Lodhi 5 Properties Investments CC v FirstRand Bank Limited [ 2015 ] 3 All SA 32 ( SCA ) and the Enforcement of Islamic Banking Law in South Africa

On 22 May 2015, the Supreme Court of Appeal (SCA) handed down a judgment in the matter of Lodhi 5 Properties Investments CC v FirstRand Bank Limited [2015] 3 All SA 32 (SCA). This judgement considered whether the prohibition against the charging of interest on a loan in terms of Islamic law (Sharia law) may be a defence for a claim for mora interest in terms of a loan agreement. This note critically discusses the judgment in the light of the approach adopted by the SCA with regard to addressing a dispute arising from a contract that has Islamic law as a governing law. As this is the first case to come before the SCA in South Africa, this note critically analyses how the court discussed the principles of Islamic law as applicable to the dispute between the parties. In particular, it questions the court's assertion that a claim for mora interest has nothing to do with and is not affected by the Sharia law's prohibition against payment of interest on a loan debt. It also looks at the SCA's approach (as a common law court) with regard to the enforcement of the principles of Islamic banking law. The judgment raises important issues regarding the enforceability of Islamic finance law and therefore merits discussion in the context of the continuing growth and expansion of Islamic banking and finance law in South Africa.


Introduction
An increase in the number of Muslims worldwide has been observed for many decades.It signals the needed for the non-Islamic world to take cognisance of Islamic law (also known as Sharia law) and practices.This has created a demand for pertinent financial transactions and services to comply with Islamic law.As a result, conflicts of law often arise where the principles of Islamic law are incorporated into the terms of financial agreements concluded in a secular context.Judicial officers in non-Muslim jurisdictions face challenges in terms of how to apply and enforce agreements incorporating these principles.This is particularly so with regard to disputes brought before secular courts in common law (and civil law) jurisdictions such as South Africa, where these courts are often called to interpret and apply, or at least to take cognisance of Islamic law.In 2015 the Supreme Court of Appeal (SCA) was faced with a problem of this kind in Lodhi 5 Properties Investments CC v FirstRand Bank Limited. 1 This case illustrates the challenges that secular courts encounter when they are confronted with the interpretation and application of uncodified Sharia law, which has been the subject of various scholarly interpretations.It also illustrates the challenges encountered by common law courts with no expertise to interpret and enforce transactions which are subject to Sharia law.This lack of expertise is evident in the abovementioned case, as the courts -both the High Court 2 (HC) and the SCA -did not address several issues which called for the interpretation of the relevant Islamic finance principles, and thus left more questions unanswered than those that were successfully addressed.The case raises important issues regarding the enforceability of Islamic finance law and merits discussion in the light of the continuing growth and expansion of Islamic banking and finance law in South Africa.The purpose of this case note is to critically analyse the decision in Lodhi 5 SCA in order to determine whether or not the court correctly applied the relevant principles of Sharia law with regard to the prohibition on the charging of riba interest.While the focus of this note is on the decision of the SCA, reference is made to the decision in the HC in order to illustrate the general approach of South African courts to the interpretation and enforcement of Islamic finance law.The discussion of the case note begins with a brief explication of the fundamental principles of * Maphuti David Tuba.LLB (WITS) LLM (UNISA).Senior lecturer, Department of Mercantile Law, University of South Africa.Email: tubamd@unisa.ac.za. 1 Lodhi 5 Properties Investments CC v First Rand Bank Limited 2015 3 All SA 32 (SCA) (hereinafter "Lodhi SCA"). 2 FirstRand Bank Ltd v Lodhi 5 Properties Investment CC 2013 3 SA 212 (GNP) (hereinafter "Lodhi HC").
MD TUBA PER / PELJ 2017 (20) 3 Islamic banking law in order to establish the concepts applicable to the case under discussion.This is followed by a description of the facts of the case and the decisions of the HC and, most importantly, the SCA.A critical analysis of the SCA decision follows thereafter, and then concluding remarks are made on the decision of the SCA.

Fundamental principles of Islamic banking law
Islamic law is a legal system which is derived primarily from the Quran (the Muslim holy book) and the Sunnah (examples of the practices of Prophet Mohammed). 3In terms of Islamic law conduct is either permitted (halaal) or strictly prohibited (haram). 4The question as to whether something is permitted or prohibited is not a simple one, however.Engaging in the following financial practices is prohibited in terms of Islamic law: gharar (indulging in risk or uncertainty), maysir (gambling), unjustified enrichment, and riba (charging interest, or usury). 5The focus of this note will be on riba, which forms the basis for distinguishing Islamic finance from its conventional counterpart.

Riba and the charging of interest on loans
Islamic law generally regards the charging of interest on loans as oppressive and exploitative, and it is therefore prohibited. 6Similar prohibitions on usurious interest exist in conventional banking, with the result that the distinction between interest and riba is sometimes blurred.Unlike the limited prohibition on the charging of interest found in the Bible, 7 the Quran expresses the prohibition against riba emphatically in four verses. 8For instance, the Quran is translated as saying: "O ye who believe! devour not Riba doubled and multiplied". 9However, it does not define what the term riba actually means.Riba literally means simply "increase, addition, expansion or growth", 10 but in the context of financial transactions it means much more than that.Terms such as "effortless gain" and "profit which is given without giving anything in exchange" come to mind. 11Sharia law prohibits riba in the sense of the accumulation of wealth that is not a product of labour or equivalent financial value. 12A consensus among Muslim jurists exists that riba has the same literal meaning and import as interest. 13It is also agreed that it refers to some form of "premium" that must be paid to the creditor, along with the principal amount, as a condition for extending the loan, or for an extension of its maturity. 14Any positive, fixed, or predetermined interest rate that is tied to the maturity of the loan is considered as riba and is therefore prohibited. 15Muslim scholars, however, have not reached a consensus on the ambit of the prohibition against riba.This has sparked a conflict of interpretation between the two main categories of Muslim scholars. 16A tug-of-war on the ambit of riba exists between classical and modern scholars.
The classical Muslim school follows the traditional definition of riba as any additional charge for borrowed money. 17They adopt the technical Arabic meaning of riba, which is translated as "an excess" or "increment". 18In their view, any additional amount charged over and above the capital originally advanced as a loan is simply "an act of renting money at a price called interest" and is therefore prohibited. 19They refute any argument that strives to make a distinction between simple interest (which is not prohibited) and usurious interest (i.e. an exorbitant amount of interest). 20According to the classical scholars, any benefit or increase (nominal or real), or any predetermined return on the loan capital advanced is riba and therefore prohibited. 21Consequently, any sum added to the principal from an exchange that is not reciprocated by an equivalent of value in return is riba. 22Their verdict is that the prohibition against interest is absolute, unambiguous and unconditional. 23dern scholars are, so to speak, "attempting to separate the chaff from the grain".The crux of their debate is about whether riba means interest or usury. 24If riba is defined as interest, any commercial transaction which requires the repayment of an amount additional to the capital is invalid under Sharia law.However, if riba simply means usury, as long as the rate of interest has not hit some rate which is determined to be exorbitant, it is valid. 25They begin by questioning a ban on riba in the modern-day economy. 26Their argument is that riba, as manifested in the Quran, is a very specific form of interest.Riba and interest are two different things, and the ban cannot therefore be applied to all forms of interest found in modern economies. 27They argue that the Quran verse quoted above is qualified by its reference to a specific amount of usury. 28In their view, the words "doubled or multiplied" connote that "interest is classified as riba if the principal repayable is double the original amount". 29What is banned by Sharia law, in their view, is "an unjustified increase" of return on a capital amount. 30Their view of the ban on riba in the Quran and Sunnah is different from that of the classical scholars.Rather than defining it literally, they look at the rationale for the injunction as a ban on exploitative forms of interest which have the effect of committing economic injustices against the poor, contrary to Sharia law. 31They support their position by arguing that the ban on riba is a ban on usuriously high and excessive interest, which is not equated with interest per se. 32Unlike the classical scholars, in their view the ban on interest is conditional and not absolute. 33Notwithstanding their different views on riba, there is a consensus amongst Muslim scholars that Sharia law prohibits riba. 34They differ only in terms of what qualifies as prohibited riba, and not necessarily on whether or not Sharia law prohibits it. 35ongside the prohibition on riba, as argued by the classical scholars, Islamic law also prohibits the additional penalty interest imposed on defaulting customers who fail to meet their obligations. 36Any additional amount claimed after the contract is agreed upon (such as an increase in price, default interest levied for late payment, and an early payment penalty) is also unlawful and prohibited as riba. 37According to contemporary Muslims, however, Sharia law allows a claim for compensation arising from MD TUBA PER / PELJ 2017 (20) 6 the actual loss suffered by the financier due to a delay in payment (ta'widh), as well as the penalty charges imposed for such a delay, without the need to prove the actual loss (gharamah). 38Such penalties can be charged, provided that the money is given to charity and is not income for the creditor. 39

Permissible financial products in terms of Sharia law
If the financial system were based on adherence to the classical position and the prohibition against levying interest on loans, this would raise a simple question: how would lenders be able to yield positive returns from the capital amounts that they advanced, without contravening Islamic law?
In particular, are there any halal alternatives to the charging of interest on loans?Islamic law provides few modes of financing which serve as a replacement for the prohibitions against riba-based financing.The bulk of these modes of financing derive from financial instruments that are "engineered" on the basis of the profit and loss sharing principle (PLS) and asset-based financing, which have become primary characteristics of Islamic banking. 40To understand what each of these financial instruments actually entails, one needs to understand the PLS principle upon which they are based.

PLS-based Islamic financial instruments
The PLS principle stems from the promotion of profit from trade and productive investments under the Sharia law. 41This principle generally means that the lender must share in the profits and losses arising out of the project for which the money was lent. 42What is objectionable in terms of the prohibition against riba, as previously indicated, is not the payment of profit, but a pre-determined rate of return that is not the result of the profits and losses incurred by either party to a financial transaction. 43This principle helps to draw a distinction between a prohibited riba and a legitimate return on investment.It recognises the use of an expected rate of return which is based on the risk that may arise from the operation of a financial transaction. 44To implement this principle and be Sharia compliant, some forms of financial arrangements have been developed which are consistent with encouraging trade and profit.What is evident from the literature is that all parties to a financial transaction need not share in both profit and loss.
In certain transactions, one party (mostly the financier) may fully shoulder the risk of loss. 45As correctly stated, "[the] underlying idea is that Quran … prohibits riba but applauds trade and profit, which is not frowned upon". 46s a result, there are numerous financial instruments that have been accepted as Sharia-compliant and which have become the core of Islamic finance today.The relevant permissible Islamic banking products are discussed below.
The most recognised equity-based Islamic financial instruments, based on the PLS principle, are the mudarabah (trust financing) and musharakah (partnership financing). 47Both are based on the idea of partnership: a passive partnership in the case of mudarabah and an active one in the case of musharakah. 48Mudarabah is defined as a type of partnership where one party -a financier or a bank -supplies the capital, while the other party provides the expertise, management and labour. 49It is called "trust financing" because the financier entrusts his or her finance or investment to another party. 50If the project results in profit, they share it in pre-determined proportions.If it results in a loss, the entire loss is borne solely by the financier, and the entrepreneur gains no benefit out of his or her effort. 51usharakah, unlike mudarabah, is purely a partnership financial instrument.It refers to a partnership agreement between two or more parties, in which the partners contribute either capital or labour in order to carry out a joint venture. 52Unlike mudarabah, both parties contribute the capital and both have management rights in the project. 53In a musharakah, both parties share in the profit according to a pre-agreed formula.Losses, however, are shared strictly according to their respective contributions to the partnership. 54Although partnership based on the PLS principle is highly recommended under the Sharia law, it is not always easy to find partners to create a joint venture, in order to obtain financing.Islamic law also recognises another financing instrument called murabaha (cost plus).Murabaha is debt-like, asset-based financing, in terms of which a customer requests the financial institution to purchase an asset for him or her and then sells it to the customer at an agreed price. 55In terms of this agreement, the financial institution buys a product or asset at the request of the buyer in the market at its own cost 56 and for its own account. 57The financial institution takes legal possession of the asset and later sells it to the buyer at cost plus a mark-up. 58By taking possession of the financed property, the financial institution bears the risk during the period between purchasing the property and reselling it to the customer. 59One of the key features of murabaha, which distinguishes it from a conventional loan, is that one cannot receive cash as a subject of the agreement. 60In a murabaha transaction, the agreed sale price of the asset consists of the amount of financing and a predetermined profit margin. 61This mark-up profit is generally not regarded as interest, simply because the financial institution is not giving a loan to the customer, but selling the goods to the customer at a profit. 62At first glance, financing in terms of murabaha looks like a conventional loan, admitting the prohibited interest as cost plus profit through the back door.In support of this position, it is argued that the credit price charged by a financial institution, which includes a pre-specified profit margin, is parallel to a prohibited riba with similar characteristics to the one charged in conventional financing. 63The reason for its acceptability, however, is that it has an "asset-for-money" character rather than a prohibited "money-for-money" character.In terms of murabaha, the financial institution does not lend the borrower money and ask for the money over time plus a profit in addition to the loan capital. 64By buying the asset and then reselling it at a higher price, the financial institution takes a risk associated with the possibility of a sudden fall in price, which could see the buyer refusing to accept the asset at the agreed higher price. 65It is acting as a seller rather than a moneylender. 66The additional profit is not associated with the lending of money but with the buying and selling of the asset. 67The acquisition of assets is the key element of murabaha which distinguishes it from the normal consumption interest-based loan, which is prohibited under Sharia law. 68

Wakalah (agency) contracts as an ancillary to PLS contracts
Each of the above financial products may be offered on its own or with others as hybrid products.One of the permissible contracts recognised as the most frequently accessed form of contract in all major Islamic financial agreements is known as wakalah (agency).Literally, wakalah means looking after, taking custody, or applying skill on behalf of others. 69Its operational models are twofold: they consist of pure wakalah and a combination of, for instance, mudarabah and wakalah. 70In a pure wakalah, the agent (wakil) is not entitled to a profit in a PLS contract, but to an agreed agency fee based on his or her duties. 71The principal (mutawakkil) bears the risks associated with the transaction.Exceptions are those that arise from the agent's negligence or misconduct. 72In a combined mudarabah and wakalah, the agent is entitled to both an agent's fee for the efforts taken in managing the investment project, and to a share of the profit at an agreed ratio, once the investment has realised any such profit. 73In order to be Sharia compliant, the wakalah agreement must not involve any of the prohibited practices, including the prohibition against riba.Like other Islamic financial contracts, wakalah (pure or combined) may be used as a "legal device" (hilah, or hiyal in the plural) in order to achieve certain objectives through legal means. 74Although these objectives may be lawful or unlawful, hiyal are mostly used when it would be impossible to attain one's objective without violating the law. 75In most cases, these legal stratagems are used in Islamic financing to circumvent the prohibition against riba, in order to frustrate the objectives of Sharia law. 76For instance, parties may decide on a loan agreement without a predetermined interest so as to circumvent the prohibition against levying interest, by also entering into an agent agreement with the lender (as the agent), who is entitled to an excessive agency fee.The test for whether or not a particular legal device is lawful MD TUBA PER / PELJ 2017 (20) 10 depends on whether or not the purpose of such a device is simply to overcome the rigidity and inconvenience of any prohibition in terms of the Islamic law. 77The motive of the parties thus determines the legality or illegality of the contract. 78The relevant question that must be asked in the context of Islamic banking and finance is "whether the legal device used amounts to a trick or deception in order to open a back door for prohibited riba". 79This note will now discuss the facts of the case and how the SCA dealt with these principles as they arose in the factual disputes between the parties.

3
The facts in the Lodhi SCA case The facts in the Lodhi SCA case arose from a relationship between the first appellant, Lodhi 5 Properties Investment CC ("Lodhi 5"), and the respondent, FirstRand Bank Limited ("FirstRand").Lodhi 5 is one entity within the Lodhi Group.Another entity within the group is Lodhi 4 Properties Investments (Pty) Ltd ("Lodhi 4"), the second appellant.The third appellant, Mr Lodhi, is the sole member of Lodhi 5, which conducts the business involving rare and fine art, sporting goods, auctioneering and textile industries. 80FirstRand offers to its Islamic customers specialised services and products that are compliant with Sharia law, in addition to its conventional banking products. 81One of the products offered to Islamic customers is called Islamic Finance Residential Property Offering. 82This involves an agency agreement that allows FirstRand to act as an agent when purchasing property on behalf of its customers in return for a fixed agency fee. 83 2008 FirstRand loaned a sum of R9,6 million to Lodhi 5 in terms of an interest-free loan agreement. 84The amount was loaned for the purchase of two properties in Kramerville, Johannesburg.This agreement provided that the loan amount would be repayable in 120 monthly instalments of R88 000.
The parties also entered into an "Agency and Administration Service Agreement" in terms of which FirstRand acted as Lodhi 5's exclusive agent and purchased the property on the latter's behalf. 85 pay an additional 8% administration fee to FirstRand, which was also payable in 120 monthly instalments. 86 security for its indebtedness, Lodhi 4 and Mr Lodhi also executed a suretyship agreement in FirstRand's favour.In terms of this agreement, Mr Lodhi and Lodhi 4 would be liable to pay FirstRand all amounts owing in the event that Lodhi 5 was unable to perform its obligations under the loan agreement and agency agreement. 87A covering mortgage bond was also registered over one of the properties in favour of the bank. 88Lodhi 5 made regular payments in discharge of the loan until September 2009. 89It later made a payment of R5 million in May 2010 towards the discharge of the loan from the insurance pay-out resulting from a fire which destroyed the building purchased through the loan granted to Lodhi 5. 90 No further payments were made thereafter.
Following these defaults in payment, FirstRand sent letters of demand to the appellants between April and May 2011, requesting them to make payments within 21 days from the dates of these letters, failing which they would be placed in mora and deemed unable to pay their debts.Notwithstanding, none of the appellants responded to these letters.As a result, FirstRand launched an application in the HC to place Lodhi 5 and Lodhi 4 under final winding-up, and for Mr Lodhi to pay the outstanding amount on the loan. 92FirstRand relied on both the loan agreement and agency agreement alleging that Lodhi 5 had fallen into arrears in terms of both agreements.It alleged that the sums of R3 609 331, 52 and R6 242, 73 remained owing as capital in terms of the loan agreement, and the balance of administration fees in terms of the agency agreement, respectively. 93

4
The main issues

The issues and the decision in the High Court
The parties approached the HC in three applications. 94The first two related applications involved placing Lodhi 4 and Lodhi 5 under final winding-up 86 Lodhi SCA para 6; Lodhi HC para 19.

MD TUBA
PER / PELJ 2017 ( 20) 12 based on their actual and deemed inability to repay their debtors in terms of the provisions of the old Companies Act 95 and the Close Corporations Act. 96he court, per Molefe J, approved these applications on the basis of the alleged failure by these companies to respond to the letters of demand and to make payments in terms thereof.It also looked at their financial statements and concluded that each company's annual income "equate [d]  to just over one month's repayment in terms of the loan agreement", excluding the payment of operating expenses. 97This was sufficient proof that they were unable to pay their debts. 98The third application, which is important for the purpose of this discussion, relates to the money judgment against Mr Lodhi.In this regard FirstRand relied on the terms of the suretyship agreement.It argued that in the event that Lodhi 5 was placed under winding-up, Mr Lodhi would have no defence against FirstRand's claim and would be liable to make payment in terms of the suretyship agreement. 99e appellants did not deny the existence of a valid agency agreement. 100However, they denied that any of the fees stipulated in the agreement were due and payable. 101They raised several defences to support this position.Firstly, they invoked exceptio non adimpleti contractus and argued that FirstRand was not entitled to payment, as it did not render its own quid pro quo. 102In particular, they argued that FirstRand had rendered no performance to earn any agency fee.Secondly, and related to the first defence, they invoked an alleged suspensive condition which has the effect of bringing both the loan and the agency agreements into effect upon signature by all parties. 103They also alleged that a second offer to purchase had to be signed by the appellants and the seller in relation to the purchases of the two properties. 104As none of these conditions had been fulfilled, they argued that FirstRand was not entitled to any agency fee. 105e third defence is important and requires closer examination.According to the appellants, the "fees" claimed by FirstRand under the agency agreement were "nothing but 'riba'". 106As a result, the only amount due and payable was the outstanding capital amount in terms of the loan agreement. 107The argument with regard to the "riba" defence related to a clause in the loan agreement which provided that their transactions should be compliant with Sharia law, particularly the prohibition against the charging of interest. 108They argued that the agency agreement amounted to the charging of the prohibited riba, which rendered it illegitimate.The essence of the argument was that the whole transaction was not Shariacompliant.The defendants finally argued that FirstRand failed to meet its obligations in accordance with Sharia law, as the agreements were not explained to Mr Lodhi, but were based on the assumption that they would be entered into on the basis of the benefits of profit and risk sharing. 109The written agreements therefore conflicted with the understanding of Mr Lodhi's "intention of the loan transaction". 110For reasons that are discussed below, the appellants were unsuccessful in their defence, and therefore appealed to the SCA against both the winding-up and money judgment orders.

The issues and the decision in the SCA
The main issues on appeal were crystallised into the following questions: whether or not (a) Lodhi 4 and Lodhi 5 were correctly placed under windingup; (b) the appeal should succeed partially by the reduction of the amount owed by Mr Lodhi to the outstanding capital amount; and (c) Mr Lodhi was liable to pay interest on such an amount, and if so, from which date.The SCA upheld the HC's ruling on the winding-up question for the same reasons.The discussion will therefore focus on the other questions raised on appeal, as they are relevant to the defences raised in relation to compliance with Sharia law and the prohibition of riba.

The decisions in the High Court and the SCA
The main factual issue involved in this case was whether or not FirstRand was entitled to the restitution of the money advanced in terms of the loan agreement and, if so, whether or not the appellants were obliged to pay back the capital amount together with any additional amount.Secondly, whether or not it was entitled to any agency fee for the work done under the agency agreement.The issue whether or not any amount was due and 106 Lodhi HC para 16. payable depended on whether or not the court upheld any of the defences raised by the appellants.In both the HC and the SCA the courts agreed on the winding-up of Lodhi 4 and Lodhi 5. 111 Both courts also ordered Mr Lodhi to pay FirstRand the money that was due and payable, together with interest. 112However, for reasons that are discussed below, the courts differed on the amounts and reasons for such payments.They also differed in terms of the reasons whether or not these transactions were Sharia compliant.
In order to address the question regarding the reduction of the loan amount and the possible liability for interest, the SCA (as had the HC) had also to address the question as to whether or not the debt claimed was due and payable.The appellants did not deny that a certain amount of the capital sum remained owing under these contracts.Their main contention was that FirstRand had not accelerated the repayment of instalments in terms of the loan agreement. 113Secondly, they argued that the payment of R5 million from the insurance proceeds amounted to the prepayment of 62 instalments and a year's worth of instalments in advance.Put differently, they were arguing that the payment made from the insurance effectively paid the monthly instalments for many months to come.Therefore, the full amount was not outstanding at the time of the application.Both the HC and the SCA disagreed with the argument pertaining to the acceleration of repayment.Both agreed with the bank's submission that a written notice by FirstRand to the applicants did actually reserve the right to declare all or part of the capital outstanding to be immediately due and payable and was therefore sufficient to accelerate the payment. 114As the HC correctly held, the "notice did declare that the outstanding balance is due and payable". 115The only right reserved, the court further held, "was to declare whether part or all the capital outstanding is due and payable". 116That is, once the letter of demand served to accelerate the payment, it was left to each party to raise the issue as to how much was immediately payable.
Having decided that the amount was due and payable, the HC had to decide how much was payable.In this regard, it had to decide whether the money payable was only the outstanding capital amount or whether interest on that amount was payable and, if so, from which date. the following defence in this regard.They argued that FirstRand had failed to meet its obligation in terms of Sharia law because neither of the agreements had been explained to Mr Lodhi.As a result, he entered into these agreements with the understanding that they would be based on the sharing of profit, as well as any risk arising from the transactions. 117Their position was basically that both agreements were generally void for noncompliance with Sharia law.They argued that the bank was not entitled to any interest as the agency fee "amounted to interest in breach of Shari'ah law". 118Both the HC and the SCA dealt with this issue, but the HC analysed the applicable principles in more detail than the SCA.It dealt both with the issue of Sharia compliance and the issue of the interest that was payable.
The HC looked at the fact that Mr Lodhi implemented all the transactions and accepted the benefits (of purchasing the house with the loan money and the extinguishing of existing debts). 119It also took into account the personality of Mr Lodhi as "an astute businessman". 120It further questioned Mr Lodhi's failure to explain why he knowingly, and applying Islamic principles, read and signed the agreements without any protest "if they were not Sharia compliant with his religious beliefs". 121It therefore found his defence to be far-fetched and untenable. 122This issue was not brought on appeal to the SCA as the parties limited their appeal to the questions of the winding-up and the amount payable. 123th regard to the amount that FirstRand was reclaiming, the HC and the SCA approached this issue differently.Having discussed some of the forms of financial transaction which are Sharia-compliant (such as wakalah), the HC analysed whether or not the loan agreement was Sharia-compliant. 124It approached the matter by asking whether or not the loan transaction provided for a shared responsibility for profit and loss between the borrower and the lender. 125After analysing both the loan and agency transactions, the HC concluded that the loan agreement between the parties was not a profit-sharing agreement. 126 already part of South African law. 139The law has, however, yet to be given detailed explication by our courts.This poses a question as to whether our courts, which are grounded in the common law, are willing to adopt and apply the principles of Islamic banking in South African law.The HC in this case has, to a minimal extent, reached its decision by infusing some principles of Islamic banking law into its deliberations.However, it still left unanswered many relevant questions arising from the facts.The parties in this case had agreed that the agreement between them would be governed by Sharia law but they had failed to agree on the specific principles of Sharia law applicable to their agreement.As a result, there were questions that were left for judicial interpretation by the courts.
The first question that the SCA had to address was whether FirstRand was entitled to charge interest in addition to the capital.It is apparent that the parties intended that the agreement should be governed by Sharia law.As the SCA correctly approached the matter, it had to decide on whether or not these transactions were Sharia compliant.This raised the question as to whether or not FirstRand was entitled to anything more than the loan capital in terms of Sharia law.This question pertains to what Sharia law actually permits.The SCA (like the HC) was reluctant to attempt to interpret what the prohibition against riba entails.The HC's dismissal of the appellant's claim was based on its acceptance that Mr Lodhi implemented the entire transaction and accepted the benefits without any protest. 140The court in this regard was able to expose the scope of possible abuses by defaulting debtors, who use the argument of the invalidity of Islamic law to avoid making payments in terms of transactions governed by this law.However, the HC's position that a financial transaction is permissible under Sharia law only if all parties share in the profit and loss in terms of the PLS principle is questionable.As indicated earlier, in certain transactions, loss can be borne fully by only one party. 141This principle does not entail that profit always be shared among the parties.It simply requires that a financial transaction should have the sharing of profit and loss as its main aim.As a result, the sharing of profit and loss is not in itself the end, but only the means to a Sharia-compliant transaction.With respect, the HC erred by applying the PLS principle as a precondition for compliance with Sharia law.Despite holding that the parties did not share in the profit and loss in terms of the loan agreement, the HC further concluded, surprisingly, that the loan and agency agreements were Sharia-compliant.The question that remains is how these agreements can be thought to be Sharia-compliant if, in the court's view, all parties do not share in the profit and loss.
Likewise, the SCA avoided addressing the main issue before it, which was whether or not Sharia law applied to the transactions.It also did not deal with the question as to whether an additional amount claimed constituted a prohibited riba.Arguably, this was a question that required the Court to take the position of either the classical school or the contemporary Muslim school in this regard.Taking the former position would have led to the conclusion that FirstRand was entitled to the advanced capital amount only.The respondent would have been liable for only the outstanding capital amount advanced by the bank.Even taking the contemporary Muslim scholars' approach would not yield a different result.FirstRand did not, as the SCA concluded, claim interest based on the enforcement of a contractual undertaking. 142The interest claimed was not in the nature of interest agreed upon in a contract, but the claim was based on the default of payment by a debtor.If the claim had been based on the enforcement of a contractual undertaking, the position of contemporary scholars would have been relevant.The court would be called upon to decide whether or not the chaff could be separated from the grain: in other words, whether or not an acceptable amount of additional profit could be separated from the prohibited exorbitant interest.Instead, the court decided the matter by looking at the nature of the interest claimed.It is submitted that the SCA ignored the parties' intention to subject their agreement to Sharia law.
Another question that the SCA left unanswered was whether or not the charging of mora interest in transactions subject to Sharia law is enforceable in South African law.The SCA's view was that the liability of the debtor to compensate the creditor for failure to perform on the due date "has nothing to do with and is not affected by the Sharia law's prohibition against payment of interest on a loan debt". 143While the rights under common law cannot be denied by the application of Islamic law principles, the defence regarding riba was purely on the basis that Sharia law governed the agreement between the parties.constitute an additional income to FirstRand, nor is there any indication that the money would be given to charity, as suggested by contemporary Islamic scholars.Therefore the SCA's focus on attempting to establish the type of interest in question was totally unrelated to the parties' intention that the agreement should be governed by Sharia law.
Having decided on the nature of the interest claimed under the loan agreement, the SCA further failed to address the question as to whether or not the fees under the agency agreement constituted riba, as claimed.This failure denied the parties an opportunity to address their dispute on this point.In order to rule on this question, the court would first have had to address the defence of exceptio non adimpleti contractus.If successful, this defence would allow the appellants to withhold the payment of agency fees until FirstRand had performed in terms of the agency agreement.This defence, however, would still not hold any ground, as FirstRand actually purchased the properties on behalf of the respondents, who subsequently registered a mortgage bond over the properties. 144If it were accepted that there was a quid pro quo on behalf of FirstRand, it would have had to be determined whether or not the payment of the claimed agency fees would have constituted riba.This would have been purely a matter of interpretation of the Islamic law.The charging of agency fees is accepted by both classical and modern Muslim scholars, as already indicated. 145Unless the use of loan and agency agreements (as hybrid murabaha and wakalah) in this case could be regarded as hilah to circumvent the strict prohibition against riba under the loan agreement, by charging agency fees in terms of the agency agreement, FirstRand would be entitled to the agency fees once it was established that it had rendered performance in terms of this agreement.In this regard, the appellants would have needed to prove only that the agency agreement was intended to achieve an unlawful objective under the loan agreement, with the intention of circumventing the prohibition against riba.
In the absence of this proof, the HC and the SCA were therefore correct in concluding that the agency agreement was Sharia-compliant, notwithstanding their failure to analyse the relevant principles in this regard.
The agency fee was payable, as FirstRand has performed by buying the property on behalf of the appellants.
The SCA's conclusion that the respondents' obligation to pay default interest had nothing to do with and was not affected by Sharia law's prohibition against the payment of interest also left much to be desired with regard to 144 Lodhi SCA para 3. the enforceability of Islamic law by our common law courts.This problem exists mostly in those jurisdictions in which the legal systems are secular, such as the United Kingdom.Common law is still dominant, as judicial officers lack the necessary expertise to address disputes arising in terms of the enforcement of Sharia law. 146As a result, the courts adopt a dismissive approach to the parties' choice of Sharia law as the governing law for their transactions.Expert views on Islamic law are often ignored in favour of the application of the national law. 147Contractual disputes are resolved by applying the law of the country in question, disregarding the intention of the parties and the commercial goals of Islamic finance law. 148 In the UK, for instance, leading cases 149 involving murabaha agreements between the financial institutions and their customers provided for a choice of English law or "the principles of the Glorious Sharia" as the governing law.In these cases the UK courts accepted English law as the governing law and therefore ignored the intention of the parties to subject their agreement to Sharia principles.The attitude of English courts towards the enforcement of Islamic banking law is exemplified by Potter 150 as follow: It was improbable in the extreme, that the parties were truly asking the English court to get into the matters of Islamic religion and orthodoxy.
The court further characterised the reference to Sharia law as being simply a reference to Islamic religious principles for conducting banking business, rather than to a system of law which could trump the application of English law. 151In justifying its stance, the court relied heavily on the existence of controversy arising from the existence of various schools of thought regarding the application of Islamic law. 152Controversial as the approach of the UK courts is, they have made their standpoint on the enforcement of Sharia law quite clear: English law trumps Sharia law in conflict of law matters.The position in South Africa, however, remains unclear.The approach by the HC seems to hold out a "jurisprudential promise" of interpreting and enforcing Islamic law.Its pronouncement about the requirements of a PLS principle is an indication that the court is willing to entertain disputes relating to the enforcement of financial transactions governed by Islamic law.However, the decision of the SCA flies in the face of this approach.To reiterate, the judicial officers in Lodhi SCA were arguably called upon to enforce the agreements between the parties in accordance with Islamic law, as the parties intended.However, the SCA chose to address the main question as to whether or not the agreements involved a prohibited riba outside the scope of the governing clause of the loan agreement between the parties by asking whether or not default interest was payable due to the loss, which is "compensated by an award of mora interest". 153The SCA was implicitly adopting the English approach of applying the common law applicable to banking law in South Africa, instead of the Islamic law chosen by the parties.Unlike the English courts, the HC and the SCA did not call for experts on Sharia law to advise on the possible solution to this dispute.As the Malaysian Appeal Court correctly pronounced: … judges in civil court[s] should not take upon themselves to declare whether the matter is in accordance to the Religion of Islam or otherwise as it needs consideration by eminent jurists who are properly qualified in the field of Islamic jurisprudence. 154less such matters can be referred to available specialised forums, they definitely calls for the opinion of experts who could provide insight into the Islamic principles at play in such cases.One should, however, acknowledge that there are differences in matters of the interpretation of Islamic law amongst Sharia experts.Civil courts should nevertheless be able to take into account different views and opinions and have the power to make a final determination on such matters.Their views are important when they adjudicate on issues that require the interpretation of Islamic law.The SCA in this case should have invited experts in Sharia law to assist with the adjudication of the issues before it.Had the SCA based its decision on the governing law in terms of the agreement between the parties, it would not have been necessary to conclude that Mr Lodhi was liable for default interest.Its failure to apply or pronounce on its position regarding the enforcement and interpretation of the governing law clause in this case leaves open the question as to whether or not parties to financial agreements governed by Islamic law can rely on the courts for the resolution of their disputes.issue comes before our courts, and they are willing to guide us on the enforceability of Islamic banking law.The SCA's reluctance to entertain this question also leaves open other questions regarding the contents of the agreements by the parties in terms of Islamic law.These questions include the following: what the ambit of the riba prohibitions is (the question of whether the chaff can be separated from the grain); whether or not hybrid loan and agency agreements are simply unlawful legal devices (hiyal) meant to circumvent the strictness of Sharia law; and whether or not the Islamic Finance Residential Property Offering (as provided to the appellants in this case) as well as agency fees charged in terms of an agency agreement are Sharia-compliant under South African law.

Conclusion
The decision in Lodhi 5 SCA provides some lessons to both parties entering into transactions incorporating Sharia law as the governing law, as well as to judicial officers regarding the challenges in terms of enforcing this law.To the former, a simple lesson is the reluctance of our secular courts to accept the application of Islamic finance principles.This reluctance creates challenges with regard to which forum is capable of addressing disputes arising from transactions based on Islamic finance principles.This reluctance is evident in this case, as the court did not address the dispute between the parties in terms of their choice of law.What is evident in this judgement is that the court had no knowledge of what the principles of Sharia law are.The SCA's failure to invite experts in Sharia law to provide guidance on the applicable Islamic law remains a cause for concern, particularly in terms of whether or not parties can in future expect our courts to enforce agreements based on Islamic law.As already indicated, the court failed to take a stand on whether or not it might enforce Islamic law.It could also not address several questions that were posed to it such as the content of a riba prohibition, and whether or not agency fees in terms of wakala agreements as well as the use of hybrid contracts of murabaha and wakala (as in this case) are Sharia-compliant.These questions will remain unanswered until another similar case comes before our courts.
South African courts need to clearly indicate whether or not they are willing to enforce and apply Islamic finance law as the governing law of a particular transaction.

145
See para 4.1 above.Also seeKusheni and Hayat Contracts and Deals 11.

Literature
Ab'Aziz Islamic Banking in Malaysia Ab'Aziz MR Islamic Banking and Finance in Malaysia; System, Issues and Challenges (USIM Negeri Sembilan 2013) Abdul-Rahman Art of RF Abdul-Rahman Y The Art of RF (Riba-Free) Islamic Banking and Finance: Tools and Techniques for Community-Based Banking 2 nd ed (Wiley Hoboken 2014) Ali Holy Qur'ᾱn: Translation Ali MS The Holy Qur'ᾱn: Arabic Text and English Translation (Islamic International Publications Islamabad 2004) Alrifai Islamic Finance Alrifai T Islamic Finance and the New Financial System: An Ethical Approach to Preventing Future Financial Crises (Wiley Singapore 2015) Ayub Understanding Islamic Finance Ayub M Understanding Islamic Finance (Wiley London 2007) Chapra 1984 HI Chapra MU "The Nature of Riba in Islam" 1984 HI 3-24 El-Gamal "Paradox" El-Gamal MA "Interest and the Paradox of Contemporary Islamic Law and Finance" in Al-Roubaie A and Alvi S (eds) Islamic Banking and Finance: Critical Concepts in Economics -Vol II (Routledge London 2010) 281-308 Fakir and Tkiouat 2016 IJEFI Fakir AEL and Tkiouat M "Single or Menu Contracting: An Application of the Hersanyi Model to Mudaraba Financing" 2016 IJEFI 221-230 Fisho-Oridedi 2009 CEPMLPAR Fisho-Oridedi A "The Prohibition of Riba under the Islamic Law: What are the Implications for the International Contracts" 2009 CEPMLPAR 1-20 Garner 2013 LJLC Garner JM "A Critical Perspective on the Principles of Islamic Finance Focusing on Sharia Compliance and Arbitrage" 2013 LJLC 69-90 Its reason was that "[t]he only party benefiting from this transaction was the respondents" (as they were in the lower It concluded that the transaction was a residential property offered with a fixed agency fee.128As a result it held, rather surprisingly, that the loan and agency agreements were Sharia-compliant.129ItorderedMrLodhi to repay FirstRand a cumulative amount of R10 328 574,25 plus interest on the said amount, at the rate of 15.5% per annum calculated from the 18 April until date of the payment.130TheSCAalsoarrivedatasimilardecision.It ordered Mr Lodhi to repay FirstRand an amount of R2 642 006.95, together with interest thereon at the rate of 15.5% per annum from 15 June 2012 to the date of the appeal.131TheSCAagreedwithFirstRand'spositionthatMrLodhiwasliableforinterest on the reduced sum at the legal rate of 15.5% at the material time.The SCA approached this issue by questioning the nature or the type of interest charged in terms of the agreements between the parties.132Itheldthat the interest sought by FirstRand was not based on the enforcement of a contractual undertaking.133Inthecourt'sview,thisinterestwasbasedon Lodhi's default in payment.134Itreasonedthat the interest was mora interest intended to compensate the party who suffered a loss as a result of "being deprived of the use of the capital for a period of time".135According to the SCA, the interest constituted damage that flowed naturally from the contract itself, due to a failure to perform a contractual obligation within the agreed time.136In the SCA's view, this obligation had "nothing to do with and is not affected by the Sharia law's prohibition against payment of interest on a loan debt". 137t therefore found Mr Lodhi liable to compensate FirstRand for its failure to perform by the due date at a legal rate of interest as prescribed by section 1(2) of the Prescribed Rates of Interest Act.138 124Lodhi HC paras32-35.125LodhiHC para 35.126 Lodhi HC para 36. 127128 Lodhi HC para 36.129 Lodhi HC para 36.130 Lodhi HC para 38.131 Lodhi SCA para 24.132 Lodhi SCA para 23.133 Lodhi SCA para 23.134 Lodhi SCA para 23.135 Lodhi SCA para 23.136 Lodhi SCA para 23.137 Lodhi SCA para 24.138 Lodhi SCA para 23.
Payment of this interest had to be decided in terms of what Sharia law permits.When applying Sharia law, the bank's claim for default interest in this case could not be regarded as either tawhid or gharamah.There is no indication that the claim for default interest would not This question that will remain open until another similar 153Lodhi SCA para 23.154 Bank Islam Malaysia Berhad v Lim Kok Hoe 2009 6 MLJ 839 840.