`widh is usually applied in the structuring of sukuk. It refers to compensation
agreed by the contracting parties that can be claimed by the creditor (the financier i.e
investors/sukuk holders) when the debtor (the sukuk issuer) fails or delays performing its
obligation to repay debt in relation to sukuk issuance.
The permissibility of imposing ta`widh on a defaulted customer is considered
based on the following evidence and arguments:

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 a. The following hadith of Rasulullah SAW that considers intentional delay in
debt payment by a person, who can pay, is a tyranny -
ُ ِّ‫صلَّى هَّللا ُ َعلَ ْي ِه َو َسلَّ َم َقا َل َم ْط ُل ْال َغنِي‬
ٌ‫ظ ْلم‬ َ ِ ‫َعنْ َأ ِبي ه َُري َْر َة َأنَّ َرسُو َل هَّللا‬
From Abi Hurairah that Rasulullah SAW had said: “Delay by a rich person (in
payment of debt) is a tyranny.”
b. There is also a fiqh maxim extracted from a hadith relating to this matter:

‫ض َر َر َوالَ ضِ َرار‬
َ َ‫ال‬
“Neither harming nor reciprocating harm (in Islam).”
Based on this maxim, the delay in payment by the customer will create
harm to the Islamic financial institution as the financier whereby the Islamic
financial institution will suffer actual loss in terms of incurring additional
expenditure, such as cost for issuing notices and letters, legal fees, and other
related costs. These issues should be avoided to ensure that business
transactions are conducted according to the principle of market efficiency (istiqrar
ta`amul).
c. Overdue payment of debt is analogous to usurpation (ghasb). Both share
the same `illah which is tyrannically obstructing the use of the property and
exploiting it. In the case of ghasb, Imam Syafii and Hanbali are of the view that
the benefit of the seized property is guaranteed and shall be compensated. In the
case of delayed payment of financing amount, the financier is also unable to
utilize the fund for other business purposes, of which should be settled within
stipulated period. Therefore, the customer should pay compensation for the
losses suffered by the financier.
d. Fiqh Maxim:

‫الضرر يزال‬
“Whatever harm should be removed.”
Based on the previously mentioned fiqh maxim, imposition of ta`widh and
gharamah on delayed payment of debt is an appropriate approach to mitigate the
harm suffered by the financier, and at the same time instilled discipline on
customer to make payment according to the stipulated schedule.

2.3 Illustration of the Islamic Banking Financing Facility Involved on Ta'widh

The SAC, in its 4th meeting dated 14 February 1998, 95th meeting dated 28
January 2010 and 101st meeting dated 20 May 2010, has resolved that the overdue
payment charge imposed by an Islamic financial institution encompassing both concepts
of gharamah (fine or penalty) and ta`widh (compensation) is permissible, subject to the
following conditions:
(1) The imposition of ta`widh on the late repayment of Islamic financing is
permissible.

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 (2) Ta`widh payment for: -
(a) arrears, and;
(b) failure to pay after the due date, are both permissible. The ta`widh
payment is for Islamic financing based on `uqud mu`awadhat including
sukuk issued based on contracts of exchange.
(3) Ta`widh imposed on a sukuk issuer who fails to meet its obligation to pay
the principal amount and profit on the agreed date is permissible although the
obligation arises based on `uqud ishtirak (i.e. musharakah or mudharabah
contracts). In the context of `uqud ishtirak, ta`widh is limited only for failure to pay
realised profit and it is not applicable for failure to pay expected profit.
(4) Ta`widh is permissible under the structure of sukuk wakalah bi al-
istithmar if the sukuk issuer/wakil (agent) does the following:
(a) Breaches its fiduciary duty as an investment manager due to failure in
distributing the realised profit to the investors on the agreed date; or
(b) Delays the payment of any amount due and payable to the investors
upon dissolution of wakalah agreement.

2.4 Issues
There are two fundamental issues:
1. What is the correct Ta’widh rate that is chargeable under an Islamic banking
financing facility, which was paid after the default of the payment of instalments but
before the maturity date of the financing facility; and
2. Whether when a Shariah question is raised, should the trial court refer the matter to
the Shariah Advisory Council (SAC) or is it entitled to look at available rulings of the SAC
and decide accordingly.

2.5 Decision
In establishing the Ta'widh rate that applies, the Court looked at the BBA Facility
Agreements entered between the Customer and the Bank in relation to the Facility and noted
that the contractually agreed rate of Ta’widh provided for in the event of default of instalment
payments was 1% per annum, and such rate may be varied by the Bank at its absolute
discretion or via Bank Negara Malaysia’s (BNM) advice upon written notification to the
Customer. The clause governing Ta’widh is set out in the respective BBA Facility Agreements
as follows in Section 9.32 defined Ta’widh that;
"If the Customer defaults in any payment on its due date of any one or more of the
instalments or any other moneys herein covenanted to be paid, the Customer shall pay
to the Bank ta’widh (compensation) at the compensation rate of 1% per annum on the
overdue instalments calculated from the date of such default until the date of payment of
the amount thereof and shall not be limited to the period of the financing or any method
approved by Bank Negara Malaysia or at the Bank’s discretion. The Ta’widh
(compensation) on overdue payment may be varied by the Bank at its absolute

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 discretion or upon receipt of advice [sic] from Bank Negara Malaysia upon written
notification to the Customer".
Besides, in deciding the rightness of the Bank's Ta'widh rate (whereby the rate actually
charged was based on the Islamic Interbank Money Market rate, instead of the contracted
Ta’widh rate of 1% per annum), the Court referred to the BNM letter issued in 1998 on
“Pengenaan Penalti Bagi Pembiayaan Perbankan Islam” together with the attachments, and
concluded that the BNM letter did not address the issue of Ta’widh but rather on the charging of
“penalty” for default in instalment payments. Even if the BNM letter were to apply, it was silent
on the need to provide notice for the Ta’widh rate, and the Court held the requirement relating to
the notice of change in the contracted Ta’widh rate (as set out in the Ta’widh clause in the BBA
Facility Agreements) must be complied with by the Bank, and in this case, the Bank did not
provide such notification to the Customer on the change in the Ta’widh rate applied by the Bank.

Furthermore, the Court also referred to the Guidelines on Late Payment Charges for
Islamic Banking Institutions 2012 (LPC Guidelines) issued by BNM on the concept of Ta’widh,
which state that the rate of Ta’widh chargeable is 1% per annum on the actual loss incurred by
the banks because of default in payments, calculated from the date of payment until the maturity
date. After the maturity date, the LPC Guidelines provide that the rate on the actual loss to be
compensated from the default in payment must not be more than the prevailing daily overnight
Islamic interbank rate on the outstanding balance.
The Court determined that, even though the LPC Guidelines were issued only after the
BBA Facility Agreements were signed in 2005, the LPC Guidelines nevertheless endorsed what
had been the practice of the Bank in charging 1% per annum for Ta’widh as contractually
provided for by the Ta’widh clause in the BBA Facility Agreements. In view of the above, the
Court then had to decide what was the correct Ta’widh chargeable for a default in payment,
upon termination of the Facility before the maturity date.
In addition, the Court held that that in this case there was an excess Ta’widh paid by the
Customer to the Bank upon termination of the Facility before the maturity date, in that the
Ta’widh rate of 1% per annum must be based on the balance sale price in accordance with the
Ta’widh clause in the BBA Facility Agreements as if there had been no default and the full sale
price would have been paid upon maturity date. Hence any failure to pay the instalment
payments would require the Customer to compensate the Bank based on the balance sale price
as at the date of termination of the BBA Facility Agreements upon default plus the
compensation based on the Ta’widh rate for actual cost that the Bank has incurred due to the
Customer’s failure to pay the instalments on time.
Pertaining to second issue, Civil courts have jurisdiction over disputes involving Islamic
financial instruments, but they are unable to determine whether a situation involving Islamic
banking complies with Shariah regulations, as this is a matter for the SAC, whose opinion is
binding on the civil courts. Even though the customer did not pursue this issue of the
requirement to refer to the SAC for determination during the appeal, the Court opted to consider
it in detail in its judgement.
Upon determining whether or not to refer the matter to the SAC, the Court firstly looked
at the relevant provisions dealing with reference to the SAC in ss 56 and 57 of the Central Bank
of Malaysia Act 2009 (CBMA 2009), which state as follows: “Section 56 (1) 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. “Section 57 Any ruling made by the

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Shariah Advisory Council pursuant to a reference made under this Part shall be binding on the
Islamic financial institutions under section 55 and the court or arbitrator making a reference
under section 56.”
The Court also cited JRI Resources' Federal Court judgement, which outlined two
possibilities for civil courts to consider when faced with a request to submit a question to the
SAC (as follows):
(a) ascertain if there are already existing rulings of the SAC on the question raised
before the civil courts.
(b) if there are none, then refer to the SAC for its rulings.
Following its discussion of the foregoing, the Court outlined the measures civil courts should
take when dealt with a Shariah issue:
(a) Whether the issue raised is a Shariah issue. If it is not a Shariah issue, then there
is no need to refer to the SAC.
(b) If there is a Shariah issue, whether there is existing guideline, ruling or resolution
issued by BNM or the SAC (as the case may be) on that Shariah issue. If there is such
existing guidelines, ruling or resolution of BNM or the SAC, then there is no need to refer
the matter to the SAC;
(c) If there is more than one guideline, ruling or resolution of BNM or the SAC (as the
case may be) on that Shariah issue, the civil courts should determine which of these is
the applicable one, taking into account the facts of the case before the civil courts.
(d) If there are no applicable guidelines, rulings or resolutions of BNM or the SAC (As
the case may be), only then should the civil courts refer the Shariah issue to the SAC.

2.6 Rationale
2.6.1 In the context of Islamic finance, the phrases "borrower" and "loan" are
used.
Unfortunately, the Court erred in the written ruling by utilising phrases like
"borrower" and "loan," which are inconsistent with the underlying Shariah structure for
the BBA Facility Agreements in this case. While such phrasing is permissible for
conventional banking, it is not proper for Islamic financing, hence the Court should have
used terms like "client" and "financing facility" that are consistent with Islamic finance in
connection to the BBA Facility Agreements in this instance.
2.6.2 The Importance of Actual Language Used in Ta'widh Clause Drafting
The Court's interpretation of the Ta'widh clause in the BBA Facility Agreements
was commendable, as the decision prioritised the language used in the drafting of the
Ta'widh clause in the BBA Facility Agreements in determining whether any change in the
contracted Ta'widh rate would be legally correct under the circumstances. The actual
language used in the drafting of the Ta'widh clause in the BBA Facility Agreements had
clearly indicated the Ta'widh rate applicable, and that any modification in the contracted
Ta'widh rate can only be made if the Bank complies with the Ta'widh clause by notifying
the Customer in writing. If the Bank had intended for a different Ta’widh rate to apply
(such as the Islamic Interbank Money Market rate) prior to and after the maturity date,

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 then the Bank should have complied with the written notification requirement for such
change in the contracted Ta’widh rate, in line with the Ta’widh clause in the BBA Facility
Agreements.
2.6.3 Whether BNM Guidelines or Policy Documents can be Used to Refer a
Shariah Issue to the SAC.
The Court’s decision has certainly clarified the way a reference to the SAC
should be made by the civil courts, which clearly builds on the earlier Federal Court’s
decision in JRI Resources. However, it may be noted that the procedure for reference as
set out by the Court may not be entirely in line with s 56 of the CBMA 2009. This is
because under s 56, the courts must determine whether there is any “published rulings
Shariah Advisory Council” before referring a Shariah issue to the SAC.
However, in this case the Court had gone further and included guidelines issued
by BNM to determine whether there is any “published rulings of the Shariah Advisory
Council” for the purpose of s 56. With respect, any guidelines (or policy documents)
issued by BNM will not come within the meaning of “published rulings of the Shariah
Advisory Council” for the purpose of s 56 of CBMA. In addition, the Federal Court’s
decision in JRI Resources (which was relied on by the Court in this case) also makes
clear that only published rulings of the SAC may be considered for the purpose of s 56.
Therefore, despite the Court’s helpful suggestions on the procedure for reference, civil
courts can consider only the SAC’s published rulings (and not any guidelines or policy
documents issued by BNM) in determining whether a reference on a Shariah issue
should be made to the SAC under s 56 of the CBMA 2009.

2.7 Commentaries
According to this case, it stated that when there is a default in the schedule of payments
in a loan facility under an Islamic banking contract, it would be unconscionable for a bank to
introduce penalty by unilaterally increasing the rate of Ta'widh; there must first be an enabling
provision in the facility agreements for the penalty to be charged. Absent such provision, it
would be disingenuous for the bank to impose it under the guise of their Islamic Interbank
Money Market ('IIMM') rate or the Bank Negara Malaysia Pro-rated IIMM Rate when
contractually, Ta'widh had been fixed at 1% per annum and no written notice had been given to
the borrower for its increase.
This case also provided guidance regarding the steps to be followed by civil court judges
before referring to Shariah Advisory Council (SAC). The court held, in the matter pertaining to
Shariah issue, the court should refer to SAC before derived any judgment on the issue. It is should
instead follow the following steps:
(i) is the issue raise a Shariah issue or is it a pure contractual issue regarding of any Shariah
element;

(ii) if it is a Shariah issue is there already a guideline, ruling or resolution of BNM or SAC on
this issue.

(iii) if there are more than one guideline, ruling or resolution on this issue the court may
proceed to decide which is the applicable one considering the factual matrix of the case; and

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 (iv) if the matter or issue raised is a Shariah issue and there is no pending guideline, ruling
or resolution on it, then the court would refer the matter or issue to the SAC."

3.0 CONCLUSION
In conclusion, this case suggests that the most significant reason behind the
implementation of overdue payment charges in Malaysia was to mitigate the credit risk faced by
the Islamic Financial Institutions. However, in the process of implementing this, a question
arises as to whether there is accuracy in claiming that imposition of ta’widh is to recoup
“additional” expenses incurred by the banks, should customers delay in payment when
everything had already been priced in the financing earlier.
Furthermore, it is imperative to formulate a yardstick to distinguish genuine defaulters
from delinquent defaulters. Moving forward, this case recommends future studies to investigate
whether overdue payment charges in Islamic banks really serve as deterrent factor and
contribute to the decline in the rate of non-performing financing since the implementation of the
guidelines on ta’widh. Accordingly, it is recommended that Islamic banks need to think out of the
box and take another approach in dealing with the situation. In line with this, it is important for
Islamic banks to formulate strategies and guidelines towards practical application of verse 280
of chapter two of the holy Quran. This is to ensure that where the customer's default in payment
is due to poverty, such a customer must be given respite until he is able to pay. This should be
done without compromising the Islamic bank's duty of care owed to the depositors to maximized
profit as much as possible.
Other than that, the introduction of Sections 56 and 57 of the CBMA is well intended as
the provisions seek to achieve certainty in Islamic banking principles by vesting the
interpretation of such principles in the SAC which comprises individuals of vast experience and
knowledge in various fields, especially in finance and Islamic law. The SAC does not encroach
into the realm of judicial power as the trial judge remains responsible for deciding the dispute
based on its facts and by applying the SAC’s ruling. The minority judges on the other hand, took
the opposite view and maintained that in substance, the SAC exercises judicial power as the
trial judge is bound to follow the SAC’s ruling on the question of Islamic law referred to it. In
short, in the matter pertaining to Shariah issue, the court should refer to SAC before derived any
judgment on the issue.

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 BIBLIOGRAPHY

1. Ta’widh and Gharamah

http://www.sacbnm.org/wp-content/uploads/2018/03/81.E.pdf

2. Application of Ta’widh and Gharamah in Islamic Banking in Malaysia

https://jmifr.usim.edu.my/index.php/jmifr/article/download/205/171/433

3.

https://www.maybank.com/islamic/en/coe/fatwa/islamic-banking/permissibility_of_late_p
ayment_charges.page?

4. Resolutions of the Shariah Advisory Council of the Securities Commission

Malaysia dated 31 December 2020

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