Federal Court of Malaysia affirms constitutionality and binding legal effect of rulings by Shariah Advisory Council
29 May 2019
JRI Resources Sdn Bhd v Kuwait Finance House [2019] MLJU 275
On 10 April 2019, the Malaysian Federal Court in the case of JRI Resources Sdn Bhd v Kuwait Finance House held, by a close majority of five to four, that sections 56 and 57 of the Central Bank of Malaysia Act 2009 (“CBA”) are constitutional. Sections 56 and 57 of the CBA require a court to refer questions on Shariah matters arising during legal proceedings relating to Islamic financial business, to the Shariah Advisory Council (“SAC”) for its ruling (where there are no published rulings by the SAC on the matter), with such rulings being binding on the court making the reference. The Federal Court ruled that SAC rulings are solely confined to Shariah matters, and do not have the “characteristics of judicial power”.
Background
Kuwait Finance House (Malaysia) Berhad (“KFH”) had filed an action in the High Court of Malaya against JRI Resources Sdn. Bhd. (“JRI”) and its guarantors, for default in payment on four ijarah muntahiah bitamlik facilities (“Ijarah Facilities”) and a murabahah tawarruq contract financing facility provided by KFH to JRI.
After the High Court granted summary judgment in favour of KFH, JRI appealed to the Court of Appeal submitting, inter alia, that the High Court had erred in not seeking a ruling on whether a clause in the Ijarah Facilities agreements was Shariah-compliant, in accordance with section 56 of the CBA. The Court of Appeal allowed the appeal and directed that the matter be referred to the SAC, which provided a ruling that the clause was Shariah-compliant. JRI subsequently filed an application for a reference to the Federal Court for a determination as to whether sections 56 and 57 of the CBA were constitutionally valid. The High Court dismissed JRI’s application for such reference, but the Court of Appeal allowed JRI’s appeal and ordered the High Court to make the reference.
SAC’s role in the ascertainment of Islamic law in Islamic banking matters
The Federal Court affirmed the Court of Appeal’s decision in Tan Sri Abdul Khalid Ibrahim v Bank Islam (M) Bhd [2013] 3 MLJ 269, in which it was held that sections 56 and 57 of the CBA are within the legislative powers of Parliament under Article 74(1) of the Federal Constitution. Article 74(1) provides that Parliament may make laws with respect to any matter set out in the Federal List, including for the “ascertainment of Islamic law and other personal laws for purposes of federal law” and “banking”.
The Federal Court then proceeded to consider the history of the SAC and, taking into account the uncertainty in the Islamic banking industry previously due to reliance on differing sources of Islamic principles by the civil courts, agreed with submissions that sections 56 and 57 of the CBA resolved this issue by allowing the SAC to serve as an authority in ascertaining the principles of Islamic law for the purposes of Islamic financial business.
Vesting of judicial power
The Federal Court held that the SAC’s rulings are solely confined to Shariah matters and do not have the “characteristics of judicial power”, as expounded in Semenyih Jaya Sdn Bhd v Pentadbir Tanah Daerah Hulu Langat and another case [2017] 3 MLJ 561. The court in Semenyih Jaya highlighted that judicial power is exercised if:
- it is exercised in accordance with the judicial process of the judicature; and
- vested in persons appointed to hold judicial office, i.e. a non-judicial personage has no right to exercise judicial power.
The Federal Court further stated that the function of the SAC was merely to ascertain the Islamic law applicable to Islamic banking matters, and, upon such ascertainment, it was for the court to apply the ascertained Islamic law for banking to the facts of the case. As such, SAC rulings did not constitute an authoritative decision as to the rights and/or liabilities of the parties before the court. In the Federal Court’s view, the SAC does not exercise judicial power at all.
Reference materials
The judgment rendered by the Federal Court in this matter is available from the website of the Office of the Chief Registrar of the Federal Court of Malaysia, www.kehakiman.gov.my/en, or by clicking here.