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Malaysian Banking Law – Providing Financing Alone Does Not Amount to Banking Business


Case Scenario
KFH Ijarah House (Malaysia) Sdn Bhd granted revolving trade line facilities to Light Style Sdn Bhd.
Under the arrangement:
  • The defendant purchased goods requested by the plaintiff,
  • The plaintiff promised to purchase the goods from the defendant under a “Promise to Purchase Agreement,”
  • The parties later entered into a Murabaha Sale Agreement,
  • The defendant sold the goods to the plaintiff at an agreed price.
When the defendant claimed repayment, the plaintiff disputed the debt and argued that:
  • The agreements were illegal,
  • The transactions contravened the Banking and Financial Institutions Act 1989,
  • The defendant was allegedly carrying on banking business without a licence.
The court therefore had to determine:
Whether providing financing alone amounts to carrying on banking business under Malaysian law.


Light Style Sdn Bhd v KFH Ijarah House (Malaysia) Sdn Bhd
[2009] MLJ 575 (High Court)


General Principle Established by the Case
The High Court held that:
Providing financing alone does not amount to carrying on banking business.
The court explained that:
  • Banking business under section 2 of BAFIA requires all essential elements together,
  • The statutory definition must be read conjunctively and not disjunctively.
Thus:
  • Merely providing financing is insufficient to constitute banking business.


Facts of the Case
The plaintiff and defendant entered into:
  • A Promise to Purchase Agreement,
  • A Murabaha Sale Agreement.
The financing structure involved:
  • Purchase of goods by the defendant,
  • Resale of goods to the plaintiff at an agreed profit price.
When repayment was demanded:
  • The plaintiff challenged the legality of the agreements,
  • The plaintiff alleged that the defendant was carrying on banking business without a licence.


Legal Issue
The main issue was:
Whether the provision of financing through Murabaha transactions constituted banking business requiring a licence under BAFIA.


Decision of the Court
The High Court dismissed the plaintiff’s application.
The court held that:
  • The defendant was not carrying on banking business,
  • Providing financing alone was insufficient,
  • No banking licence was required for the transaction.
The court further held that:
  • Even if there had been a contravention of BAFIA, section 125 BAFIA would preserve the validity of the agreement.


Banking Business Must Be Read Conjunctively
Rohana Yusuf J explained that under section 2 of BAFIA:
Banking business involves:
  1. Receiving deposits,
  2. Paying and collecting cheques,
  3. Providing financing,
  4. Other prescribed business.
The court stressed that:
All three limbs must be read conjunctively and not disjunctively.
Therefore:
  • Performing only one activity, such as financing, is insufficient.
The court stated:
“If a person is providing only one of the businesses under the three limbs in section 2, say merely providing financing, such activity would not be sufficient to constitute Banking Business.”


Providing Financing Alone Does Not Require a Banking Licence
The court held that:
  • Section 6(4) BAFIA only requires licensing where a person carries on:
    • Banking business,
    • Finance company business,
    • Merchant banking business,
    • Discount house business.
Since the defendant merely provided financing:
  • No banking licence was required.


Finance Company Business Also Requires Deposits
The court further noted that even:
  • “Finance company business”
under section 2 BAFIA requires:
  • Receiving deposits,
    together with:
  • Credit facilities,
  • Leasing,
  • Hire purchase activities.
Thus:
  • Financing alone is insufficient even to constitute finance company business.


Section 125 BAFIA Saved the Agreement
The court also held that:
  • Even if the transaction had contravened BAFIA,
  • Section 125 BAFIA preserved the validity of the agreement.
Section 125 provides that:
Contracts entered into in contravention of BAFIA are not automatically void solely because of the contravention.
The court relied on:
  • Coramas Sdn Bhd v Rakyat First Merchant Bankers Bhd & Anor,
  • RHB Sakura Merchant Bankers Bhd v Tan Sri Dato’ Ting Pek Khiing (No 1).
Both cases held that:
  • Contravention of BAFIA does not automatically invalidate contracts unless the statute expressly declares them void.


Reference to United Dominions Trust Ltd v Kirkwood
The court referred to:
  • United Dominions Trust Ltd v Kirkwood.
Lord Denning identified classic banking characteristics as:
  1. Accepting money and collecting cheques,
  2. Honouring customer cheques,
  3. Maintaining current accounts.
The Malaysian court adopted this traditional understanding of banking business.


Reference to Paget’s Law of Banking
The court also referred to:
  • Paget’s Law of Banking.
The textbook states:
No one can be a banker unless they:
  1. Take current accounts;
  2. Pay cheques;
  3. Collect cheques.
This supported the court’s conclusion that:
  • Financing alone is insufficient.


Reference to PP Consultants Pty Ltd v Finance Sector Union
The court referred to:
  • PP Consultants Pty Ltd v Finance Sector Union.
The Australian High Court described banking business as:
  • Receiving deposits,
  • Creating debtor-creditor relationships,
  • Relending collected funds.
This reinforced the traditional definition of banking business.


Reference to Koh Kim Chai Case
The court also relied on:
  • Koh Kim Chai v Asia Commercial Banking Corporation Limited.
In Koh Kim Chai:
  • Making advances alone did not amount to banking business.
The Privy Council held that:
  • The full banking characteristics must exist together.


Reference to Arab-Malaysian Merchant Bank Bhd v Silver Concept Sdn Bhd
The court also referred to:
  • Arab-Malaysian Merchant Bank Bhd v Silver Concept Sdn Bhd.
The case recognised the statutory definition of banking business under BAFIA because of limited precedents under Islamic banking law.


Licensed Business, Approved Business, and Authorised Business Under Malaysian Law


Licensed Business
Under the Financial Services Act 2013, “licensed business” refers to businesses requiring a licence under section 10.
Licensed business includes:
  • Banking business,
  • Insurance business,
  • Investment banking business.
A person carrying on licensed business must obtain a licence from:
  • Bank Negara Malaysia.


Approved Business
“Approved business” refers to businesses requiring approval under section 11 of the Financial Services Act 2013.
Approved businesses include:
  • Payment systems,
  • Designated payment instruments,
  • Insurance broking,
  • Money-broking,
  • Financial advisory services.
These activities require approval but do not automatically constitute banking business.


Authorised Business
“Authorised business” means:
  • Licensed business; or
  • Approved business.
Thus:
  • Authorised business is a broader category that includes both licensed and approved financial activities.


Authorised Person
An “authorised person” means:
  • A person licensed under section 10; or
  • A person approved under section 11.
Thus:
  • A person may lawfully carry out certain financial activities without necessarily being a licensed bank.


Relationship With Sabah Development Bank Case
The reasoning is consistent with:
  • Sabah Development Bank Bhd v Skbs (Sabah) Sdn Bhd & Ors.
In Sabah Development Bank:
  • Lending alone did not amount to banking business,
  • Essential banking characteristics were required.


Relationship With Vernes Asia Case
The reasoning also aligns with:
  • Vernes Asia Ltd v Trendale Investment Pte Ltd & Anor.
In Vernes Asia:
Lending alone was insufficient to constitute banking business.


Relationship With Bank Industri Case
The approach is also consistent with:
  • Bank Industri (M) Bhd v Technopro Corp (M) Bhd & Ors.
That case confirmed that:
  • Development finance activities are lawful scheduled businesses,
  • Financing activities alone do not automatically amount to banking business.


Practical Application
Suppose a company:
  • Provides Islamic financing,
  • Grants Murabaha facilities,
  • Offers trade financing,
but:
  • Does not accept deposits,
  • Does not maintain current accounts,
  • Does not process cheques.
Applying:
  • Light Style Sdn Bhd v KFH Ijarah House (Malaysia) Sdn Bhd,
the company may not be regarded as carrying on banking business.


Critical Analysis
This case is important because it:
  • Clarifies the conjunctive interpretation of banking business,
  • Protects Islamic financing institutions from being incorrectly classified as banks.
The decision supports:
  • Commercial certainty,
  • Islamic finance development,
  • Financial innovation.
However:
  • Modern financial institutions increasingly provide financing without accepting deposits,
  • The distinction between financing institutions and banks may become increasingly blurred.
Thus:
  • Regulators must carefully supervise non-bank financial institutions.


Further Analysis
The case supports:
  • A strict statutory interpretation,
  • The traditional understanding of banking business.
The decision also reflects:
  • Judicial reluctance to criminalise or invalidate commercial transactions unnecessarily.
The use of section 125 BAFIA further protects:
  • Commercial certainty,
  • Financial stability,
  • Contractual enforceability.


Unresolved Issues
Digital Financing Platforms
Can digital lenders providing financing without deposits avoid banking regulation?


Islamic FinTech
Should Islamic digital financing platforms require banking licences?


Modern Banking Definitions
Traditional cheque-based banking definitions may no longer reflect modern financial systems.


Solutions to the Case Scenario
Solution 1
The Murabaha Sale Agreement should remain enforceable because financing alone does not amount to banking business.


Solution 2
The plaintiff’s illegality argument should fail because the defendant was not carrying on banking business under section 2 BAFIA.


Solution 3
Even if there were a contravention of BAFIA, section 125 would preserve the validity of the agreement.


Solution 4
Bank Negara Malaysia should continue supervising financing institutions to ensure that they do not evolve into unlicensed deposit-taking institutions.


Conclusion
Light Style Sdn Bhd v KFH Ijarah House (Malaysia) Sdn Bhd established that providing financing alone does not amount to banking business under Malaysian law. Banking business under BAFIA must be interpreted conjunctively, requiring the combined existence of accepting deposits, paying and collecting cheques, and providing financing. The reasoning is consistent with United Dominions Trust Ltd v Kirkwood, Paget’s Law of Banking, PP Consultants Pty Ltd v Finance Sector Union, Koh Kim Chai v Asia Commercial Banking Corporation Limited, Sabah Development Bank Bhd v Skbs (Sabah) Sdn Bhd & Ors, Vernes Asia Ltd v Trendale Investment Pte Ltd & Anor, and Bank Industri (M) Bhd v Technopro Corp (M) Bhd & Ors.

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