EXTENDING UNFAIR CONTRACT TERMS PROTECTION TO BANKING CONSUMERS IN MALAYSIA: THE CASE OF ISLAMIC BANKS

Abstract

Standard form consumer contracts are pre-prepared by Islamic banks, which has the most bargaining power in the transaction and makes the offer on a ‘take it or leave it’ basis to banking consumers. For banking consumers, there is no scope to negotiate changes but to accept terms that unfairly advantage Islamic banks at their expense. Also, many do not read the standard form contracts and for those who actually read them may not understand or value fully the risks of the terms. Based on this backdrop, this study examines the issue of fairness in the actual terms of Islamic banking standard form consumer contracts (‘substantive unfairness’) and the domestic laws relating to unfair contract terms (UCT) in standard form consumer contracts of Islamic banks. Using doctrinal and content analysis methodology, this study analyses the already in place legal protections of Consumer Protection Act (CPA) 1999 and Islamic Financial Services Act (IFSA) 2013 that protect banking consumers when they encounter such problems, and how effective these mechanisms are. The findings suggest that there is inadequate protection from unfair terms in Islamic banking consumer contracts in Malaysia especially to banking consumer, which not only led to significant imbalance in the contracting parties’ rights and obligations but has also resulted in considerable detriment (whether financial or otherwise) to banking consumers. This study concludes with options for legislative amendment to address unfair contract terms problem, such as to extend the existing CPA 1999 provisions to capture contracts involving banking consumers or to broaden the provisions in IFSA 2013 on UCT. This study has important implications on Islamic bankers and the government in determining an effective protection policy to financial consumers and growth sustainability of Islamic banking institutions in Malaysia.