UKM News Official Portal

By Abdul Ghani Nasir 
Pisc by Mohd Hairul Azmi

BANGI, 27 Okt. 2011 – A UKM economics scholar has suggested that the Banking and Financial Institution Act 1993 (Bafia) be amended to avoid disputes involving Islamic financing transactions being resolved based on the English common law through the civil courts.

Prof Dr Abdul Ghafar Ismail, from the Faculty of Economics and Management said though there are provisions for financial activities be based on margins and not interests, “it was only in the form of rules and regulations without any explanations on the supporting laws to be used in disputes.”

Prof Ghafar who was giving a Public Lecture on “The Structure of Islamic Financial System – Supporting Infrastructure and Effects of Tithes” here last Friday, said “Islamic financial institutions which offer transactions based on the syariah will face problems should there be disputes since all disputes involving commercial issues will be brought before the civil courts and not the syariah courts.”

He listed out a number of such casses being brought before the civil courts to settle their disputes. They include Tinta Press Sdn Bhd vs BIMB (1987); Bank Islam vs Adnan Omar (1994); Dato’ Nik Mahmud bin Daud vs Bank Islam (1996); Bank Kerjasama Rakyat Malaysia Bhd vs Emcee Corporation (2003); Bank Islam vs Pasaraya Peladang; Arab Malaysian Merchant Bank vs Silver Concept (2005) and Malayan Banking vs Ya’kup Oje & Anor (2007).

“The disputes will be argued according to the English common laws.  And contracts like Mudarabah and al-Ijarah will be forced to be interpreted according to concepts of the English common laws should there be disputes,” he said.

This is different  in Pakistan, where its Banking Ordinance and Mudarabah 1980 provides provisions for the central bank to determine the maximum and minimum profit margin that Islamic financial institution can use.
 
In Iran the Banking Act provides detailed explaination on the type of financing that can be traded by Islamic financial institutions like Mudarabah, Qard al-Hasan and other contracts.

Another issue that needed to be look into was that companies in Malaysia needed to register under the Companies Act 1965 which is also based on the English common law when involving monetary contracts like the Leasing Act.

“Bafia do not have provisions allowing banks to have an equity that is more than five per cent in any firm. Due to this the mechanism for profit and loss sharing under mudarabah and musyarakah is limited according to the tradition of conventional relationship between the bank and its customers,” he said.

Prof Ghafar suggested that further studies be carried out to highlight the dominance of equity financing (profit sharing) in the Islamic financial system.

“Based on the zakat calculations either by capital method or working capital method, equity financing had become more popular among the Islamic financial system. Tax benefits had also resulted in the tendency of entrepreneurs to choose debt financing,” he said.