Malaysia – Are Sections 56 and 57 Of The Central Bank of Malaysia Act 2009 Constitutional?

 
IN THIS ARTICLE, PAULINE KOH XIU YI LOOKS AT THE CASE OF JRI RESOURCES SDN BHD V KUWAIT FINANCE HOUSE (M) BHD (PRESIDENT OF ASSOCIATION OF ISLAMIC BANKING INSTITUTIONS MALAYSIA, INTERVENERS)[1] ON WHETHER SECTIONS 56 AND 57 OF THE CENTRAL BANK OF MALAYSIA ACT 2009 ARE CONSTITUTIONAL.         
 
Introduction
 
The Federal Court, by a majority, held that sections 56[2] and 57[3] of the Central Bank of Malaysia Act 2009 (“CBMA 2009”) under which the Shariah Advisory Council (“SAC”[4]) gave its rulings on the Shariah matter arising in the subject financing were constitutional and did not breach the Federal Constitution (“FC”).
 
Brief facts
 
The plaintiff/respondent, Kuwait Finance House (M) Bhd (“KFH”), had granted Islamic credit facilities namely five Ijarah Muntahiah Bitamlik facilities and a Murabahah Tawarruq Contract Financing facility to JRI Resources Sdn Bhd (“JRI”) to finance JRI’s leasing of shipping vessels owned by KFH (the vessels were purchased by KFH for leasing to JRI) with the 2^nd, 3^rd and 4^th defendants as the guarantors.
 
Decision of the High Court and Court of Appeal
 
Whilst the High Court granted a summary judgment against JRI and its guarantors for sums owing on the financing following breach of repayment terms, the Court of Appeal disagreed and held that the High Court had erred in not seeking an SAC ruling on whether a clause[5] in the Ijarah facilities agreements provided that all major maintenance works on the vessels were the responsibility of JRI was Shariah compliant as ownership of the vessels vested in KFH.
 
The Court of Appeal set aside the summary judgment and directed that an SAC Ruling be obtained.
 
The SAC ruling 
 
After considering the conflicting expert opinions that were provided by KFH and JRI, the SAC stated that its duty was merely to analyse Shariah issues in each question posed and that the jurisdiction to apply the ruling to the facts belonged to the Court.
 
It was decided that as with other arrangements allowed by the SAC for the owner of an asset to delegate to the lessee the maintenance of the asset, the cost of which would be deducted in the sale and purchase of the asset at the end of the lease period, the clause determining that JRI is the party to bear the maintenance costs of the vessel is allowed — as long as such clause has been agreed by the contracting parties.
 
Questions to the Federal Court
 
Following the ruling from the SAC and before the trial could proceed in the High Court, JRI filed an application for a reference to the Federal Court pursuant to Article 128(2) of the FC and section 84 of the Courts of Judicature Act 1964 on the constitutionality of sections 56 and 57 of the CBMA 2009. JRI argued that such sections were contrary to the FC and usurped the judicial powers of the Court in light of the requirement for a mandatory SAC ruling on any Shariah matter. The questions were: 

 

 

The application was dismissed by the High Court but the Court of Appeal allowed JRI’s appeal and ordered that the High Court make the constitutional reference to the Federal Court.
 
The decision of the Federal Court on the constitutionality of sections 56 and 57 of the CBMA 2009 
 
The majority decision of the Federal Court recognises that an SAC ruling under section 57 of the CBMA 2009 does not conclude or settle the dispute between the parties and that the determination of liability under any banking facility is decided by the presiding judge and not the SAC.
 
The critical feature that confirms that the SAC does not perform a judicial function is that it does not give a final decision in the dispute between the parties[6]. The Federal Court held that the ruling made by the SAC is solely confined to the Shariah issue and the presiding judge who made reference to the SAC will still exercise his judicial power and decide the case based on the evidence submitted before the Court.
 
The apex court therefore held that the SAC does not usurp the judicial power of the Court as no judicial power is vested in the SAC and the sections do not breach the FC.
 
In reaching its decision, the Federal Court took the position that the civil courts are not sufficiently equipped to make findings on Islamic law[7].  Furthermore, the Federal Court held that the SAC has been harmonising the proliferation of Shariah opinions in the industry since its inception, with the SAC being aware of the practical considerations and the need for certainty on Islamic banking principles. Therefore, the binding nature of a SAC ruling is justified and section 56 of the CBMA 2009 conserves and protects the public interest.
 
The Federal Court also held that, in the case of a reference made pursuant to section 56(1)(b) of the CBMA 2009, the parties involved are allowed to provide their own Shariahexpert’s views on the Shariah questions (in JRI both parties provided the SAC with its own Shariah expert’s view) and hence the issue of inequality before the law simply does not arise.
 
In considering the question on expert evidence, the Federal Court held that if parties were allowed to lead expert evidence on Islamic law questions, it would fall upon the civil courts to ascertain what the applicable Islamic law was and then proceed to apply the ascertained law to the facts of the case.
 
The Federal Court concluded that the use of expert evidence would not be helpful to a civil court judge as, ultimately, the judge would have to decide which expert opinion to rely on and this could be further complicated if each expert based his/her opinion on different schools of Islamic jurisprudence.
 
The Federal Court opined that it was for the SAC, a body of eminent jurists, to deal with questions of Islamic jurisprudence and Islamic finance in Malaysia.
 
Conclusion
 
The majority view of the Federal Court prevails and the Federal Court has recognised sections 56 and 57 of the CBMA 2009 as being constitutional and not in breach of the FC.

The apex court accepted that the SAC does not in any way usurp the judicial power of the civil courts as the SAC only ascertains Shariah issues, leaving the final determination of the dispute between parties to an Islamic financing still within the jurisdiction of the civil courts.