"If you're interested in publishing papers, we can work together, contact me. Interest: Islamic banking + marketing".

2009/09/27

The Legal Aspects of Marketing for Islamic Banking Services

INTRODUCTION

In this paper I would deal with basically the two aspects which I consider play a major role, other things being equal, in the decision of a customer opting for or deciding to take up a particular banking product, or availing himself of a particular banking service, over another in relation to Islamic banking services. These are:

1. The forum in which any disputes arising in the transaction will be decided; and
2. The law that will be applied in deciding the dispute.
Accordingly, a clear understanding of these matters is essential in marketing Islamic banking services.

ISLAMIC BANKS AND FINANCIAL INSTITUTIONS

In the strict sense of the word there is o¬nly o¬ne Islamic bank in Malaysia, Bank Islam Malaysia Berhad, it being the o¬nly bank to date licensed under the Islamic Banking Act, 1983 ("The Islamic Banking Act"). However under the amendments made to the Banking and Financial Institutions Act, 1989 ("BAFIA") (Which came into force o¬n 1 August 1996) all conventional banks and financial institutions. Mohamed Ismail Shariff 1 April 1997, The legal aspects of marketing for Islamic banking services.

Can carry o¬n Islamic banking business and Islamic financial business. This is brought about by the amendment to Section 124 of the BAFIA which reads as follows:

"124. (1) Except as provided in section 33, nothing in this Act or the Islamic Banking Act 1983 shall prohibit or restrict any licensed institution from carrying o¬n Islamic banking business or Islamic financial business, in addition to its' existing licensed business, provided that the licensed institution shall consult the Bank before it carries o¬n Islamic banking business or any Islamic financial business.

(2) For the avoidance of doubt, it is declared that a licensed institution shall, in respect of the Islamic banking business or Islamic financial business carried o¬n by it, be subject to the provisions of this Act.

(3) Any licensed institution carrying o¬n Islamic banking business or Islamic financial business, in addition to its existing licensed business may, from time to time seek the advice of the Syariah Advisory Council established under,subsection (7), o¬n the operations of its business in order to ensure that it does not involve any element which is not approved by the Religion of Islam.

(4) Any licensed institution carrying o¬n Islamic banking business or Islamic financial business shall comply with any written directions relating to the Islamic banking business or any other Islamic financial business, carried o¬n by such licenced institution, issued from time to time by the Bank, in consultation with the Syariah Advisory Council.

(5) Any licensed institution carrying o¬n Islamic banking business or Islamic financial business shall be deemed to be not an Islamic bank.

(6) This Act shall not apply to an Islamic bank.

(7) For the purposes of this section -

(a) There shall be established a Syariah Advisory Council which shall consist of such members, and shall have such functions, powers and duties as may be specified by the Bank to advise the Bank o¬n the Syariah relating to Islamic banking business or Islamic financial business;
(b) "Islamic banking business" has the meaning assigned thereto under the Islamic Banking Act 1983 1; and
(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."
So it is clear that both categories of banks, Islamic and conventional, can do Islamic banking business. And in a broad sense they are both subject to the same law (with some variations) in so far as their Islamic banking business is concerned.

WHICH COURT HAS JURISDCTION OVER ISLAMIC BANKING LAW MATTERS - THE CIVIL COURTS OR THE SYARIAH COURTS?

This question arises because of certain amendments made to the Constitution of Malaysia with regard to the jurisdiction of the High Court. The provision of the Constitution referred to is Article 121. Prior to the amendment it read as follows:

"121. (1) Subject to Clause (2) the judicial power of the Federation shall be vested in two High Courts of co-ordinate jurisdiction and status, namely

(a) o¬ne in the States of Malaya, which shall be known as the High Court in Malaya and shall have its principal registry in Kuala Lumpur; and
(b) o¬ne in the States of Sabah and Sarawak, which shall be known as the High Court in Borneo and shall have its principal registry at such place in the States of Sabah and Sarawak as the Yang di-Pertuan Agong may determine;
and in such inferior courts as may be provided by federal law.

(2) The following jurisdiction shall be vested in a court which shall be known as the Supreme Court and shall have its principal registry in Kuala Lumpur, that is to say
(a) Exclusive jurisdiction to determine appeals from decisions of a High Court or a judge thereof (except decisions of a High Court given by a registrar or other officer of the court and appealable under federal law to a judge of the Court);

(b) Such original or consultative jurisdiction as is specified in Articles 128 and 130; and

(c) Such other jurisdiction as may be conferred by or under federal law."
Clauses (3) and (4) are not relevant to the present discussion.
The amended Article reads as follows:
"121. (1) There shall be two High Courts of co-ordinate jurisdiction and status namely -
(a) o¬ne in the states of Malaya, which shall be known as the High Court in Malaya and shall have its principal registry in Kuala Lumpur;

(b) o¬ne in the States of Sabah and Sarawak which shall be known as the High Court in Borneo and shall have its principal registry at such place in the States of Sabah and Sarawak as the Yang diPertuan Agung may determine;

and such inferior courts as may be provided for by federal law; and the High Courts and inferior courts shall have such jurisdiction and powers as may be conferred by or under federal law.
(1A) The courts referred to in clause (1) shall have no jurisdiction in respect of any matter within the jurisdiction of the Syariah Courts.

(2) There shall be a court which shall be known as the Supreme Court and shall have its principal registry in Kuala Lumpur and the Supreme Court shall have the following jurisdiction, that is to say -

(a) Exclusive jurisdiction to determine appeals from decisions of a High Court or a judge thereof (except decisions of a High Court given by a registrar or other officer of the court and appealable to a judge of the court);

(b) Such original or consultative jurisdiction as is specified in articles 128 and 130; and
(c)Such other jurisdiction as may be conferred by or under federal law."

Relying o¬n this amendment (particularly Clause (1A)) it has been argued that the Civil Courts no longer have jurisdiction to hear cases where Islamic law is applicable, such jurisdiction now being vested in the Syariah Courts. Previously the Syariah Courts and the Civil Courts exercised concurrent jurisdiction o¬n certain matters involving Islamic law.2 With the inclusion of Clause (1A) in Article 121 it was thought that the jurisdiction of the Civil Courts o¬n matters involving Islamic law had been taken away.

In at least o¬ne case involving a banking transaction based o¬n Islamic principles in which the writer was Counsel the High Court has ruled that Clause (1A) has not take away its jurisdiction and that it did have jurisdiction to hear the case.3 It is the writer's view, with respect, that this decision is correct for reasons which need not be discussed in detail here.

In brief, Syariah Courts o¬nly have jurisdiction in respect of matters that fall within the State List in the Federal Constitution.4 The Civil Courts have jurisdiction in respect of matters which fall within the Federal List. The Ninth Schedule of the Federal Constitution contains the Federal List and the State List which set out the respective areas where the Federal Parliament or the State Legislature may make laws. Banking as well as the incorporation and regulation of corporations fall within the Federal List. Banks are companies incorporated under the Companies Act, 1965. Accordingly they fall within the jurisdiction of the Civil Courts.
Besides, the State List, which provides for the establishment of Syariah Courts, states that they (the Syariah Courts) "shall have The legal aspects of marketing jurisdiction o¬nly over persons professing the religion of Islam..."5 Banks being a creature of statute can have no religion.
For these reasons it is clear that the Syariah Courts cannot assume jurisdiction over banks and other companies or in respect of any other matter that falls within the Federal List.
There is no written judgment o¬n this issue and it is hoped that should the matter be ever raised again there would be an authoritative pronouncement from the Courts o¬n the subject.

WHAT LAW APPLIES TO ISLAMIC BANKING TRANSACTIONS

The Islamic Banking Act is an unique piece of legislation. It provides 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 similar legislation in any other jurisdiction following the common law system.
Up to the present o¬nly o¬ne bank, Bank Islam, has been licensed under the Islamic Banking Act.
The Islamic Banking Act stipulates that a bank licensed under it Act shall carry o¬n "Islamic banking business".

Section 2 defines "Islamic Bank" as "any company which carries o¬n 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". It is to be noted that "banking business" itself is not defined.

The definition of Islamic banking business appears at first flush to be simple; but in reality it is not so. What is the meaning, for example, of the expression "any element which is not approved by the Religion of Islam"? There are four madzhabs in the sunni branch of Islam (as opposed to the Shi'a branch). And opinions even among the four schools do vary o¬n many aspects of the law and no o¬ne can say that o¬ne opinion is correct and the others are not. It is more a question of choice. In the event of differences in opinion o¬n the law applicable in respect of any particular matter, there is no direction in the Act as to the law of which madhab is to be applied. Seen from this point of view the wording may seem to be too general. It might be thought that greater certainty would have been achieved if the definition had been more precise, such as providing that in the event of a difference the law to be applied is the law in accordance with, say, the Shafi'e madzhab.

On the other hand, however, the broad definition does have some positive aspects. The writer considers the definition to be a liberal o¬ne. That would facilitate, for instance, the reception and application of the law from any of the four schools or even from the Shi'a branch to suit the circumstances, thus making the resulting proposition of the law more widely acceptable.
The Islamic Banking Act by not defining banking business has either left it to be: implied by the Courts that the meaning of the term is to be the same as that applied in conventional banking or intended that term to acquire a meaning by custom and usage over the years. The civil courts would have to rule o¬n that issue when the occasion arises; but for now it is an open question.

THE APPLICATION OF ISLAMIC LAW WITHIN A COMMON LAW SYSTEM

It must be remembered that the Islamic Banking Act and Islamic law generally are to be applied and implemented within the existing common law system and the regime of all other existing laws. This includes not o¬nly the laws but also the courts system and court procedure. Needless to say, that system and those laws and procedure were not drafted or designed with Islamic law in mind or to facilitate the application of Islamic law.

A moment's reflection will bring into focus the enormity of the problem. To a legal practitioner this is a legal nightmare. What this means is that any document that is to be used1 in an Islamic banking transaction has to comply with BOTH (1) Islamic law (or in the words of the Act it must "not involve any element which is not approved by the Religion of Islam") AND (2) also with all other applicable laws, eg Contracts Act, 1950, Bills of Exchange Act,1949,just to name two. To take a simple illustration: a contract made in a banking transaction by an Islamic bank or as an Islamic transaction must be valid under Islamic law AND also under the civil law, for it to be enforceable in the civil courts. For example, a contract may be valid under Islamic law yet it could fail in the civil courts for want of consideration and thus be unenforceable. The reverse situation can quite as well happen.

Thus any document or instrument to be used in Islamic banking has to:
(1) Be in accord with Islamic law;
(2) Be in accord with the existing civil laws; and
(3) Be structured in such a way (eg, as to form) as to be enforceable in the civil courts.
This problem was realised at the outset when banking documents were first drafted for use by Bank Islam and a great deal of caution was exercised to ensure their compliance with the above-stated requirements.6 Over the years these documents have been modified and improved upon.
The validity of some of these documents were challenged in the courts but, happily, none of those challenges have been successful.7

One provision of particular significance is Section 3(5)(b) of the Islamic Banking Act which provides that the Central Bank (ie Bank Negara Malaysia) shall not recommend the grant of a licence, and the Minister shall not grant a licence, unless he is satisfied:

(b) that there is, in the articles of association of the bank concerned, provision for the establishment of a Syar'iah advisory body to advise the bank o¬n the operations of its banking business in order to ensure that they do not involve any element which is not approved by the Religion of Islam".

This is an important provision. However, its real purport has not been tested in the courts as yet.8 The setting up of a Syar'iah advisory body is a statutory requirement and its f-unction is "to ensure that [the operations of the bank] do not involve any element which is not approved by the Religion of Islam". What is the ambit of this subsection? To take an example, if a particular document used in banking transactions by a bank licensed under the Islamic Banking Act has been approved by its Syar'iah advisory body, can it then be challenged in court as being contrary to Syar' iah? Can the court find such a document to be not in accordance with the Syar'iah? If it does so, what is the effect of it o¬n the decision of the Syar'iah advisory body?

Put another way, are decisisons of the Syar'iah advisory body open to review by the courts? This is by no means an easy question to answer. And it is not easy either to venture an opinion o¬n the issue since any opinion has to be relative to particular factual situations. In the writer's view the issue should be cleared up by legislation rather than by lengthy and costly litigation in the courts.

The establishment of the Syariah Advisory Council under BAFIA raises another problem. It is this: it will be recalled that o¬ne of the requirements of an Islamic Bank is to have an in-house Syariah advisory body "to advise the bank o¬n the operations of its banking business". What would be the position if the advice of these two bodies (both of which are established under statute) o¬n the same issue differ?

Such conflict of opinion is not unforeseeable. And it should be avoided before it arises. There must be some machinery set up to ensure that both advisory bodies consult each other and agree o¬n the advice to be rendered o¬n any issue of Islamic law. It would be even better if the twc bodies are merged into o¬ne so that there would be no opportunity for such conflicting advice to be rendered at all.

It must be recognised, however, that the documents now in general use by Bank Islam (and adopted and used by other' banks and financial institutions) cannot meet all the banking or commercial requirements. As the application and use of Islamic law in commercial transactions become more pervasive the necessity for new types of documents will be felt (as they have been) and these must be devised (as has beer, done). Great ingenuity and far-sightedness will be needed in the creation of such documents. But the task is enormous and urgent and should not be done piecemeal. It must be adressed and necessary action taken o¬n a collective or central basis rather than by individual banks or financial institutions as seems to be the practice now.

CONCLUSION

In Malaysia Islamic banking is o¬n par with conventional banking:

1. Islamic banking is regulated by the Islamic Banking Act (under which Islamic law is to be applied to banking transactions) but all other laws applicable to banking matters generally also apply to Islamic banking. Thus a customer who does Islamic banking enjoys double protection; and
2. Any legal disputes involving Islamic banking matters are brought before the civil courts.
Thus the writer sees no major legal impediment for the growth of Islamic banking in Malaysia, though certain amendments to existing laws need to be made to make them more suited to Islamic law principles. The real challenge facing Islamic bankers is to bring home the message to Muslims and, more importantly, to non-Muslims:
1.That Islamic banking is open and available to everyone, Muslim and non-Muslim,
2. That it is relevant to present times and can meet the demands of modern-day business; and
3. That it is a true and in many respects a better alternative to conventional banking.

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6 Comments:

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At Sat Oct 02, 04:47:00 AM GMT-1, Anonymous islamic finance courses said...

Law Islamic banks and Islamic law in general should be applied and enforced in accordance with the common law system in force and the system of all existing laws. This does not include laws or ¬ only, but also the court system and judicial proceedings. Needless to say, this system and these laws and procedures were not written or directed to Islamic law in the mind or to facilitate the implementation of Islamic law.

 
At Sat Sep 17, 04:54:00 PM GMT-1, Anonymous Bouhedli Mohamed Nassim said...

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