Remedies upon default payments by the customer in Islamic Banking in Malaysia

Abstract

The study on remedies upon default in payment in Islamic banking in Malaysia is crucial as it involves two (2) different laws namely Islamic law of contract and banking law. The granting of remedies become complex when the court applies the civil law and common law. The purpose of this study is to consider the adequacy of the law of remedies for default in payment in Islamic banking. This study seeks to answer three (3) research questions (i) whether legal remedies, equitable remedies and statutory remedies are adequate remedies in the event of default in payment (ii) what is the amount of damages that the bank is entitled to claim upon default in payment by the customer under al-bai` bithaman ajil, ijarah and musyarakah mutanaqisah and (iii) how far the application of civil law and common law by the court affects the bank in getting adequate remedies. For this purpose, three (3) types of Islamic banking products are chosen as they represent different methods of financing which deal with buying and selling, leasing and a combination of musyarakah, leasing and selling. The products are al-bai` bithaman ajil (deferred payment sale), ijarah (leasing) and musyarakah mutanaqisah (diminishing partnership). This study is limited to two (2) banking products namely home and car financing. It is conducted based on doctrinal research. The hypothesis of this study revealed that the laws of remedies upon default in payment by the customer in Islamic banking are not adequate. This inadequacy has resulted in the bank losing adequate remedy on damages, judges misinterpreting or misapplying the law and the remedies failing to fulfill the maqasid al-Shari`ah and maslahah. The study recommends the creation of ijarah act and institutionalizing the recovery of debts by setting up a documentation unit and recovery unit.