1. Mahyuddin Khalid
emkay@salam.uitm.edu.my
ISLAMIC FINANCIAL
LEGAL FRAMEWORK
JURISDICTION OF THE COURT OVER ISLAMIC
BANKING DISPUTES

2. CONTENT
2
 INTRODUCTION
 CIVIL COURT
 SHARIAH COURT
 ARTICLE 121 (1A) OF FEDERAL
CONSTITUTION
 JURISDICTION FOR ISLAMIC BANKING
CASES
 ALTERNATIVE DISPUTE RESOLUTION
 ARBITRATION
 CONCLUSION

3. INTRODUCTION
3
 In countries having dual judiciary system (civil
and Shariah), a clear stand must be made as
to which court shall have jurisdiction to
preside power over Islamic banking disputes.
 Ideally, cases involving Islamic banking ought
to be heard at the Shariah court as they apply
Islamic law and principles.
 However in most if not all of the Islamic
countries, commercial issues such as banking
are not within the jurisdiction of Shariah court.

4. CIVIL COURT
4
 Administration of justice is a federal matter
and civil courts therefore fall under federal
authority.
 The civil courts which comprises the Federal
Court, the Court of Appeal, the High Courts
(Malaya and Borneo) and subordinate courts
are set up under the Federal Constitution.
 The Federal Court and the Court of Appeal
have jurisdiction throughout the Federation.
 The two high Courts are of co-ordinate
jurisdiction and status.

5. JURISDICTION OF CIVIL COURT
5
 The jurisdiction of the civil court is provided
by the Federal Constitution in the Ninth
Schedule, List I — Federal List.
 List I clearly vests the establishment of the
court of justice under the power of the federal
government.
 Thus, the civil court shall have jurisdiction,
among other matters which come under the
civil court’s jurisdiction are contracts such as
partnership, agency and banking facilities
such as negotiable instrument, bill of
exchange, cheques, promissory notes,
foreign exchange and others.

6. SHARIAH COURT
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 The Shariah court comprises the Shariah
Subordinate Court, Shariah High Court and
Shariah Court of Appeal.
 The Shariah Courts are set up under the
respective states’ administration of Islamic
law Enactments/Acts.
 These courts deal principally with the
personal and family laws of persons
professing the religion of Islam, Islamic law of
succession, betrothal, marriage, divorce,
dower, maintenance, adoption, legitimacy,
and criminal offences under Islamic law.

7. JURISDICTION OF SHARIAH
7
COURT
 Paragraph I of the State List of the Ninth Schedule to
the-Federal Constitution shows the state authority
and jurisdiction of the Shariah court.
 This paragraph clearly stipulates the administration
of Shariah court limited only over persons professing
the religion of Islam
 It shall not have any jurisdiction in respect to
offences stated in the Federal List.
 The criminal jurisdiction of the Shariah courts is
limited to offences punishable with:
 imprisonment for up to three years
 fine for up to RM5000
 whipping for up to six strokes or any combination of the
above.

8. ARTICLE 121 (1A) OF FEDERAL
CONSTITUTION
8
 In view of the above, the most significant change to the
jurisdiction of the Shariah courts was effected by the
amendment of article 121 of the Federal Constitution in
1988 that among others added a new clause (1A) which
stipulates that the High Court in Malaya and the High Court
in Borneo shall have no jurisdiction in respect to any matter
within the jurisdiction of the Shariah court.
 It should be noted that the purpose of the amendment is to
prevent the High Court from exercising its powers of judicial
review over decisions of the Shariah court.
 The effect of the amendment is that the High Courts and
courts subordinate to it shall have no jurisdiction in any
matters under the Shariah court jurisdiction.
 However, the jurisdiction of the High Court is not taken away
if the jurisdiction of the matter does not fall within that of the
Shariah court.

9. ARTICLE 121 (1A) OF FEDERAL
CONSTITUTION
9
 This issue was raised in the case of Bank Islam Malaysia
Bhd v. Adnan bin Omar & Ors.
 The defendant raised a preliminary objection that, as the
plaintiff was an Islamic bank, the court had no jurisdiction to
hear the case following the inclusion of Clause (1A) of
Article 121 of the Federal Constitution.
 NH Chan overruled the preliminary objection that the civil
court cannot exercise jurisdiction over Islamic banking
matters based on the following grounds:
 List I — the Federal List enumerates various matters in respect
of which the Parliament may make the law; included within its
scope are banking.
 List H — the State List courts and stipulates that Shariah courts
shall have jurisdiction only over persons professing the religion
of Islam.
 Since Bank Islam is a body corporate, it does not have a
religion and, as such, will not be subject to the jurisdiction of
the Shariah court.

10. JURISDICTION FOR ISLAMIC BANKING
CASES
10
 Abdul Hamid JCA asserted that only the civil court has the
jurisdiction to hear cases involving Islamic banking transactions
 The Shariah court is not an adequate forum to decide over Islamic
banking cases. He argued:
 Disputes over Islamic banking transactions which have arisen so far
do not involve Islamic law only, but involve the applications of other
statutes under the civil law such as the National Land Code, the
Companies Act, the Contracts Act etc., of which the Shariah court has
no jurisdiction and the Shariah court judges are not trained in and not
familiar with.
 The power of enforcement and remedies available in the Shariah
courts are very limited.
 Islamic banking customers are not only confined to Muslims but also
include non-Muslims. The Shariah court does not have jurisdiction
over non-Muslims and neither can non-Muslim lawyers appear in the
Shariah court.
 Shariah court has a limited power of imposing a fine which must not
exceed five thousand ringgit in criminal offences.

11. JURISDICTION FOR ISLAMIC BANKING
CASES
11
 The civil courts are not equipped to decide on
Shariah issues arising from Islamic banking
disputes due to:
 The civil court judges are not trained in Islamic law
and thus are not in the position to ascertain the law.
 It was suggested that the civil court judge, in hearing
Islamic banking disputes should be assisted by a
Shariah advisor who must be well versed in Islamic
banking. The judge would pose the Shariah issues to
the Shariah advisor for his ruling and the ruling
would be binding on the judge.
 Shariah court obviously has no jurisdiction and
sufficient power and legal provisions which would

12. ALTERNATIVE DISPUTE
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RESOLUTION
 Litigation is arguably not the preferred
method of dispute resolution in Islam.
 Instead, some of the alternative dispute
resolution mechanisms that would appear to
be more in line with Islamic precepts would
be consultation (shura), mediation and
conciliation (sulh), as well as arbitration.
 Alternative dispute resolution mechanism that
has been recommended as a substitute for
litigation is arbitration.

13. ARBITRATION
13
 Arbitration is an integral part of the Shariah system.
 The ultimate objective of arbitration is to obtain a fair
resolution of disputes.
 It also helps to put an end to a dispute without
unnecessary delays and expenses as it is done
through a tribunal. which act differently from a court.
 Obviously, through arbitration settlement, the parties
to a dispute can agree that Shariah principles be the
governing legal principles to solve their conflict and
dispute.
 This is because the law of arbitration gives the
freedom to the parties concerned to have their own
choice of law or principles of law to find a solution to
any given dispute.

14. ARBITRATION
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 Arbitration is regulated by the courts under Arbitration Act
1952 that regulates the conduct of arbitration general.
 The Act only applies to arbitration proceedings that arise out
of a written agreement.
 The arbitration proceedings that excluded from the
supervision of the Malaysian Courts are those conducted
under:
 Convention on the Settlement of Investment Disputes Between
the States and Nationals of Other States 1965
 United Nations Commission on International Trade Law
Arbitration Rules 1976
 Rules of the Regional Centre for Arbitration Kuala Lumpur.
 Using ADR mechanisms in Islamic banking and finance
transactions is a new approach.
 Arbitration is the preferred form of dispute settlement while
recourse to the common law court is often regarded as a
last resort.

15. REJECTION OF LITIGATION
15
 The settlement of investment disputes by
litigation rejected by foreign investors for several
reasons:
 Litigation is regarded as protracted because it often
takes a court years to render a final judgment -
investors cannot afford to wait for such a long period.
 Most foreign investors tend to remove potential
disputes in the host countries - because they lack
sufficient knowledge about the legal systems of the
host country,
 Litigation usually causes unwanted publicity to the
foreign investors who usually prefer to be secretive
on their investment disputes.
 Foreign investors may have no confidence in the
impartiality of the national courts of some host

16. ARBITRATION OF ISLAMIC FINANCIAL
DISPUTES
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 The qualification of the arbitrator
 Must be learned and well versed in the principles of Islamic law.
 A stricter requirement such as having practical working
experience in Islamic finance for a certain number of years.
 The governing principles of law
 Reference to Shariah principles must be made to avoid reliance
on English principles of law.
 The clause “Shariah principles” manifested in at least four main
schools of law, which raises the issue of which version of
Islamic law is to be followed in the arbitration exercise.
 The arbitration proceedings.
 The quality of evidence and the procedure for accepting
evidence since Islamic law has a different set of principles for
evidence and procedures.
 This should not deter us from preparing a complete code of
evidence and procedures to support the practice of Islamic-law-
based arbitration.

17. CONCLUSION
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 The amendment of the CBA in 2003 has given
recognition to BNM’s SAC as the highest reference
point for all IFI.
 The above provisions also acknowledge the authority
of the arbitrator as one of the process in dispute
resolutions in cases involving Islamic banking -
matters.
 The advice made by the SAC will be binding on the
decision of the arbitration tribunal.
 The decision of the SAC should be equally binding
on the judges of the civil court to end the dispute on
the substantive interpretation of Shariah principles.
 Otherwise, the problem of substantive interpretation
of Islamic banking practice might to harm Islamic
banking development in the future particularly in
legal disputes at the civil court.

18. 18 END OF CHAPTER