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.

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
1 2

Shariah is translated as Islamic law. Syariah is a variant spelling commonly used in Malaysia. http://syafiqe.wordpress.com/2008/03/26/sejarah-ringkas-perkembangan-sistem-perbankan-islam-dimalaysia/ 3 Tabung Haji website-http://www.tabunghaji.gov.my

(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: 2

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, takaful and 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)

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 4

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

Hamzah Ismail and Radziah Abdul Latiff. 1999. Reporting Islamic Based Transactions Question Of Substance. The Malaysian Accountant February 1999. p 2-4. 6 In 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 losses are shared as agreed between the mudharib and the capital provider.

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

Largely discussed in Hamzah Ismail and Radziah Abdul Latiff 2001. Survey and Analysis of financial reporting of Islamic banks worldwide. Arab-Malaysian Banking Group and Malaysian Accountancy Research and Education Foundation. ISBN 983-40841-0-2. pgs.115-117. 8 Commercial banking primarily involves deposit taking and fund mobilising activities. Investment banking refers to specialised investment activities. Merchant banking primarily involves fee based activities such as underwriting.

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 : 7

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

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

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 takaful and 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.

10

ditto

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.

2.4 Losses and the New 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

10

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 (under mudharabah)? 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.

11

Exhibit 1

Financial facility or product Savings and current account General and Special investment Asset purchase financing

Shariah principle Al-Wadiah Yad Dhamanah (custodian or safekeeping) Mudharabah (Profit sharing, losses are borne by depositer as capital provider) 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 Letter of credit Shipping and bank guarantee Islamic Bonds Underwriting Benevolent loan

Murabahah (sale) or Bai al-Dayn (sale of debt) Wakalah, Mudharabah or Musharakah Kafalah (Agency) Ujr (Fee based) Qardhul Hassan

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

12

Exhibit 212 Balance Sheet (30th June) Assets Cash and short term funds Securities: - Held for trading - Held to maturity - Available for sale Financing, advances and other loans Other assets Statutory deposits with Bank Negara Malaysia Investments in subsidiary companies Investments in an associated company Property, plant and equipment Tax recoverable Total assets Liabilities and Shareholders Funds Deposits from customers Deposits and placement of banks and other financial institutions Bills and acceptances payable Other liabilities Zakat and taxation Deferred taxation Subordinated financing Total liabilities Share capital Reserves Total shareholders funds Total Liabilities and Shareholders Funds 13,483,171 1,357,526 86,471 85,204 1,259 5,094 100,000 15,118,725 600,000 130,181 730,181 15,848,906 14,386,516 63,026 100,919 232,693 100,000 14,883,156 880,000 -1,157,840 -277,840 14,605,316 2005 RM 000 2,723,061 1,132,372 103,473 2,003,291 9,168,596 192,481 428,467 13,075 1,900 82,190 15,848,906 2006 RM 000 2,866,488 249,618 132,064 2,084,475 8,501,362 212,781 459,856 5,947 85,335 7,390 14,605,316

12

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

13

Exhibit 3
Income Statement 2006 2007 RM'000 RM'000

Year (30th Juine)

2008 RM'000

2009 RM'000

2010 RM'000

Income derived from investment of depositors' funds

810,545

841,659

919,496

1,022,362

1,140,781

Income derived from investment of shareholders' funds Allowance financing for losses on

150,088

168,834

232,545

244,725

217,832

-1,325,478 -156,473 -9,308

4,816 72,552 -47,921 -3,810

7,547 12,163 8,317 -11,231 1,168,837 -421,186 747,651 -436047 -3337 308,267 -9,368 85,218

-123,291 -5,438 2,716 -16,563 1,124,466 -431,486 692,980 -457,129 -2,755 233,096 -6,000 -66,489 160,607

-124,718 -234 8,308 -18,001 1,223,968 -372,019 851,949 -538,914

Impairment loss Profit equalisation reserve Direct expenses Total distributable income Income attributable to depositors Total net income Other operating expenses Finance cost Profit before zakat and tax Zakat Tax expense Profit after zakat and taxation Convertible Redeemable NonCumulative Preference Shares (CRNCPS) dividends

-530,626 -371,011 -901,637 -365366 -10,157 -1,277,160 -4,000 -15,629 -1,296,789

1,036,130 -407,527 628,603 -374318 -17,625 236,660 -4,200

313,035 -9,993 -89,192 213,850

232,460

384,117

-19,115 Profit for the period -1,296,789 232,460 384,117 160,607 194,735

14

Exhibit 4
Income Statement 2001 2002 RM'000 RM'000

Year (30th Juine)

2003 RM'000

2004 RM'000

2005 RM'000

Income derived from investment of depositors' funds

431,401

490,847

571,711

611,655

753,777

Income derived from investment of shareholders' funds Allowance for losses on financing Allowance for diminution in value of investment securities Impairment loss Profit equalisation reserve Direct expenses Total distributable income Income attributable to depositors Total net income Other operating expenses Finance cost Profit before zakat and tax Zakat Tax expense Profit after zakat and taxation Convertible Redeemable NonCumulative Preference Shares (CRNCPS) dividends

60,454 -49,371

62,118 -41,954

88,596 -63,880

75,593 -103,376

131,222 -648,030

-35 -50,903 -7,433 -25,832 -7,148

442,484 -241,637 200,847 -144,464

511,011 -256,945 254,066 -187,877

588,959 258,617 330,342 -200011

558,040 -237,106 320,934 -222,636

178,918 -281,217 -102,299 -377,479

56,383 -2,699 -28,729 24,955

66,189 -1,125 -30,805 34,259

130,331 -3,509 -48,612 78,210

98,298 -4,663 -18,373 75,262

-479,778 -2,520 -25,509 -507,807

Profit for the period

24,955

34,259

78,210

75,262

-507,807

15

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 Bin Abdullah v. Affin Bank Berhad, a decision of the Kuala Lumpur High Court in December 2005. Zulkifli bought a house from a vendor and applied for BBA financing from his employer, Affin Bank. The bank paid the balance sum due to the vendor (the facility amount) and Zulkifli was required to repay to the Bank the facility amount over a period of 18 years by a fixed monthly amount. The total payment of RM466,847.28, is the bank's selling price to Zulkifli. Zulkifli's facility was restructured because he had defaulted in his repayment and also because he had left his employment with the Bank. The restructuring involved a revision of the bank's purchase price, the bank's selling price, the tenure of the facility and the monthly instalments payable. 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 some payments, Zulkifli defaulted, and the bank commenced an action to sell the property by way of 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 that the bank is not entitled to claim for profit margin for the full tenure of the facility over 25 years.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 until the loan amount is fully settled, and not for the full original tenure of the loan where no interest is applied on the unexpired tenure. However, in this case, the bank is seeking to claim 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 is a series of equal monthly instalments. The profit margin is calculated with the profit rate applied to the full tenure. If the customer is not given the full tenure to pay the selling price, then the bank is not entitled to claim for the bank's profit margin for the full tenure, as to allow the bank to do so would mean that the bank is able to a earn a profit twice upon the same sum at the same time. The profit margin charged on the unexpired part of the tenure is unearned profit and not actual 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 that the balance due by Zulkifli was RM582,626.80 instead of RM958,909-21. The bank is however entitled to profit per day until full payment. Zulkifli therefore got away with having to pay 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)

16

Exhibit 6

Case 2 (BIMB and customers) : 1. On 18 July 2008, the Kuala Lumpur High Court delivered a common judgment for 12 cases concerning Islamic financing which sent shock waves to the Islamic banking industry. The learned Judge declared that the Bai Bithaman Ajil (BBA) contract, a financial instrument in Islamic financing, which had been in existence and practised in this country for the 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: those where there was a novation agreement and those where there was none. In those where there was a novation agreement he further subdivided it with two sub-categories: those where the financing had expired and those where it is still ongoing. For those where the financing period had expired, the claim by BIMB was allowed in full. For those where the financing period is still ongoing and had not expired, he ruled that the amount claim was excessive and unfair. He applied the equitable interpretation of the sale price as he had interpreted in his earlier 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 the balance of the principal of the facility plus profit on the balance principal calculated at a daily rate until payment. 10. The learned Judge further ruled that for those contracts, where there was no novation agreement, 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 the Contract Act 1950. Mohamad Sofee Razak http://mohamadsofee.blogspot.com/2009/10/sah-kontrak-bai-bithaman-ajil-memang.html

17

Exhibit 7

Milestones
Over the years, the bank has chartered various milestones: Year 1983 Milestones of BANK ISLAM MALAYSIA BERHAD 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 for Shell 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

18

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

19

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-i is 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 Minister Dato 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

20

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.

21