Application and Development of Ibra’ in Islamic Banking in Malaysia

Ibra’ (rebate) is a term used in Islamic banking and finance literature which denotes the granting of rebate by Islamic banks, at their discretion, to their
customers who settle their debt obligations arising from sale-based contracts
prior to the agreed settlement period. The issue of the application of ibra’
in default cases arose in court since the first known reported case in 1994.
Beginning from 2007, some High Court judges tried to resort to ibra’ in their
attempt “to be fair and equitable” to customers of Islamic banks. However,
they were reversed by the Court of Appeal to comply with the Shari’ah and
“to support” the industry. At the same time, while the banks were insisting on
judgment for the “full purchase price” and that ibra’ was at their discretion,
they were in fact giving ibra’ to customers “for early settlement” at the amount
determined by them in order to be competitive with their conventional
counterparts. Practice varies. Bank Negara Malaysia (BNM), concerned
about what was happening in the courts, the lack of standard practice by the
banks, the unhappiness of the customers and the competitiveness of Islamic
banking, went to the Shari’ah Advisory Council (SAC) for a resolution that
empowers BNM to issue Guidelines to require the banks to grant ibra’ for
early settlement cases and the mechanism thereof. While the SAC resolution
did not specifically state that “early settlement” includes default cases, the
Guidelines clearly say so. If banks were to follow the Guidelines (which
under the law they should) and, if they don’t, the courts were to enforce them
(which they should too), it appears that the issue is now settled in favour of
the customers. The High Court judges who were “wrong” earlier have been
vindicated, the Islamic banks are now at par with their counterparts and it
is also a milestone in the development of Shari’ah spearheaded by Malaysia.
This paper traces and discusses that development.