Court of Appeal upholds Validity of BBA Contracts

A case commentary on Bank Islam Malaysia Berhad v Lim Kok Hoe and Other Appeals [2009] 6 CLJ 22 by Oommen Koshy



The Court of Appeal had on 31 March 2009 reversed the shock waves that were sent to the Islamic banking industry on 18 July 2008 when the Kuala Lumpur High Court in Arab-Malaysian Finance Bhd v Taman Ihsan Jaya Sdn Bhd & Ors; Koperasi Seri Kota Bukit Cheraka Bhd (Third Party) and Other Cases [2009] 1 CLJ 419 declared that the Bai Bithaman Ajil (“BBA”) contract was contrary to the religion of Islam.




The High Court decision was a common decision for 12 cases involving the BBA contract which is an Islamic financial instrument that has been in existence and practised in Malaysia for the past 25 years.


The High Court Judge had, inter alia, held as follows:


(1) where a novation agreement was used, the banks could claim the full sale price if the financing period had expired;

(2) if the financing period has not expired, the banks could claim the ‘equitable’ interpretation of the sale price as his Lordship had interpreted in his earlier judgment in the case of Affin Bank Bhd v Zulkifli Abdullah [2006] 1 CLJ 438;

(3) where no novation agreement was used, the agreement was in fact a loan agreement, and, since interest is prohibited in Islam, the banks could only recover the principal sum advanced pursuant to Section 66 of the Contracts Act 1950;

(4) the BBA contract was far more onerous than the conventional loan with riba’ which is prohibited and unequivocally condemned in Islam; and

(5) the BBA contract practised in Malaysia is not acceptable by all the 4 mazhabs in Islam. It is only acceptable to one mazhab and accordingly, not sufficient to say that it is approved by the religion of Islam which is a requirement under Section 2 of the Islamic Banking Act 1983.





A BBA contract is the most common form of transaction used in Islamic banking in Malaysia. It is a deferred payment sale contract used to finance the purchase of properties by the bank’s customers. The bank will purchase the property from the customer pursuant to a Property Purchase Agreement for a purchase price. The bank will sell the same property back to the customer pursuant to a Property Sale Agreement for a sale price.


The purchase price is called the facility amount or the financing amount and the bank will pay the same immediately to the vendor. The sale price will be paid by the customer to the bank over a period of years by monthly installments.


The BBA contract is therefore completed with the Property Purchase Agreement and the Property Sale Agreement. There is no need for a Novation Agreement. The bank may, however, take a charge or assignment on the property as a security arrangement.




The appeal before the Court of Appeal involved 9 cases. Bank Islam was the Appellant in all the cases.


The Court of Appeal accepted the High Court's finding that riba’ or interest is prohibited in Islam. However, they disagreed with the learned judge's method of comparing a BBA contract with a conventional loan agreement as the two instruments of financing are not alike and have different characteristics. A conventional loan agreement is a money lending transaction whereas a BBA contract is a sale agreement.


The High Court Judge had erred when he equated the profit earned as similar to riba’ or interest when the BBA contract is in fact a trade transaction which has a purchase agreement and a sale agreement.


The Court of Appeal also found that the comparison made by the High Court Judge was of no relevance as the law applicable in a BBA contract is no different from the law applicable in a conventional loan agreement. This was held by the Court of Appeal in Bank Kerjasama Rakyat Malaysia Berhad v Emcee Corporation Sdn Bhd [2003] 1 CLJ 625.


Accordingly, the law applicable is the law of contract and the same principles should be applied in deciding these cases. The Court has a duty to defend, protect and uphold the sanctity of the contract entered into between the parties unless there are any vitiating factors recognised in law such as fraud, coercion, undue influence, etc. It is trite law that the court should not rewrite the terms of the contract between the parties that it deems to be fair or equitable.


"Islamic banking business" is defined in Section 2 of the Islamic Banking Act 1983 as "banking business whose aims and operations do not involve any element which is not approved by the Religion of Islam."


The Court of Appeal found that "Islamic banking business" does not mean banking business whose aims and operations are approved by all the four mazhabs. Further, the religion of Islam is not confined to the four mazhabs alone as the sources of Islamic law are not limited to the opinions of the four imams and named after them. Islamic law is derived from the primary sources i.e. the Holy Quran and the Hadith and secondary sources. There are other secondary sources of Islamic law in addition to the jurisprudence of the four mazhabs.


The Court of Appeal was of the view that judges in civil courts should not take it upon themselves to declare whether a matter is in accordance with the religion of Islam or otherwise as it is a requirement for any Islamic bank to establish a Syariah advisory body to advise the bank and to ensure the operations of its banking business do not involve any element which is not approved by the religion of Islam. Further, in 2003, a single Syariah Advisory Council was established through Section 16B of the Central Bank of Malaysia Act 1985 under the aegis of Bank Negara Malaysia. With this amendment, all business which is based on Syariah principles will come under this single Syariah Advisory Council.


The Court of Appeal further held that the validity and enforceability of the BBA contracts had been raised in previous cases and had been ruled upon such as in Adnan bin Omar v Bank Islam Malaysia Berhad (unreported) by the Supreme Court, and Datuk Hj Nik Mahmud Nik Daud v Bank Islam Malaysia Berhad [1998] 3 CLJ 605 and Bank Kerjasama Rakyat Malaysia Berhad v Emcee Corporation Sdn Bhd by the Court of Appeal. The High Court Judge should have held that he was bound by the said superior court decisions based on the doctrine of stare decisis.





The decision of the Court of Appeal was a landmark one which served to clarify and elucidate the basic principles of Islamic financing as it is practised in Malaysia. It has resolved once and for all the conflicting approaches to Islamic banking adopted in the decisions of the various High Courts in Malaysia. This judgment was awaited with great anticipation by the entire Islamic banking industry.



OOMMEN KOSHY ( This e-mail address is being protected from spambots. You need JavaScript enabled to view it )



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