Rights To Ibra'[i] in Cases of Termination Due to Customer's Default

  1. Introduction:

    1.1 The issue on Ibra' or commonly known as rebates has been the subject of both discussion and dispute [iii] as evidenced by claims made by Islamic Banks against defaulting Customers until the recent decision by Justice Mohd Zawawi Salleh in CIMB ISLAMIC BANK BHD v. LCL CORPORATION BHD & ANOR. ("the LCL case" ).

    1.2 The LCL case has shed some lights on the issue of the Customer's rights to Ibra' after termination upon default by the Customer as will be discussed in this letter.

    1.3 It further sets as a useful precedent on the aforesaid issue which was commonly raised by defaulting Customers in defending claims by Islamic Banks.

    1.4 For the purpose of this opinion, we will focus primarily on the issue of the Customer's entitlement to Ibra' (rebate) upon early termination by the Bank as discussed in the LCL case.

  2. Facts of the LCL case:

    In the LCL case, the Plaintiff Bank applied for Summary Judgment[iv] against the Customer and Guarantors under Order 14 Rules of the High Court 1980 for the sum of RM54,442,744.08 due under a term financing facility granted to the Customer pursuant to the Islamic concept of Al Bai Bithaman Ajil [v] ("BBA Facility" ).

    2.1 In its application, the Plaintiff Bank also sought ta'widh ( compensation) and costs.

    2.2 The Second Defendant, who was the director of the Customer, provided the security for the BBA Facility and executed a Memorandum of Deposit of Securities of Shares ("MOD ") in favour of the Plaintiff Bank.

    2.3 The amount claimed by the Plaintiff Bank was the shortfall after the Plaintiff Bank sold off the shares pledged under the MOD. Prior to the BBA Facility, the Plaintiff Bank had granted the Customer another BBA Facility ("the First BBA Facility" ) to refinance a Short Term Advance Facility granted by CIMB Bank Berhad.

    2.4 In opposing the Summary Judgment application, the Defendants argued that no monies were ever disbursed under the BBA Facility.

    2.5 The Defendants further argued that the BBA Facility was a sham to disguise a rescheduling of repayments under the First BBA Facility as the First BBA Facility had not been terminated and that the same asset was utilized in both transactions i.e. under the BBA Facility and the First BBA Facility.

    2.6 In response to the Summary Judgment application by the Plaintiff Bank, learned counsel for the Defendants argued on five (5) main issues: (a) that the BBA Facility was null and void; (b) that the amount claimed was wrong and inaccurate; (c) that the Defendants were entitled to Ibra' upon early termination by the Plaintiff Bank; (d) that the calculation on ta'widh was wrong; and (e) that the Plaintiff Bank had no right to claim against the Second Defendant. That being the case, it was submitted that this was not a proper case for summary application.

    2.7 In reply, the learned counsel for the Plaintiff Bank countered, inter alia, that the allegations put forth by the Defendants and submitted that they were bound by the agreements that have been duly perfected. In the absence of any manifest error on the statement of account, this court is obliged to hold that the said statement is the final and conclusive proof of indebtedness of the Defendants to the Plaintiff Bank.

    2.8 Decision of the Court:

      2.8.1 In allowing the Summary Judgment application with costs, the Court had most notably made the finding on the issue of the entitlement of Customer to Ibra' that on a plain reading of the letter of offer entered between the Bank and the Customer, the entitlement to Ibra' on early settlement only referred to a situation where the first Defendant made early payment of the BBA Facility before the end of the tenure without compulsion (emphasis added).

      2.8.2 This was not so in the Defendants' case as until to date there was no effort to settle the outstanding. It was decided that the Plaintiff Bank was therefore under no obligation or duty to grant Ibra' (rebate) to the Defendants upon the early termination of the facility.

    2.9 Analysis of the Decision:

      2.9.1 In arriving at the above conclusion, as there was no precedent case on the issue, the learned Judge in the LCL case had referred to and considered various Resolutions made by the Shariah Advisory Council of Bank Negara Malaysia[vi] on Ibra' by Islamic Banks and the terms of the applicable facility documents.

      2.9.2 It was decided that the early settlement referred to in the Ibra' clause only refers to a situation when the Customer makes early payment of the facility before the end of the tenure without compulsion.

      2.9.3 This, according to the Learned Judge, does not include termination upon default. In such circumstances, the Bank is neither under any obligation nor duty to grant Ibra' to the Customer.

      2.9.4 A further point to note is that even though it was not clearly stated in the LCL case, the case may stand as a further authority for the principle that Islamic Banks could now claim for the full outstanding sale price under BBA Facility i.e. facility amount plus profit from Customers upon default and termination without considering any rebate.

      2.9.5 It is pertinent to note that the decision in the LCL case departs from the earlier High Court decision in Affin Bank Berhad v. Zulkifli Abdullah[vii] where Justice Abdul Wahab Patail held that the Bank was not entitled to claim for the full outstanding selling price upon termination of facility and rebate (Ibra' ) must be taken into account.

      2.9.6 The principle on Ibra' as decided in the LCL case was however referred to by the learned Justice Kamardin Hashim in the case of BANK KERJASAMA RAKYAT MALAYSIA BERHAD v. FLAVOUR RIGHT SDN BHD & ORS[viii] wherein the Customer's argument on entitlement for Ibra' upon termination was rejected by court.

  3. Conclusion:

    3.1 The principle laid down by the learned Judge Mohd. Zawawi Salleh in the LCL case on the Customer's entitlement to Ibra' upon early termination of the facility will doubtlessly be the focal precedent and reference on Ibra' .

    3.2 Moving forward, it is pertinent to note that the above decision is not the end for the defaulting Customers in raising the same issue as it was only decided by the High Court and subject to any appeal process. Any further resolutions by the Shariah Advisory Council of Bank Negara Malaysia may have some bearing on future cases.

    3.3 Further, we are of the view that despite any judgment for the full sale price is recorded against a defaulting Customer, the Customer's entitlement to Ibra' may still survive as long as the Customer is able to make full settlement before the end of the facility tenure.

    3.4 This rights are guaranteed by the existing Resolutions made by the Shariah Advisory Council of Bank Negara Malaysia [ix] which resolved inter-alia that Islamic Banks should not be allowed to enjoy the profit for an unexpired tenure.

[i] In the conventional system, customer has to pay only the outstanding principal amount and earned interest at the time when early settlement is made. The unearned interest is normally waived by the financier. Contractually, customer in Islamic financial system has to settle total outstanding selling price in the case of early settlement. However, Islamic Banks normally give Ibra' or rebate to its customer who has made early settlement. This practice of rebate is important to maintain competitiveness in Islamic banking. Therefore, the concept of Ibra' resembles the rebate payment under the conventional system.
[ii] [2011] 7 CLJ 594
[iii] Most notably in AFFIN BANK BHD v. ZULKIFLI ABDULLAH [2006] 1 CLJ 438, where the bank was denied the right to claim for the full unearned profit upon termination of facility by default.
[iv] In law , a summary judgment is a judgment entered by a court for one party and against another party summarily without the need of going for full blown trial of the claim, i.e. , upon an application supported by an affidavit which shows no defence on merit and no triable issue.
[v]Al Bai Bithaman Ajil means a "deferred payment sale". It is a mode of Islamic financing used for property, vehicle, as well as financing of other consumer goods.
[vi] Primarily the Resolutions made on 27th February 2003/25th Zulhijjah 1423 and during the 95th meeting held on 28th January 2010, where it was resolved that in line with the need to safeguard maslahah (public interest) and to ensure justice to the financiers and customers, Islamic banking institutions are obliged to grant Ibra' to customers for early settlement of financing.
[vii]Supra note ii
[viii] [2011] 1 LNS 1165 where it was held that the Plaintiff Bank is not obliged to grant Ibra' to the Customer upon early termination of Facility by the Bank.
[ix]Supra note vi

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