D I F F E R E N C E S

B E T W E E N I S L A M I C

N E G O T I A B L E

I N S T R U M E N T A N D

C O N V E N T I O N A L

N E G O T I A B L E

I N S T R U M E N T

NEGOTIABLE INSTRUMENT

• a written instrument, signed by the

maker or drawer of the instrument that

contains an unconditional promise or

order to pay an exact sum of money (with

or without interest in a specified amount or

at a specified rate) on demand or at an

exact future time, or to a specific person, or

to order, or to its bearer.

– negotiable instrument is a substitute for money

or serves as an extension of credit.

• Characteristic deemed to be a negotiable

instrument:

i. legal title to the instrument.

is defined as a thing or property used in performing an

action e.g. a banking transaction, which is freely

transferable. Section 31 Bills of Exchange Act 1949.

ii. the person (usually called the Transferee) to whom

the instrument is negotiated can sue on the

instrument in his own name

iii. a person who takes the negotiated instrument in

good faith and for value (a bona fide transferee) may

acquires a title to the instrument better than that of

the transferor, even though the transferor held a

defective title or no title at all.

LAW APPLICABLE FOR

NEGOTIABLE INSTRUMENT

IN MALAYSIA

• CONVENTIONAL NEGOTIABLE

INSTRUMENT

– Bills of Exchange Act 1949

Malaysia has also incorporated

the provisions of the English

Cheques Act 1957 into its own

principal Acts.

• ISLAMIC NEGOTIABLE INSTRUMENT

– Islamic Financial Services Act 2013

TYPES OF

CONVENTIONAL

NEGOTIABLE

INSTRUMENT

A) BILLS OF EXCHANGE

Defined in Section 3(1) of the Bills of Exchange Act 1949 as:

“an unconditional order in waiting, addressed by one person to

another, signed by the person giving it, requiring the person to whom

it is addressed to, pay on demand or at fixed or determinable future

time, a sum certain in money to or to the order of, a specified person,

or to a bearer.”

– Bill of Exchange transaction usually involves at least three

transacting parties.

• Drawer – person who draws up the bill or who gives the instruction on

the bill

• Drawee – the agent of the Drawer is responsible for carrying out the

instruction of the Drawer.

• Payee – whom the bill is made payable & is entitled to receive

payment on the bill.

B) CHEQUES

• Section 73(1) of the Bills of Exchange Act 1949:

a cheque is a form of bill of exchange drawn on

a banker and made payable on demand.

• Payable on Demand – if the cheque is presented on the

date it bears or within a reasonable time of the date stated,

the bank must effect payment.

B. CHEQUESCONT…

• Difference between cheques and bill of exchange :

– In cheque, there is normally no acceptor.

– The drawee (usually a banker) of the cheque assumes no legal liability

toward a payee or any holder of the cheque for the payment.

– But the drawee is answerable only to his own customer, i.e. the

drawer of the cheque.

– It is to be noted that a post-dated is not an invalid bill of exchange.

Hence, the holder of a post-dated cheque has no legal rights to

institute legal action on the cheques before its date of issue has

arrived.

• Section 13(2) of the Bills of Exchange Act clearly stated

that bill of exchange is not invalid by reason that it is

post-dated or antedated.

Yee Chow Fah v Multihorizon Sdn Bhd [1998] 1

LNS 365.

• the Multihorizon Sdn. Bhd (the respondent), on 19th February

1994 drew a crossed post-dated cheques HSBC in the sum of

RM 23,000.00 made payable to cash or bearer dated 23rd

February 1994 and delivered the cheque to Cipta Hikmat

Development Sdn. Bhd for the purchase of timber logs from the

latter.

• As Cipta Hikmat was unable to supply the logs, the respondent

countermanded the payment. In the meantime, the cheque fell

into the hands of Mr. Yee Teck Fah, counsel who argued this

case in front of the judge on behalf of the appellant, who is his

sister.

• The Counsel negotiated the cheque with the appellant and

obtained cash RM 23,000.00 from her in return for the cheque.

On 23rd February 1984, the appellant presented the cheque for

payment and it was dishonoured, having been countermanded

by th respondent.

• The appellant brought and action against the respondent

on the dishonoured cheque for the sum of RM 23,000.00.

However, the learned magistrate rejected the claim on the

ground that the appellant was a complete stranger to the

respondent, and in the absence of any consideration, the

appellant cannot recover the amount from the respondent.

• According to counsel, the cheque was meant for Cipta

Hikmat as there was a contract between the two, and not

for the appellant who was a fourth party to the cheque. As

such, the learned magistrate was right to dismiss the

appellant's claim. The appellant appealed the claim.

Consequently, the appeal is allowed and the decision of

the learned magistrate be set aside. There will be

judgment for the appellant on her claim for the sum of

RM23,000 with costs, plus interest on the amount at 8%

per annum calculated from the date of the summons, i.e.

23rd April 1994 until the judgment is satisfied.

C) PROMISSORY NOTES

• Section 88(1) of the Bills of Exchange Act 1949 defines

Promissory Note as:

‘an unconditional promise in writing made by one person to

another, signed by the maker, engaging to pay, on demand or

at a fixed or determinable future time, a sum certain in money

to, or to the order of a specified person or to a bearer’.

• There is a difference between a promissory note and

an acknowledgement of a debt, like an “I.O.U”. An

I.O.U. note or receipt may constitute evidence of a

debt, but it is not a negotiable instrument and hence,

the holder of such a document does not possess

legal right to take legal action on the document.

D) BANKER’S DRAFT OR

CHEQUE

• sometimes it is called a banker’s cheques is an

order addressed by a banker to itself, to pay a

specified sum of money.

• A banker’s draft may be issued by one bank upon

another bank.

• It may also be drawn by a bank branch addressed

to its head office or to another branch of the similar

bank.

E) TREASURY BILL

• equivalent to a Promissory Note.

• The only difference is that the Treasury Bills are issued by the

Government at a discount and falling due at certain dates, for

example, for tenure of 92 days.

• government normally treats the issuance of Treasury Bills as a

vehicle to raise short-term funds, whereas, the banks use it as a

means of a short term lending which is one of the safest types of

lending as far as bankers are concerned.

F) SHARE WARRANTS

• Warrants issued by a public company, whether they are listed

or not-listed public companies, are called Share Warrants. All

share warrants issued to bearer are negotiable and the

bearer is entitled to the shares mentioned in the share

warrants.

G) DIVIDEND WARRANTS

• When a company declares dividend, it will normally issue

dividend warrants instructing its banker to pay to a named

shareholders of that company, a specified sum of money.

Dividend warrants which are usually drawn in the form of

cheques or banker’s draft or cheques are negotiable

provided otherwise stated.

E. TRESURY BILLS

H) DEBENTURES PAYABLE TO BEARER

• Debentures are security documents raised as an

acknowledgement of indebtedness. Debentures are usually

issued by a company or corporation acknowledging a mid or

long term loan to the company in favour of the lender, which

is normally issues by banking institutions. Debentures, if

expressly stated as payable to bearer are negotiable.

I) TRAVELLER’S CHEQUES

• Traveller’s cheques are in fact a special type of banker’s draft

or cheques which allows the holder of it to draw cash.

Basically, a traveller’s cheque is an order requested by the

customer, addressed to his banker and requiring the banker

to pay to himself, or at his order, the sum of money specified

therein. Given the availability of credit cards, traveller’s

cheques nowadays is not that popular vis-à-vis the credit

cards.

ISLAMIC

NEGOTIABLE

INSTRUMENTS

ISLAMIC NEGOTIABLE INSTRUMENT OF DEPOSIT (INID)

• There are two types of Islamic negotiable instruments, Islamic

Negotiable Instrument of Deposit and Negotiable Islamic Debt

Certificate.

• The Islamic Negotiable Instruments of Deposits is based on the

concept of Al-Mudharabah.

• Al-Mudharabah refers to an agreement between the bank and the

customer when the customer agreed to participate in the financial

activities undertaken by the bank. The bank and the customer will share

the profit generated from financing and investment activities based on an

agreed profit-sharing ratio.

• This type of Islamic negotiable instruments can be sold or traded in

the Islamic money market. This instrument is tradable in the secondary

market in order to enhance its liquidity and also has a floating profit rate.

• Under the Islamic Negotiable Instruments of Deposits, the investor or the

customer will deposit sum of money with the Islamic financial institution.

• The Islamic financial institution will issue the certificate of Islamic

Negotiable Instruments of Deposits as the evidence of the deposit

acceptance.

• The maturity of the Islamic Negotiable Instruments of Deposits is not

earlier than 30 days and up to 10 years. The nominal value of a minimum is

RM 50,000 and up to RM 10,000,000.

• On the maturity date, the investor will then return the Islamic Negotiable

Instruments of Deposits to the Islamic financial institution and then will

receive the principal value with its declared dividend.

• The profit rate is depends on the profit sharing ration as it is based on

the concept of Al-Mudharabah.

FEATURES OF ISLAMIC INSTRUMENTS

NEGOTIABLE INSTRUMENT OF

DEPOSITS

1. The first one is this instrument can be legally

transferred through a depoditary institution.

2. The second feature is that it can be issued to the non-

resident or resident may buy from or sell to a non-

resident, which is subjected to the rules and

regulations imposed by Bank Negara Malaysia.

3. The third feature is that the Islamic Negotiable

Instruments of Deposits can be traded in the

secondary market.

NEGOTIABLE ISLAMIC DEBT CERTIFICATE

(NIDC)

• The Negotiable Islamic Debt Certificate is a form of deposit

instrument from the customer to the bank and based on the

principle of Bai Bithaman Ajil (BBA).

• Bai Bithaman Ajil refers to the sale of good based on a

deferred payment basis where the bank buy the assets that

are requested by the customer and later sells the goods to the

customer at a marked price which both parties agreed with

the stipulated price.

• Even though this instrument known as deposit, the

underlying contract is essentially sale and purchase contract

and it should comply to all the principles pertaining to the sale

and purchase instead of the deposit or investment.

• Under the Negotiable Islamic Debt Certificate (NIDC), the bank will

sells its asset to a customer or investor for cash and subsequently the

customer will sells back the asset to the bank.

• The bank later on will issues a Certificate of Debt, also known as

Shahadah al- Dayn as evidence of the bank’s debt to the customer.

• In the case of Bank Kerjasama Rakyat Malaysia Bhd v Brampton

Holdings Sdn Bhd, it was held that the Plaintiff had exhibited a

certificate of indebtedness which certified that the defendant owed the

outstanding sum to the Plaintiff. Such a certificate was conclusive

evidence of the Defendant’s indebtedness unless the Defendant was

able to prove fraud or could show manifest error in respect of the

certificate. This shows that the certificate of debt issued by the bank is

important as proof of indebtedness.

• Basically this transaction consists of two

steps.

• The first step is the Islamic bank will sells

its assets to an investor at agreed cash

price.

• The second step is that the investor will

then resell the assets that have been

acquired from the bank at a marked up price

and the bank will pay the agreed amount at

an agreed future date.

• The difference of the marked up price will

be the profit to the customer.

• .

LEGAL ANALYSIS• Commercial paper formats exists to simplify the trade

transactions by having an equivalent value as to a

monetary standard.

• Therefore, for the purpose of this research paper, we

had discussed;

on the types and importance of various negotiable.

divided the discussion into two parts to make a

distinction of these two areas of banking practice;

Conventional Banking and Islamic Banking.

• So under this third part, we will accordingly reveal and

analyse on the difference between the Islamic

Negotiable Instruments and Conventional

Negotiable Instruments.

• Negotiable instrument is a

written order promising to

pay a sum of money payable

to the creditor.

• There are two categories of

negotiable instruments;

Islamic Negotiable

Instruments and

Conventional Negotiable

Instruments.

ISLAMIC MARKET

• utilises Shari’ah-compiant contracts

such as mudarabah, murabahah and

wakalah

Islamic finance every transaction done

must be in compliance with Shari’ah

principle, which is without riba (interest)

or gharar (uncertainty).

Taking murabahah as an example. It is a

sale of contract where the bank buys a

product on behalf of a client and resells

the product to the same client.

monetary obligation arising out of a

murabahah transaction cannot create a

negotiable instrument.

• However, if there is a mixed portfolio

consisting of a number of transactions

like musharakah, leasing and

murabahah, then this portfolio may issue

negotiable certificates subject to certain

conditions.

CONVENTIONAL MARKET

• focus on issues debt contract

for placement of funds

• conventional finance is loan that

include sum of debt and interest

ISSUANCE PROCESS, TYPES OF

STRUCTURE AND INVESTORS

ISLAMIC MARKET CONVENTIONAL MARKET

• For Islamic instrument, it must be

Sharia’ah compliant and

approved by both; the Council

and Shariah Committee.

• The structured would be based

on assets, equity and debt-

based.

• It may include both Islamic and

conventional investor. In

Malaysia, the regulators of the

Islamic finance system are Bank

Negara Malaysia(BNM) and the

SC which govern the banking

industry and the securities

market respectively.

• the issuance process must be

approved by the respective

financial regulator.

• The market is structured based

on debt only.

• It only includes conventional

investors.

• We prefer to choose Islamic Negotiable

Instruments in performing banking business or

transaction. This is due to few considerations –

including its position of Shari’ah compliant and

rapid growth with the wide range of product

and services of the Islamic facility itself.

positive development by Islamic Banking in

this country is a lifesaver for the people since

they are very cautious in involving themselves

in riba transaction.

• Nonetheless in real practice, the

documentations in regards to application of

Islamic loan would be quite costly and timely

CONCLUSION

• Negotiable instrument is crucial especially to

facilitate any business transaction worldwide

such as export and export. Development of

negotiable instrument would indirectly

encourage on the economic growth.

• We are free to determine which type of

negotiable instruments that suit our interest the

best; conventional or Islamic negotiable

instruments. This creates such an advantage to

us as consumers.