TOPIC: Legal issues challenging development and advancement of

Islamic banking and finance. (Brunei Darussalam)

Brunei Darussalam is a small country of only about 400,000 people. The majority of the population are muslims and in Brunei Darussalam constitution proclaims that the official religion of Brunei Darussalam is Islam according to the Shafeite sect of Ahlis Sunnah Waljamaah, with a proviso that all other religions may be practiced in peace and harmony by the person professing them. Brunei Darussalam like many other country under the influenced of British administration, has both a parallel judicial systems (the secular and religious courts) and parallel laws (secular and religious laws). Religious laws are limited to the areas of family, marriage and divorce, personal, gifts, wills and estate of deceased Muslims and the trouble start when the secular laws govern all other aspects of commercial transactions not coming within the ambit of religious laws, including matters relating to Islamic finance the validity, enforceability and dispute resolutions of contracts which support Islamic finance. Having Islamic banks and finance disputed being heart in secular courts is one of the challenge faced by Islamic banks and its clients. I will discuss this further later. The first and we can say the only Islamic bank in Brunei was established in 2006 by the name of Bank Islam Brunei Darussalam Berhad (BIBD). We also have one Islamic financial institution, Tabung Amanah Islam Brunei (TAIB), a statutory corporation established in 1991. The establishment of Islamic bank in was induced by the royal address of His Majesty the Sultan and Yang Di-Pertuan of Brunei Darussalam on 25th of September, 1990 where His Majestys interest in setting up an Islamic financial system (sxcerpt), For example, the matter concerning the Islamic financial system, the most popular nowadays is the Islamic bank. It is no longer a dream or imagination, but we are informed that there are already more than fifty Islamic commercial banks in Islamic countries.this is also one of the obligations of Fardhu Kifayah for each of the said Islamic countries, including our State of Brunei Darussalam.

In order for Islamic banking and finance to further develop and advance an effective legal structure is important. Therefore any legal issues arises that may handicap the advancement and development of Islamic banks should be deal with. Amongst the challenges are: 1) The civil court where all the cases pertaining to Islamic banks are being tried doesnt have the necessary expertise to deal with Islamic banking and finance. Therefore it is not fair for both Islamic banking and financial institutions and their clients. There is a need for the judge and the lawyers to have multidiscipline knowledge in both syariah laws and that of civil law. We are yet to harmonize between both laws. Since the laws lay out by the Syariah Financial Advisory Board may contradict that of the civil laws. In cases like this, a clause in the law (preferably the constitution of Brunei Darussalam) should be added that for cases pertaining the Islamic banking and financial institutions and their clients, the civil courts have to refer to the fatwas given by the Syariah Financial Advisory Board. Not only that to ensure fairness and justice, a higher Syariah Financial Advisory Board should be created to govern the laws and regulations laid out by individual Islamic banks. Therefore when such cases happen the civil courts can refer and have and expert evidence and witness from the High Syariah Financial Advisory Board. Therefore the cases have equal opportunity to get their justice without being discriminated just because the civil courts dont care to get the truth. Only the truth as they see it. 2) The lack of professional with sufficient familiarity in areas of commerce and banking who are skilled in bi- or multi-disciplines such as Syariah law-banking, or Syariah secular law-banking. Unfamiliarity with the practicalities of commerce and workings of banking inhibits experts from taking a holistic approach to product development, and may have difficulties in grasping financial terms and terms sheets. Presently, each of these professionals are largely only familiar with their respective mono-disciplines and this in turn inhibits product development because occasions often arise when what is Syariah compliant may not be compatible with secular laws (which is the ultimate arbiter of what is binding, valid and enforceable). We need the professional and we need those years ago. As we are still in the process of producing these professional, why dont we hire experts

to help us in the mean time. We need them during trials, to draft contracts and to make judgments and give advice when needed. His Majesty the Sultan and Yang Di-Pertuan once said that if skilled expertise is not available and there is dire need to meet demands, to resort to hiring experts where necessary on temporary employment to assist in making the project a success. If we can copy other country Islamic banking and financial products why cant we hire some of those experts to help us in more ways than just as one by teaching our people to become experts themselves. 3) Stamp duty laws imposes additional costs on Islamic finance due to the Syariahs emphasis (or, injunction) on bi-lateral trade (buy and sell, and often, re-sale or lease and buy-back) and earning profits (rather than straight loan with interest), resulting in dual and, often multiple transactions and documents, to endorse a single financing facility with the label of Syariah compliant, and each transaction document attracting stamp duty on an ad valorem basis). This creates what is commonly called the unequal-playing field effect. In Islamic finance, the multiple transactions are often facilitative in nature, that is, only pass-through transactions with legal, but not economic, consequences, and often entered into simultaneously. The high rate of stamp duty tends to discourage Islamic finance although this also affects conventional banking. In order to rectify this, we should change the law (the constitution) regarding this matter to cater for Islamic banks. We are being encouraged by His Majesty to form Islamic financial Institutions but so far, our law doesnt seem to lean that way. 4) The unsuitability of the present provisions of the Land Code, Cap. 40, in particular, the forms of memoranda of charges and provisions relating to effecting of charges and collateral are insufficient to meet the peculiar requirements of Islamic financial transactions. Other laws, for example, bankruptcy laws, need to be modified to cater for the peculiarities of Islamic finance transactions. All of these laws, following the rules of common law and principles of equity and/or statutes modeled along the English legal tradition were enacted with no particular thought given to either the Syariah or Islamic finance. 5) The issues arising with incompatible laws in Brunei Darussalam with regards Islamic finance transactions is due to Islamic finance transactions having two sets of governing laws.

(i)

Firstly, at its inception, development and consequent birth, the principles of Syariah are strictly applied, and during its life time and demise (termination where there is dispute or default), the full weight of secular laws are applied with rigour. When an Islamic financing product is being developed, the focus is on compliance with Syariah principles. At that stage little, if any, thought is given to compliance with secular laws that will eventually govern the transaction and apply to bind the parties. However, after the transaction is entered into by the Islamic bank and the customer, and in the event of a dispute, secular laws apply without mitigation;

(ii)

Secondly, the development and implementation of Islamic products for use by the public requires secular contract documents to be drawn up to form the basis of the contract. At the contract drafting stage, it is often discovered that legal difficulties exists in attempting to match broad Syariah concepts with secular laws so as to make it valid, binding and enforceable. Frequently, the lawyer has to perform legal acrobatics to match the two sets of incompatible laws and must have the foresight of a seer to try to predict the various adverse situations that can emerge in the future that may have adverse legal risks on the transaction or that the transaction may not be upheld by secular courts. Being an acrobat, and a seer, are difficult abilities, and when combined, is almost impossible. In a addition to that, the validity of contracts drafted by Syariah law (which are according to Syariah law valid) are being decided by common@ secular law (where they often if not always find that the contracts drafted by Islamic banks are void according to secular law).

6) For the Syariah advisers of the Islamic bank, that the Constitution specifies Shafii as the sect followed in Brunei Darussalam is difficult to reconcile with the legal definitions given in the more recent legislations touching upon Islamic finance. For example, the Syariah Financial Supervisory Board Order, 2006, defines Hukum Syara as means the Laws of Islam according to Syafeite, Hanafi, Maliki or Hanbali sect of Ahlis Sunnah Waljamaah. Whilst this has the advantage of flexibility of views in product

development and approvals, it also contributes to uncertainty because it is difficult for those involved in the earlier stages of product development to decide which of the sects should be given priority, if any. A clause to clarify this is much needed. We need rules in our life and the rules have to be clear. Since taking different road may lead you to different direction. It is difficult for the banks to create a product if they dont know what is acceptable and what is not or because the law is too vague to understand.

7) The introduction of a continuous practice development programme for practitioners and Syariah scholars aimed at enhancing understanding in multiple disciplines will assist in enhancing relevant knowledge of both sets of laws and the workings of Islamic finance and consequently, product development, drafting of contracts and implementation by relevant stakeholders.

8) Programmes geared towards public education and awareness of Islamic finance and the Syariah principles that apply, rather than solely emphasising or relying on the Islamicity of a product through issuing of Syariah compliant certificates, will increase public acceptability and provide the impetus for greater participation by the public in Islamic finance. 9) Providing for dissemination of Syariah resolutions issued by the banks Syariah advisory bodies and by the Syariah Financial Supervisory Board will act as a set of guidelines for practitioners as to how and the criteria by which products are approved and give awareness to the public who use the products.

(a) Lack of codification on laws relating to Islamic banking and financing. The codification of specific laws relating to Islamic finance products, whether in areas of substantive law (eg., contract law) or by way of product specific laws (eg., laws relating to murabahah) will assist to provide increased certainty to issues of validity and enforceability of Islamic finance product contracts. Certainty of laws gives more confidence to all participants, such as, banks Syariah advisers and bankers who have to develop the products, lawyers who have to draft contracts, the Syariah Financial Supervisory Board who have to

approve the products and ultimately, the users, directors and shareholders who are confident that what they are participating in is not only Syariah compliant but will also be upheld by secular courts. For Syariah advisers and lawyers, (i) without clarity of subject matter and laws, their task is substantially hindered and carries with it consequential risks, and (ii) they must know how relevant authorities will treat the views of the various madzhabs, and (iii) whether a secular court will or will not uphold, not only the broad Syariah concepts (which have the benefit of a stamp of approval), but also the numerous terms and conditions (of no less importance than the broad concepts) contained in an Islamic transaction to cater for the innumerable twists and turns of life to make the transaction work and meaningful. Presently, in the Islamic finance world, there are examples where Islamic transaction contract documents have been prepared and entered into without adequate consideration whether these are compatible with relevant secular laws, a risk that is unjustified and can no longer be ignored. After all, it only requires

that one particular material term (out of many) be rendered invalid and the whole transaction may be in dire jeopardy.

10) Presently, Syariah scholars provide broad Islamic concepts and lawyers have to draft contractual terms and conditions to fit in with the broad concepts, that is, to fill in the flesh to the skeletal structure so as to make it whole, meaningful and functional. At the drafting of contract stage, the detailed terms and conditions must be inserted, and it is at this stage where most difficulties are encountered due to incompatibility of laws. It is perhaps akin to trying to fit a goat skin onto a camel. This is a problem since most lawyers are mono discipline, which makes it difficult for them to draft a contract that is in accordance to both Syariah and secular laws when they only know secular laws

The major changes we should do in order to cater for islamic banking and finance is to reform the whole constitution. Our current constitution aged, and no longer valid for this time and place, His Majesty government should look into this and do something about it. Harmonization between two laws should also be done, or assigning islamic banks and finance dispute to Syariah courts provided that we already have experts in dealing with this disputes which lead us to produce or even hire multi-disciplines experts to judge or deal with issues arises.