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ISLAMIC BANKING : Profit, Not Loss Sharing

A Case Study on Bank Islam Malaysia Berhad (BIMB)

Radziah Abdul Latiff*

ABSTRACT

This case illustrates the issues pertaining to; shariah, legal and

competitive pressures, faced by an Islamic bank, Bank Islam

Malaysia Berhad (BIMB) as it grows and evolves into a modern bank.

One strand of pattern that emerges is that as it appears to be similar

to a conventional bank it might appear to compromise the basic

tennets of Islamic banking in the financial products that it provides

and in the profit and loss sharing basis with its depositors and

shareholders.

*Radziah Abdul Latiff, Universiti Kebangsaan Malaysia, Malaysia.

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Introduction

This case illustrate the issues pertaining to; shariah1, legal and competitive

pressures, faced by an Islamic bank, Bank Islam Malaysia Berhad (BIMB) as it grows and

evolves into a modern bank. One strand of pattern that emerges is that as it appears to be

similar to a conventional bank it might appear to compromise the basic tennets of Islamic

banking in the financial products that it provides and in the profit and loss sharing basis with

its depositors and shareholders.

The case presentation proceeds as follows; part 1 provides a background of BIMB

including a brief history of BIMB, regulatory (legal and shariah) framework and unresolved

legal issues regarding its product. Part 2 presents an overview of BIMB operation especially

with regards to mobilisation of funds and illustrate a critical period of losses of BIMB which

draws question on its profit and loss sharing principle. Part 3 discusses the case and

concludes.

1. Background

1.1 Brief History of Islamic Banking and BIMB

Some historians suggested that as early as in the 16th century, transactions based on

Islamic principles such as, murabahah, mudharabah and musharakah were reportedly found

especially during the Malacca sultanate2. Many would argue that Islamic banking in Malaysia

began in the early 1960s with the establishment of the Pilgrims Fund Management Board

(Lembaga Urusan Tabung Haji) (Ahmad Mokhtar, Abdullah & Alhabshi 2008). The main

objectives of the Board are to assisst Muslims to save, maximise the return of their savings

by investing in varied business ventures and manage their pilgrimage trips3 However the first

Islamic bank, that operates as a commercial retail bank, is Bank Islam Malaysia Berhad

1Shariah is translated as Islamic law. Syariah is a variant spelling commonly used in Malaysia.

2http://syafiqe.wordpress.com/2008/03/26/sejarah-ringkas-perkembangan-sistem-perbankan-islam-di-

malaysia/3

Tabung Haji website-http://www.tabunghaji.gov.my

http://syafiqe.wordpress.com/2008/03/26/sejarah-ringkas-perkembangan-sistem-perbankan-islam-di-malaysia/http://syafiqe.wordpress.com/2008/03/26/sejarah-ringkas-perkembangan-sistem-perbankan-islam-di-malaysia/http://syafiqe.wordpress.com/2008/03/26/sejarah-ringkas-perkembangan-sistem-perbankan-islam-di-malaysia/http://syafiqe.wordpress.com/2008/03/26/sejarah-ringkas-perkembangan-sistem-perbankan-islam-di-malaysia/http://syafiqe.wordpress.com/2008/03/26/sejarah-ringkas-perkembangan-sistem-perbankan-islam-di-malaysia/http://syafiqe.wordpress.com/2008/03/26/sejarah-ringkas-perkembangan-sistem-perbankan-islam-di-malaysia/

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(BIMB). It was incorporated in 1983 under the Companies Act 1965. The Islamic Banking

Act was enacted to regulate Islamic banking activities. BIMB operated as the sole Islamic

bank in Malaysia until 1993 when the government allowed other conventional banks to

provide Islamic banking services through the operation of Islamic windows (Ahmad Mokhtar

et al 2008). The Islamic windows eventually were replaced by Islamic banking schemes in

1998. What this meant is that instead of conventional banks operating their Islamic banking

activities along side the conventional ones, they in fact have physically separate entities that

operate these Islamic banking schemes. As a result of the restructuring and consolidation of

the banking system as the aftermath of the financial crisis, Bank Muamalat Malaysia Berhad,

another full fledged Islamic bank was established.

Some alleged that BIMB along with other Islamic insitututions such as the

International Islamic University were smoke screens to the government secularism. The

government wanted to appease the rising Islamic fundametalism in the early 1980s and

wanted to be seen as embracing Islam as a way of life- where Islamic principles are not

confined to prayer and fasting but are applied equally in all spheres of life including financial

dealings. There are many scepticisms as to the Islam in BIMB is truly Islam as there are

scepticism as to whether the government, in particular UMNO, the Malay/Muslim represented

party of the ruling coalition, really want to implement Islamic teachings.

1.2 The Legal/Regulatory Framework

General Conduct

The central bank, Bank Negara Malaysia (BNM), regulates the activities of BIMB

through the Islamic Banking Act 1983 (IBA). Conventional banks come under the purview of

the Banking and Financial Institutions Act 1989. Apart from the usual rules pertaining to

licensing, financial requirements (capital and reserve funds, liquid assets maintenance,etc)

and business restrictions, the IBA provides that BIMB as well as other Islamic banks to seek

and comply with the Syariah Advisory Council (SAC) (para 13A Islamic Banking Act 1983)

The following describes the status of the SAC:

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The SAC has been given the authority for the ascertainment of Islamic law for the

purposes of Islamic banking business, takaful (insurance) business, Islamic financial

business, Islamic development financial business, or any other business, which is based on

shariah principles and is supervised and regulated by Bank Negara Malaysia. As the

reference body and advisor to Bank Negara Malaysia on shariah matters, the SAC is also

responsible for validating all Islamic banking and takaful products to ensure their

compatibility with the shariah principles. In addition, it advises Bank Negara Malaysia on any

shariah issue relating to Islamic financial business or transactions of Bank Negara Malaysia

as well as other related entities. In the recent Central Bank of Malaysia Act 2009, the role

and functions of the SAC was further reinforced whereby the SAC was accorded the status

of the sole authoritative body on shariah matters pertaining to Islamic banking, takafuland

Islamic finance. While the rulings of the SAC shall prevail over any contradictory ruling given

by a shariah body or committee constituted in Malaysia, the court and arbitrator are also

required to refer to the rulings of the SAC for any proceedings relating to Islamic financial

business, and such rulings shall be binding4. As such even though BIMB has its own Syariah

Supervisory Council, decisions on the permissibility of new products or conduct must have

the final approval of the SAC.

Issues pertaining to the permissibility of products

The ruling of the SAC related to ba al-Inah (BAI) based products especially for

providing cash financing has drawn critisms locally and abroad. BAI is a transaction where

one party (the bank) sells an item to another party (customer) where the settlement is

through deferred payments. The customer then sells back the item at a lower price giving the

seller/bank a margin in return for cash. The sole purpose is to provide cash to the customer.

BIMB utilises this concept as a basis to provide personal financing and credit card facilities.

The SAC has ruled BAI as permissible for two reasons; that there is no clear prohibition in

4

Bank Negara Malaysia website- http://www.bnm.gov.my/index.php?ch=7&pg=715&ac=802)

http://www.bnm.gov.my/index.php?ch=7&pg=715&ac=802http://www.bnm.gov.my/index.php?ch=7&pg=715&ac=802http://www.bnm.gov.my/index.php?ch=7&pg=715&ac=802

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the Quran or the Sunnah and that it is for the good of the people - masalih. To the sceptics,

this just provides BIMB with hilah that is a way to circumvent what would have been

prohibited.

However there has been instances where customers challenge banks for the legality

of Islamic financing based on BAI (Exhibit 5 and 6 : cases of Bai Bithaman Ajil financing that

is similar to BAI). The issue is whether banks can claim the whole purchase price or only the

principal plus profit that is time apportioned based on duration of financing, especially when

the duration of financing voluntary or through default.

Another contentious product is ijarah or the Islamic lease. The conservative ruling

only accept ijarah as an operating lease and that is as a pure rental arrangement and does

not accept ijarah as a finance lease (Ijarah Muntahia Bittamleek- IMB), which is permissible

in Malaysia. See Exhibit 1 for examples of financial facility and products provided by BIMB

and the Shariah principle on which it is based.

Accounting and Reporting Requirements

In terms of financial reporting BIMB is required to comply with the guidelines issued

by BNM namely Guidelines on Financial Reporting for Licensed Islamic Banks (GP8-i) and

the Malaysian Accounting Standard Board (MASB) requirements especially the Statement of

Principles i-1 (SOP i1) which in all material aspects are based on international financial

reporting standards. There has been attempt by the MASB to produce standards specifically

for the purpose of Islamic finance transactions. However in the most recent development

MASB has concluded that the existing financial reporting standards together with additional

disclosures where necessary are sufficient.

Reporting Issues

Conventional financial reporting standards is guided by the substance over form

principle. Transactions are to be recorded and reported based on their economic and

financial reality and this overrides legal form or consideration. There has been some

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discussion whether this principle is at all applicable to Islamic financing and banking, where

in the first place there should not be an issue of the substance and form being different.

Following this reasoning the Accounting and Auditing Organisation for Islamic Financial

Institutions (AAOIFI) appears to be favouring reporting the form of transaction. MASB and

GP8-i favour the opposite given their stand on reporting standards5.

With the existence of BAI transactions, IMB and other products that are more or less

replications of conventional financial products, reporting on the form would not provide users

with a true and fair information to assist them in decision making.

Refer to Exhibit 2,3 and 4 for BIMB Income Statement and Balance Sheet

presentation.

Note that BIMB does not record the sales from BAI transactions nor purchase price

(cost plus mark-up) for financing assets. The margin is recorded as income/expense whilst in

conventional banks the margin is interest income/expense. However BIMB does not

compund the profit as a conventional bank compound interest in the case of default payment.

Deposits in BIMB are recorded as liabilities even though they are profit and loss

sharing bases (mudharabah or musharakah6). Arguably they are not liabilities as BIMB has

no obligation to return the deposits in the case where utilisation of the funds result in losses.

BIMB has obligation to return deposits (savings and current) that are based on al-wadiah yad

dhamanah principle where customers place their cash at BIMB for safe keeping and in return

the customers allow BIMB to utilise the deposits. There is no profit in terms of dividends on

such deposits. BIMB may provide hiba (gifts) to make the deposits more competitive.

Even though the mudharabah/musyarakah depositors have potential to lose their

deposits, this is most unlikely to happen and thus they are in substance liabilities of BIMB

and reported as such (Exhibit 3). This is evident in year 2006 where the depositors were

5Hamzah Ismail and Radziah Abdul Latiff. 1999. Reporting Islamic Based Transactions Question Of

Substance. The Malaysian AccountantFebruary 1999. p 2-4.6In mudharabah contract, in principle,the capital provider (depositors) bears all losses while profits are

shared between capital provider and agent/bank- mudharib. In musyrakah contracts profits and lossesare shared as agreed between the mudharib and the capital provider.

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allocated profits even though there was total distributable loss. Thus shareholders bear the

brunt of the losses.

1.3 Competitive pressure

Since 1993 when conventional banks are allowed to operate Islamic banking activities

and more recently with the liberalisation of the banking industry where foreign banks are

allowed to open Islamic banking units, BIMB are facing increasing competitive pressures on

a number of front.

In terms of facing the numbers, there is a pressure to increase the types of products.

On this BIMB has claimed a number of achievements (Exhibit 7). On the other hand this lead

to some believing that BIMB is taking short cuts such as by producing a lot of BAI based

products. The competition seems to intensify further when even Muslims customers perceive

Islamic banking and financial products to be of no difference in substance. Thus BIMB has

not only the other Islamic banks or units to compete with but also the conventional ones.

2. Bank Islam Malaysia Berhad

2.1 Overview of BIMB operation Mobilisation of Funds7

Conventional banks are often classified as commercial8, investment and merchant

banks. This classification is legally enforced in Malaysia where BNM determines the scope

of operation for what is termed as a commercial bank, a finance company or a merchant

bank. In general an Islamic bank does not really fit singly into any of these classifications as

it would be involved in trading, fee based activities and investment. However due to some

reasons for example, an apparent business climate in the region, some Islamic banks tend to

7Largely discussed in Hamzah Ismail and Radziah Abdul Latiff 2001. Survey and Analysis of financialreporting of Islamic banks worldwide. Arab-Malaysian Banking Group and Malaysian AccountancyResearch and Education Foundation. ISBN 983-40841-0-2. pgs.115-117.

8Commercial banking primarily involves deposit taking and fund mobilising activities. Investment

banking refers to specialised investment activities. Merchant banking primarily involves fee basedactivities such as underwriting.

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develop a niche in certain type of banking activities even though there is no legal reasons for

doing so.

Those Islamic banks that can be characterised as commercial banks are those that

tend to be involved in sales based financing and provide depositors with conventional type of

facilities such as al-wadiah and mudharabah deposit account, trade financing and other

credit facilities. These banks tend not to be involved with financing based on profit and loss

sharing, musharakah or mudharabah, contracts. In other words there is a substantial

involvement of profit and loss sharing contracts in the liability side of the banks balance

sheet but not in the asset side.

On the liability side, BIMB mobilises funds in two pools: shareholders and

depositors. Deposits are taken based on al-wadiah (for savings and current accounts) and

mudharabah (for general and special investment accounts) principles. These deposits are

used first to meet statutory reserve and liquidity requirements. The balance of customer

deposits, together with shareholders funds are used to provide various financing facilities.

As normal banking practice rather than as a shariah requirement, shareholders funds are

mainly used to finance banks operations such as purchase of fixed assets and customer

deposits for financing facilities. However they are co-mingled.

BIMB is not involved substantially in the type of financing that requires it to be

involved in the management and to take on more risk beyond customer default risk.

Substantial part of its financing consists of al-bai bithaman ajil and murabahah financing,

which arguably tend to be like any other commercial bank. Thus there is no necessity to keep

an accounting system to trace revenues and expenses that are accrued to the utilisation of

each of shareholders and depositors funds. Expenses incurred are all overhead and none is

regarded as specific to a facility or project.

The co-mingling of funds from different depositors (or investment account holders)

and shareholders has been criticised as follows :

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Investment account holders are generally perceived as requiring protection of their funds,

whereas shareholders, who have provided equity, will expect high returns the result, for

commingled funds, is a conflict of interests, with investment account holders restricted in

their control over investment strategy. The investment account holder is therefore exposed to

the same risk as the shareholder, but is not expected to receive proportionate rewards.9

A particular issue in its balance sheet management peculiar to Islamic bank in

general, not excluding BIMB, is that whilst funds are normally utilised for largely fixed income

asset, the cost of fund is normally variable. However this is changing as new innovative

products are created with variable rate.

2.2 Profit Equalisation Reserve (PER)

As a measure to stabilise deposit rate the BNM has introduce PER, where in times of

high profit a certain amount is transferred to PER and in times of low profit PER can be used

to supplement profit and transferred back from reserve to total income. PER is borne by both

depositors and the bank or shareholders (Exhibit 3 and 4).

The creation of PER has drawn many criticisms to the point of questioning the

shariah permissibility of it in the first place. The following excerpt summarises the criticism

against PER :

This problem is then further exacerbated by the arguably controversial practice of utilising a

PER, which effectively obscures the actual return on investments and prevents the

unrestricted investment account holder from properly assessing the implications of the IFIs

investment strategy. Moreover, the PER is subject to what IFSB (Islamic Financial Services

Board) refers to as inter-generational problem, in that a build-up of reserves during periods

of above average profits may leave unrestricted investment account holders with forgone and

9

(http://www.newhorizon-islamicbanking.com/index.cfm?section=academicarticles&action=view&id=10716)

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unrealised benefits if they withdraw their investment before such a time when reserves are

utilised.10

In addition, the existence of PER has created financial reporting issues that is

whether PER fits into the definition of the elements of financial statements, whether can it be

classified as an expense and liability.

2.3 2006 Capital Restructuring

There has been two major capital restructuring that BIMB has undergone (Exhibit 7);

in 1997 and 2006. The first was in 1997 where BIMB was delisted and its listing status was

taken by its newly formed holding company BIMB Holdings Berhad. Its takafuland capital

market operations was incorporated and become subsidiaries of BIMB Holding Berhad. The

five year financial review (1993 -1997) as reported in its 1997 annual report revealed a

positve outlook of increasing reserves, deposits and total assets.

Unlike the 1997 restructuring where it was seen as more operational than financial,

the 2006 restructuring involved a substantial amount of capital injection to cover the equity

deficit. The whole process resulted in BIMB Holdings having a 51% interest, whilst Dubai

Financial LLC and Tabung Haji having interests of 40% and 9% respectively. Tabung Haji

subsequently obtained a further interest after taking up the 2009 issue of Islamic convertible

redeemable non-cumulative preference shares (CRNCPS) giving it an overall effective

interest of 43.5% which made it the ultimate controlling shareholder.

This deficit is the culmination of losses since 2005. In 2005 the huge losses had

arisen from the conversion of its Labuan offshore subsidiary, Bank Islam (L) Ltd. to a branch.

The losses were attributed to large non-performing finances of the Labuan branch. The

injection of capital turned the shareholders fund deficit of around RM278 million to an over a

billion ringgit positive fund.

10ditto

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There were hues and cries over losses from all quarters; members of the ruling party

party (Datuk Shahrir Abdul Samad) and the opposition (Mr Lim Kit Siang of the Democratic

Action Party (DAP)) alike. There were calls for investigation but there has not been any

satisfactory report produced.

In his written reply, the Second Finance Minister said the Bank Islam losses were the result

of loans given to non-relevant parties. Who are these non-relevant parties, when and

what are the sums and who made the decisions for these irrelevant loans? When were

the RM700 million Bank Islam losses first discovered?11

There were some unsubstantiated rumours of the losses being connected to some

shady investment in South Africa and Bosnia. But BIMB management has never confirmed

or otherwise such reports citing Bank-customer confidentiality relationship.

2.4Losses and theNew Management Big Bath

The restructuring saw the installation of new management team in 2006 who decided

to write off huge amount of the non-performing financing (Exhibit 3). This resulted in lower

provision in coming years. In fact in years 2007 and 2008 there has been a claw back of

provision. BIMB reported a profit of about RM255 million for 2007,the highest ever profit in 24

years and a profit of about RM308 for 2008, the highest ever profit in 25 years.

It is not apparent whether the losses had arisen totally from utilisation of shareholders

fund or depositors or both. BIMB deposits has always been many times more than the

shareholders fund (Exhibit 2). And by looking at the total financing. Its more likely that both

funds have been used.

11

Lim Kit Siang on 2006 Budget Committee stage

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3. Discussion and Conclusion

BIMB was established as a government initiative and thus has a strong support. BIMB

operation has the mandate of the SAC, the highest Shariah authority in the country. So their

conduct and products are legitimate even though some principles of Islamic financing may

appear to have been compromised.

BIMB is unable work against competitive presssure from fellow Islamic banks and the

conventional ones and appear to have taken the easier route by offering BAI products rather

than involved in profit and loss sharing. On the other hand its sources of funds are on profit

and loss sharing.

The huge write off of non-performing financing may have only been an accounting

adjustments without any serious impact on cash flows, to make the new managements

performance appear good in later years (big bath). Note that the depositors are in no way

affected by the losses.

Throughout the loss making period (Exhibit 3 and 4), there has always been a

transfer to PER to support the depositors return. Why are not the losses being shared (under

musharakah) or borne by depositors (undermudharabah)?

There may be two legitimate reasons. The first is that the depositors fund are not

used for the defaulted financing. As discussed earlier this appear to be unlikely. The second

reason is that the losses do not fall under the category to be shared with or borne by

depositors as the capital provider. The loan loss provision is due to poor credit management

which is the responsibility of management. Thus shareholders bear the loss as management

is employed by shareholders.

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Exhibit 1

Financial facility or product Shariah principle

Savings and current account Al-Wadiah Yad Dhamanah (custodian orsafekeeping)

General and Special investment Mudharabah (Profit sharing, losses areborne by depositer as capital provider)

Asset purchase financing Bai Bithaman Ajil as in Bai Al-Innah

Ijarah- leasing/rent

Project financing Mudharabah (Profit sharing, losses are

borne by depositer as capital provider)

Musharakah (Profit and loss sharing)

Credit export refinancing Murabahah (sale) or Bai al-Dayn (sale ofdebt)

Letter of credit Wakalah, Mudharabah orMusharakah

Shipping and bank guarantee Kafalah (Agency)

Islamic Bonds Underwriting Ujr(Fee based)

Benevolent loan Qardhul Hassan

Adapted from Nor Mohamed Yakcop (1996) Teori, Amalan dan Prospek Sistem Kewangan Islam diMalaysia. Utusan Publication

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Exhibit 212

Balance Sheet (30th June)

2005 2006Assets RM000

RM000

Cash and short term funds 2,723,061 2,866,488

Securities:

- Held for trading- Held to maturity- Available for sale

1,132,372103,473

2,003,291

249,618132,064

2,084,475

Financing, advances and other loans 9,168,596 8,501,362

Other assets 192,481 212,781

Statutory deposits with Bank Negara Malaysia 428,467 459,856

Investments in subsidiary companies 13,075 5,947

Investments in an associated company 1,900 -Property, plant and equipment 82,190 85,335

Tax recoverable - 7,390

Total assets 15,848,906 14,605,316

Liabilities and Shareholders Funds

Deposits from customers 13,483,171 14,386,516

Deposits and placement of banks and other financialinstitutions

1,357,526 63,026

Bills and acceptances payable 86,471 100,919Other liabilities 85,204 232,693

Zakat and taxation 1,259 -

Deferred taxation 5,094 -

Subordinated financing 100,000 100,000

Total liabilities 15,118,725 14,883,156

Share capital 600,000 880,000

Reserves 130,181 -1,157,840

Total shareholders funds 730,181 -277,840

Total Liabilities and Shareholders Funds 15,848,906 14,605,316

12

Exhibits 2, 3 and 4 have benn prepared from annual Reports (1997-2010) available on BIMBwebsite http://www.bankislam.com.my

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Exhibit 3

Income Statement

Year (30th Juine) 2006 2007 2008 2009 2010

RM'000 RM'000 RM'000 RM'000 RM'000

Income derived from investmentof depositors' funds 810,545 841,659 919,496 1,022,362 1,140,781

Income derived from investmentof shareholders' funds 150,088 168,834 232,545 244,725 217,832

Allowance for losses onfinancing -1,325,478 4,816 7,547 -123,291 -124,718

Impairment loss -156,473 72,552 12,163 -5,438 -234

Profit equalisation reserve -9,308 -47,921 8,317 2,716 8,308

Direct expenses -3,810 -11,231 -16,563 -18,001

Total distributable income -530,626 1,036,130 1,168,837 1,124,466 1,223,968

Income attributable to depositors -371,011 -407,527 -421,186 -431,486 -372,019

Total net income -901,637 628,603 747,651 692,980 851,949

Other operating expenses -365366 -374318 -436047 -457,129 -538,914

Finance cost -10,157 -17,625 -3337 -2,755

Profit before zakat and tax -1,277,160 236,660 308,267 233,096 313,035

Zakat -4,000 -4,200 -9,368 -6,000 -9,993

Tax expense -15,629 85,218 -66,489 -89,192

Profit after zakat and taxation -1,296,789 232,460 384,117 160,607 213,850

Convertible Redeemable Non-Cumulative Preference Shares(CRNCPS) dividends

-19,115

Profit for the period -1,296,789 232,460 384,117 160,607 194,735

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Exhibit 4

Income Statement

Year (30th Juine) 2001 2002 2003 2004 2005

RM'000 RM'000 RM'000 RM'000 RM'000

Income derived from investmentof depositors' funds 431,401 490,847 571,711 611,655 753,777

Income derived from investmentof shareholders' funds 60,454 62,118 88,596 75,593 131,222

Allowance for losses on financing -49,371 -41,954 -63,880 -103,376 -648,030

Allowance for diminution in valueofinvestment securities -35

Impairment loss -50,903

Profit equalisation reserve -7,433 -25,832 -7,148

Direct expenses

Total distributable income 442,484 511,011 588,959 558,040 178,918

Income attributable to depositors -241,637 -256,945

-

258,617 -237,106 -281,217

Total net income 200,847 254,066 330,342 320,934 -102,299

Other operating expenses -144,464 -187,877 -200011 -222,636 -377,479

Finance cost

Profit before zakat and tax 56,383 66,189 130,331 98,298 -479,778

Zakat -2,699 -1,125 -3,509 -4,663 -2,520

Tax expense -28,729 -30,805 -48,612 -18,373 -25,509

Profit after zakat and taxation 24,955 34,259 78,210 75,262 -507,807

Convertible Redeemable Non-Cumulative Preference Shares(CRNCPS) dividends

Profit for the period 24,955 34,259 78,210 75,262 -507,807

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Exhibit 5

Case 1 (Affin bank Berhad and a customer):

The contrast in obligations and liabilities of a bank's customer under a conventional loan

and under Islamic financing, did not really manifest itself until the recent case of Zulkifli BinAbdullah v. Affin Bank Berhad, a decision of the Kuala Lumpur High Court in December2005.

Zulkifli bought a house from a vendor and applied for BBA financing from his employer, AffinBank. The bank paid the balance sum due to the vendor (the facility amount) and Zulkifli wasrequired to repay to the Bank the facility amount over a period of 18 years by a fixed monthlyamount. The total payment of RM466,847.28, is the bank's selling price to Zulkifli. Zulkifli'sfacility was restructured because he had defaulted in his repayment and also because hehad left his employment with the Bank. The restructuring involved a revision of the bank'spurchase price, the bank's selling price, the tenure of the facility and the monthly instalmentspayable. Zulkifli agreed with all the terms of restructuring, and hence agreed to pay to the

bank the revised selling price of RM992,363-40, over 25 years. After making somepayments, Zulkifli defaulted, and the bank commenced an action to sell the property by wayof public auction. The Bank claimed that the balance due from Zulkifli was RM958,909-21,being the difference between the revised selling price and the amount he had paid.

The Learned Judge did not agree with the bank's calculation of the amount due and held thatthe bank is not entitled to claim for profit margin for the full tenure of the facility over 25years.His reasonings are summarised as follows:

Under a conventional loan, the amount due by a borrower over and above the loan amount(i.e. interest and late payment interest), is limited to the period from release of the loan untilthe loan amount is fully settled, and not for the full original tenure of the loan where nointerest is applied on the unexpired tenure. However, in this case, the bank is seeking toclaim the profit on the unexpired tenure of 25 years. The bank's selling price in BBA financing, is not a sale price paid in a single payment, but isa series of equal monthly instalments. The profit margin is calculated with the profit rateapplied to the full tenure. If the customer is not given the full tenure to pay the selling price, then the bank is notentitled to claim for the bank's profit margin for the full tenure, as to allow the bank to do sowould mean that the bank is able to a earn a profit twice upon the same sum at the sametime. The profit margin charged on the unexpired part of the tenure is unearned profit and notactual profit, and therefore cannot be claimed under BBA.

The Court then recalculated the bank's profit margin up to the date of judgment and held thatthe balance due by Zulkifli was RM582,626.80 instead of RM958,909-21. The bank ishowever entitled to profit per day until full payment. Zulkifli therefore got away with having topay substantially less than what he had agreed to pay to the bank for the restructured facility.The bank did not appeal against the decision.

02/06/2006 The Sun - Law & Realty By Kalathevy Sivagnanam(http://hba.org.my/articles/lawyers/2006/conventional.htm)

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Exhibit 6

Case 2 (BIMB and customers) :

1. On 18 July 2008, the Kuala Lumpur High Court delivered a common judgment for 12cases concerning Islamic financing which sent shock waves to the Islamic banking industry.The learned Judge declared that the Bai Bithaman Ajil (BBA) contract, a financialinstrument in Islamic financing, which had been in existence and practised in this country forthe past 25 years was contrary to the Religion of Islam.

6. In his ruling, the learned Judge had grouped the BBA contracts into two categories: thosewhere there was a novation agreement and those where there was none. In those wherethere was a novation agreement he further subdivided it with two sub-categories: thosewhere the financing had expired and those where it is still ongoing. For those where thefinancingperiod had expired, the claim by BIMB was allowed in full. For those where the financingperiod is still ongoing and had not expired, he ruled that the amount claim was excessive andunfair. He applied the equitable interpretation of the sale price as he had interpreted in hisearlier judgment in the case of (Affin Bank Bhd. v Zulkifli Abdullah [2006] 1 CLJ 438).

9. It can be seen from the case cited above that an Islamic bank could only recover thebalance of the principal of the facility plus profit on the balance principal calculated at a dailyrate until payment.

10. The learned Judge further ruled that for those contracts, where there was no novationagreement, the agreement was in fact a loan agreement. And, since interest is prohibited in

Islam, BIMB could only recover the principal sum advanced pursuant to section 66 of theContract Act 1950.Mohamad Sofee Razak

http://mohamadsofee.blogspot.com/2009/10/sah-kontrak-bai-bithaman-ajil-memang.html

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Exhibit 7

Milestones

Over the years, the bank has chartered various milestones:

Year Milestones of BANK ISLAM MALAYSIA BERHAD

1983 Officially launched on 1 July 1983 by former Prime Minister Tun Dr Mahathir

Mohamad, Bank Islam was incorporated with an authorized capital of RM500 million

and a paid-up capital of RM79.9 million

First Islamic bank in Malaysia to cater to the specific financial needs of Muslims

Bank Islam is ultimately the flag-bearer for the countrys Islamic financial services

industry

1990 Lead arranger forShell MDS Sdn. Bhd., Malaysias first ringgit-denominated Islamic

corporate bond issuance

1992 The first Islamic financial institution to be listed on Bursa Malaysia Securities Berhad

The first bank in Malaysia to introduce the chip-based ATM card (Smart Card)

1997 Launched its website: www.bankislam.com.my

Developed its Total Islamic Banking Solutions under its MIS Upgrade Program

BIMB Holdings Berhad was formed to replace Bank Islam as the Groups holding

company and to assume the Groups listing status

2000 Awarded ISO 9001:2000 Certification by SIRIM for its Trade Financing and Bills

operations

2001 Excellence Performance Award by Association of Islamic Banking Institutions

Malaysia (AIBIM)

Lead arranger for First Global Sukuk Inc, the worlds first Islamic global corporate

Sukuk

Rated A by Malaysia Rating Corporation (MARC)

2002 First bank in the Asia-Pacific region to introduce EMV-compliant credit cards with

chip-based system following the launch of Bank Islam MasterCard

Co-manager for Malaysia Global Sukuk Inc, the worlds first Islamic sovereign

Sukuk

2003 Launched its Internet banking

First bank to offer zakat (tithe) payment facilities via ATM and credit card

2004 First bank in Malaysia to offer SMS banking service (bankislam.sms) using any

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mobile operators

2005 Awarded ISO BS7799 Certification by SIRIM for IT related services covering

planning, software development, operations and user support services and data

center services

2006 Voted Best Provider of Islamic Finance in Malaysia by Finance News Best Islamic

Banks Poll 2005

First bank in South East Asia to introduce an Islamic Platinum MasterCard

Awarded Platinum Award for Best e-commerce Related Initiative in Asia-Pacific by

MasterCard Worldwide

Introduced Wiqa Forward Rate Agreement, a Shariah-based financial hedging tool

to facilitate in-house risk management

Dubai Islamic Investment Group (DIG) and Lembaga Tabung Haji (LTH) purchased

a 40 per cent and 9 per cent stake each in Bank Islam.

2007 Entered into its first Islamic cross-currency swap agreement

Launch of the new corporate identity of Bank Islam, officiated by a Minister at the

Prime Ministers Office, YB Dato Dr. Abdullah Md Zin

Embarked on Branch Remodeling exercise

Announcement of a profit before zakat and tax (PBZT) of RM255.49 million for the

financial year ended 30 June 2007 (FY2007), its highest ever in 24 years

Signing of a strategic collaboration deal with the European Islamic Investment Bank

plc (EIIB), a gateway for Bank Islam to make inroads into the European market

2008 Celebrates its 25th anniversary

Recorded highest profit of RM308.27 million in 25 years

Launched a new product called Commodity Undertaking-i, an Islamic option based

product to be used for asset liability management purpose and investment purpose

Launched our first Islamic structured and capital protected funds, An Najah NID-i,

the first Shariah-based structured product with health care as the investment theme

Expanded its foreign currency retail services with the opening of its first bureau de

change (BDC) outlet at the Low Cost Carrier Terminal (LCCT), Kuala Lumpur

International Airport

2009 Nationwide branch expansion

Awarded Readers Digest Platinum Trusted Brand Award 2009 for Islamic Financial

Services

Awarded The Edge-Lipper Malaysia Fund Awards 2009 for ASBI Dana Al-Munsif

Best Mixed Asset MYR Balanced Islamic Fund for period ending December 2008,

managed by Bank Islam subsidiary BIMB Investment Management Berhad

Bank Islam is the sole Islamic bank and the only commercial bank that the

Securities Commission approved under its list of Principal Advisers for specific

corporate proposals in Malaysia.

Awarded Best Mixed Asset MYR Balanced Islamic Fund for period ending

December 2008 in conjunction with The Edge-Lipper Malaysia Fund Awards 2009

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for Bank Islams ASBI Dana Al-Munsif managed by its subsidiary, BIMB Investment

Management Berhad

Strategic Collaboration between Bank Islam subsidiary Bank Islam Trust Company

(Labuan) Ltd and Bank Muamalat Indonesia Group to cooperate in the promotion of

Islamic trust products to the worlds largest Islamic population

Launched Al-Awfar, a first-of-its-kind combination of savings-i and investment-i

account which offers cash prizes

Awarded Readers Digest Platinum Trusted Brand Award 2009 for Islamic Financial

Services

Manager for the Terengganu Investment Authority RM5.0 billion IMTN Programme

guaranteed by the Government of Malaysia; a landmark 30-year issue, being the

longest tenured bond issued in Malaysia for both Sukuk and conventional bond

markets

Launched Sinar Letrik Home Campaign where the Bank will help home owners

pay their electricity bills for five consecutive years under a collaboration entered into

with Tenaga Nasional Berhad. Sole Islamic bank and the only non-investment bank that the Securities Commission

approved under its list of Principal Advisers for specific corporate proposals in

Malaysia

The first Commercial Bank as Adviser for equity-linked transactions for YSP

Southeast Asia Holdings Berhad on Rights Issue

Transacted the first asset swap transaction for Bank Islam; which entails applying

hedge accounting for the first time to the bond portfolio

Transacted the first Islamic equity option transaction for Bank Islam

Launched a new line of business i.e. Bulk Payment Foreign Exchange transaction

Introduced a new customer service i.e. daily market news update via SMS

First Bank to join effort with LTH in launching the Uniteller Service which enables

performance of LTH transactions and Hajj registration at any Bank Islam branches

nationwide

Launched Ziyad NID-i, an investment product structured to take advantage of the

recovery of Asias equity markets. Ziyad NID-iis a 5-year investment product in the

form of Islamic Negotiable Instruments

2010 Launched its 100th branch in Bukit Damansara

Launched Waheed-i, the first of its kind in Malaysia for corporate customers. It is a

Malaysian Ringgit fixed term deposit product based on the Shariah contract of

Wakalah (Agency). It is the first Shariah-based deposit product that meets both local

and international Shariah standards

Named the winner of The Brand Laureate Awards 2009-2010 for best brands in

Corporate Branding Best Brands in Banking Islamic Bank by The Asia Pacific

Brands Foundation (APBF)

Launched the Islamic pawn-broking (Ar-Rahnu) which was officiated by Prime

MinisterDato Sri Mohd Najib Tun Hj Abdul Razak

Named winner of the Platinum Award for Islamic Financial Services for two

consecutive years in the annual Readers Digest Trusted Brands Award 2010

Entered into a strategic collaboration with Tune Talk, Malaysias newest mobile

service operator, to increase the subscriber base of Bank Islam Card (BIC)

Bank Islam and Barclays Capital Markets Malaysia Sdn Bhd signed a Memorandum

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of Agreement for Collaboration on Customization of Islamic Investment Products

and Hedging Solutions

Bank Islam and Universiti Teknologi MARA (UiTM) unveiled the Bank Islam UiTM

Alumni Platinum MasterCard Card Sentiasa Di Hatiku to raise funds for UiTMs

Scholarship Fund called Tabung Mengubah Destini Anak Bangsa

Launched another first, offering consumers Malaysias first truly mob ile banking

service. With Transact at Palm or TAP Mobile Banking-i, account owners can

perform banking transactions anywhere and anytime, without internet access.