In brief

  •  Modern Islamic finance has seen a significant increase in utilization since its inception in the 1960s, and its continuing development demands that the legal framework within which Islamic finance in Malaysia is to thrive must keep pace. The Federal Court case of Maple Amalgamated Sdn Bhd & Anor v Bank Pertanian Malaysia Berhad (“Maple Amalgamated”) represents the latest in a long line of developments which will inevitably play a key role in shaping the legal framework of Islamic finance in Malaysia.
  •  Such Bai’ Bithaman Ajil (BBA) financing facilities, as seen in Maple Amalgamated, typically entail the bank purchasing a specific asset owned by the customer in exchange for the value of the financing to be provided. Following that, the bank will sell the same asset back to the customer at a higher price than the value obtained by the customer, which will be paid in instalments. The agreements used to carry out this exercise are known as asset purchase and asset sale agreements, respectively.

What is Bai’ Bithaman Ajil Facility? 

  • Islamic financing facilities are never referred to as “loans” because the practice of money lending with the imposition of interest is prohibited under Shariah law because it is considered exploitative. As a result, financial institutions have developed a variety of Islamic financing products,” such as the BBA facility, through which banks can provide financing in a way that does not violate Shariah laws.
  •  In general, an Asset Purchase Agreement and an Asset Sales Agreement are used in a normal BBA financing transaction between a bank and a purchaser. The bank is said to have “purchased” an asset from the customer under the asset purchase agreement, which it then immediately “sells back” to the customer via the asset sales agreement on a deferred payment basis (instalment), at a sale price that includes a profit margin for the bank, giving rise to the concept of “double sale.”
  •  Ultimately, regardless of the terminology used, the net effect of a conventional loan or a BBA facility is that the bank will disburse funds to the borrower or customer, as the case may be, which they must then repay to the bank.

The compatibility between BBA and section 214A of the National Land Code

  •  Maple’s case against the Bank hinges solely on the interpretation of section 214A of the NLC. When discussing section 214A of the NLC, it is unavoidable that the discussion will turn to the relatively recent Federal Court case of Gula Perak, in which the Federal Court held, among other things, that section 214A of the NLC must be read in its entirety in order to be correctly interpreted, and that the stated provision’s goal is to control and prevent estate land fragmentation.
  •  The Bank relied heavily on Gula Perak by emphasizing the rules intent behind Section 214A of the NLC. However, Maple sought to distinguish Gula Perak on the grounds that, whereas the sale and purchase agreement in Gula Perak was conditional (subject to the approval of the Estate Land Board), however in Maple’s situation it was held to be unconditional.
  • Furthermore, the federal court noted that there are two approaches to applying section 214A of the NLC to the facts of this case. The first is Maple’s claim that the BBA agreement has resulted in the Land being “disposed of.” The other is that there was no actual “transfer, conveyance, or dispose of” the Land because of the nature of the BBA agreement and the parties’ intentions when they signed it. This type of construction is favored because it avoids the potential of violating the law, as well as making excellent commercial sense, in light of the Parliamentary intent behind Section 214A of the NLC.
  •  On the facts, the BBA agreement does not amount to a “transfer, conveyance, or disposal” in either form or substance. It is a legally permissible financial commercial transaction.

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