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INTRODUCTION 1.0 Definition of BBA 1.1 Modus Operandi HISTORICAL PERSPECTIVE 2.0 Historical Development 2.1 Legality in BBA ISSUES 3.0 Bay al-Inah concept 3.1Transfer of ownership 3.2Selling Non-Existent Assets 3.3 The prohibition of riba CONCLUSION

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1.0 Definition of Bay BithamanAjil (BBA) Bay BithamanAjil can simply be explained from the word Bay, which means sale and BithamanAjil, which means the deferred payment of the price. In other words, it is the financing facility involving the sale of goods where the price is payable at certain particular time in the future. It is also known as Bay Muajjal. This type of financing facility is a Murabahahcontract based on controversial Bay al-Inah concept, which will be explained later in the next section. 1.1 Modus Operandi

Bay BithamanAjil (BBA) financing is employed by the bank in order to provide long term financing to the customer who want to acquire property like land, motor vehicle and house. As we have been through a lot of articles, it shows that house financing is the most popular

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facility granted under the concept of BBA. It involves of either to purchase existing completed house or constructed new house. In BBA, firstly customer will identify the house that they want to purchase from a developer. At this transaction, the customer normally enters into Sales and Purchase Agreement with the developer and pays the deposit amount, for example, 10 %.1 Actually the agreement is not a part of the facility but it is required in order to obtain the facility. Next step is, after the customer paid the deposit then he or she will obtain beneficial ownership of the property. Then, the customer will approach the bank for financing the remaining balance. This can be done through the Property Purchase Agreement (PPA). The agreement is about when the customer sells the property to the bank at a price equivalent to the financing amount.2 Other than that, Property Sale Agreement (PSA) also involve in this case. This agreement is signed between the customer and the bank. PSA should be signed after the signing of the PPA, so as to allow the bank to sell back the asset to the customer at a markup price which includes the banks profit on the sale. Last but not least, the customer will pay the sale price to the bank by installment basis. 3 This transaction is called as Deeds of Charge.

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Dr. Muhammad HasibDifari, Home Financing and BBA, p. 2. Dr. Muhammad HasibDifari, Home Financing and BBA, p. 2. 3 Dr. Muhammad HasibDifari, Home Financing and BBA, p. 3.

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2.0 Historical Development Bay BithamanAjil or referred to as BBA, is the most famous form of financing facility being used by many financial institutions in Malaysia. It is the primary concept for Islamic home financing which is widely used in Malaysia, until now. Bank Islam Malaysia Berhad (BIMB), which is the first Islamic bank in Malaysia (1983), is the one that introduced and implemented this method of financing. From the Annual Report of Bank Negara Malaysia (BNM) in year 2005, it shows that the total financing given by Islamic banking institutions based on BBA concept remained dominant because it comprises 40.7% of total financing.4 From this number, we can say that BBA has recently become the most crucial anchor in the growth and establishment of Islamic banking in Malaysia. 3.1 Legality in BBA There is a Quranic verse that we can relate with Bay BithamanAjil (BBA) which is in the Surah An-Nisa (4:29). It stated that O you who believe! Eat not up your property among yourselves unjustly except it is trade amongst you, by mutual consent.5So, according to the verse, BBA is permissible for people to use it in their life. This is because BBA contract is clearly concluded by mutual consent from both parties.

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Bank Negara Malaysia Annual Report 2005, 167 Yusuf Ali, The Holy Quran, (2007)

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In general, no issue arises from the practice of deferring the payment of sale price. This is because, it stated in a Hadith by Jabir that the Prophet (pbuh) bought a camel from him outside the city of Madinah whereby the payment was settled later on in Madinah. In another hadith, it was reported that the Prophet (pbuh) had bought some food from a jew on a credit basis (with a delayed payment) and he pledged his steel armour. The legality of BBA in this hadith indicates the legality of Bay Taqsit (sale through installment payment) since this type of sale actually a sale with deferred payment of the price. The main objective is to settle the payment through several different installments with a specific period of time. There is no difference in the Islamic ruling whether it is made through one lump sum in the future or spread over different period of time. According to the majority scholars which are Al-Kasani, Ibn 'Abidin, IbnRushd and Al-Nawawi, increasing the price due to the deferment in the payment is permissible because the increase is against the commodity and not against the money. So, there is no involvement of usury or riba.

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3.0 Bay al-Inah concept in Bay BithamanAjil BBA has become the contentious issue among the scholars since the practice of the sell and buy back does not reflect the real objective of BBA, which is to acquire an asset or property. However, the practice nowadays, where under the agreement, the intention of the customer is actually to borrow money in order to finance the spending on the property, while the intention of the bank is to lend money at mark-up price. This refers toBay al-Inah concept. Bay al-Inah is a sale based on the transaction of Nasiah (delay). According to Imam Shafii, it is a credit purchase of an asset which is later sold to the original owner or a third party, whether at deferred or spot, higher or lower price than the first contract, or for an exchange of goods.6In simple words, it refers to a sale of an asset, which is later will be repurchased at a higher price than the original one. The property is sold immediately while the payment is deferred to a later date. Many scholars such as Hanafis, Malikis,Hanbalis and Shafiis, reject this contract of sale. The application of Bay al-Inah concept in BBA can be reflected in two separate sale contracts which are Property Purchase Agreement (PPA) and Property Sale Agreement (PSA). The first contract is when the customer sells the property to the bank and receives payment in cash and on the spot. The payment received is actually the amount of financing. After that, the bank immediately sells back the same property to the customer (even on the same day) on deferred-payment basis or by installments. In addition, the bank charges price which is slightly


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higher than the price before. The difference between both is the bank profit margin, which represents the profit to the bank. Some jurists such as Hanbali, Hanafi and Imam Malik, prohibit Bay al-Inah because they said that the sale under Bay al-Inah is void. They viewed such transaction as a fictitious sale to legalize that which is illegal or usurious under the Shariah principles.7 In order to determine the validity of the transaction, the bona-fide (real) intention should be taken into account. Both parties actually have no interest to own the property through the sale but they rather want to borrow and lend money. The customer is interested to borrow money with a cash-basis while the bank is interested to gain profit from that by receiving a higher amount. Hence, Bay al-Inah is prohibited since the main reason is to obtain a loan (financing amount) with interest (profit). In addition to that, it can be said that the difference between the pricesin which is claimed as the bank profit margin isdeemed as the interest being charged on a loan, which is tantamount to riba. This is expressly prohibited in Islam since riba caused injustice towards some parties. There is a Quranic verse related to the prohibition of riba; Allah will deprive usury of all blessing, but will give increase for deeds of charity: for He does not love any ungrateful sinner, 2:276.8 Besides, this act is unlawful according to the Shariah since it leads to unjustified enrichment in terms of monetary to one party, which refers to the bank, without giving any counter value (iwad) to the other party, which is the customer. There is a Quranic verse related to this: Do



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not eat up your property among yourselves for vanities, nor use it as bait for the judges, with intent that ye may not eat up wrongfully and knowingly a little of (other) peoples property, (2:188). On contrary, scholars of Shafii school permit Bay al-Inah but considered it as reprehensible (makruh). They stated that the intention is not important as long as the transactions were executed properly and in the right ways. This means that it should be carried out based on the expressed intention, which is to conduct the sale of the property. Furthermore, if the real intention is taken into account, it can cause hardship and difficulty to carry out the business. Overall view, the contemporary scholars have different opinions regarding this issue. Some argue that if the customer is unable to pay the price upon the fixed date, the charge imposed should not for the motive to compensate the bank. Instead,Malikis schools allow this increase if the default is without any valid reason. They viewed this as part of the punishment for the customer and the bank should spend it as charitable purpose on behalf of the customer.9 To sum up, this legal issue arises in BBA contract still remain unresolved although there have been a lot of legal scrutiny on it.Hence, Bay al-Inah which is constituted in BBA, still subject to debate by the scholars as the sale contract involves riba (the difference between the prices or called as the bank profit margin).


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3.1 Transfer of Ownership One of the issues that arises in the concept of Bay BithamanAjil (BBA) is about transfer of ownership. Since BBA is actually a sale contract, the transfer of ownership and taking into possession over the property must truly happen even for a short time period. There is a Shariah requirement that the seller must own the property before he can sell that particular thing or asset. This opinion is based on the Prophets hadith which stated Do not sell what is not with you.10 It means that anyone is not allowed to sell what one does not own at the time of sale. Therefore, under BBA, the seller is supposed to have an ownership over the property of which he wanted to sell. Under the Property Purchase Agreement (PPA), the customer is supposed to have that ownership. But in BBA, it is only beneficial ownership has been transferred. Effectively, ownership of property still remains with the customer. So, actually transfer of ownership does not take place in this transaction. However, itis still a contentious matter whether the Sale and Purchase Agreement can create beneficial ownership or not. For example, in the case of Dato Haji Nik Mahmud bin Daud v Bank Islam Malaysia Berhad (1996). The issue arises from this case is about whether the execution of PSA and PPA amounted to transfer of ownership or not. Court held that it was never the intention of the parties to involve any transfer of ownership. The executions of PSA and PPA were actually the part of the process required by Islamic Banking procedure.11 Although justice and equity have been carried out in this case but the judgment caused serious conflict with the concept of BBA. The contract should result in transfer of ownership even only for a second.


Muhammad Ibn Ismail al-Sanani (t.t), Subul al-Salam SharhBulugh al-Maram. Vol.3, Cairo:Al-Maktabah alTijariyyah, p. 17. 11 Dr. Muhammad HasibDifari, Home Financing and BBA, p. 7.

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3.2 Sale of Thing which is Non-Existent Under the current practice of BBA, the customer is selling non-existence or incomplete existence of a house to the bank and vice versa. This situation is actually contrary with Shariah requirements for the conditions of subject matter. Since BBA is a sale contract, so the condition of the subject matter is among the most crucial elements of the contract. Failure to meet such condition may cause the sale contract is void.Even when the subject matter exists, they are subject to quite strict conditions as to ascertain ability, control and value. What more if the subject matter is non-existent, the sale contract will be invalid. According to the majority of jurists, financing for house under construction is not allowed since the subject matter is non-existent. While according to IbnTaymiyyah and Ibn Al-Qayyim, they allow the selling of non-existent subject matter, provided that the parties to the contract are confident that the delivery is possible at the future agreed time. To conclude, BBA creates controversial issue since the customer sell non-existence property to the bank and vice versa. In order to avoid any conflicting issue that may arise, it has been recommended that banks use other types of financing for property under construction. For instance, banks can use the contract of parallel istisna as it relates to the financing of asset involving future delivery.12


INCEIF CIFP Module on applied Shariah in Financial Transactions.

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3.3 The Prohibition of Riba Interest or Riba is a main issue of BBA home-financing contract because its characteristic that is derived from the concept of Bay al- Inah. As stated on the first issue of BBA, Bay al-Inah is permissible only for the Shafii school of Fiqh but it is prohibited for the majority of Fiqh because it is resemble and become the legal way to obtain the interest from. Since BBA contract is applied into Islamic banking and finance, there are many cases practiced in Malaysia reflects that conventional home loan is far better off than what Islamic home financing have done as the case study between Affin bank and Zulkifli (2005) has shown. For the fact of the case, home financing amount is RM346000 with repayment period 18 years Zulkifli who was an Affin banks customer had paid the payment for 2 years and 8 months before default payment occurred. After that the bank sued full selling price plus other charges amounting to RM958909. If the implication after court judgment is that the house is auctioned for RM400000 and a customer still must pay debt RM558909. This case shows indifference of home financing contract between Islamic and conventional bank. Moreover, some said that BBA of Islamic bank more exploit to individuals. These problems are the consequence of profit on deferred sale which is calculated as same as the conventional amortized fixed-rate home loans. It includes the element of compounding of interest that interest earns interest. Therefore there are arguments to oppose Bay Bithaman Ajil contract that it is just a legal tool is used to be a bypass in order to eradicate the prohibition of riba. Finally, BBA contract does not help customer in the aim of being without suffering from the interest and it still circle around and around Muslims lives.

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3.4 Floating Rate BBA According to the structure of BBA financing facilities is fixed-rate financing. Some people are convinced that a fixed-rate mechanism is more preferable as they provide more financial stability. The nature of fixed-rate financing would enable them to plan their cash flow since monthly payment is fixed throughout the financing period. Thus, some customers might prefer to have this kind of facility instead of having equivalent conventional product which is floating-rate in nature. This is because the payment of the selling price (purchase price together with a profit of the bank) will be fixed and settled by installment over a long-term period. So, if the client who is a government servant is granted a financing facility to buy a house, he will know the amount that he has to pay monthly, and this amount will be fixed no matter how the bank interest rate fluctuates. With that, he can plan his payment properly without affecting his other monthly budgets. However, it is argued by some that fixed-rates method of financing might affect the competitiveness as well as the viability of Islamic banks and sometimes it is not a preferred mode of financing to some clients. It is submitted that the clients of Islamic banks are varied. Some of them are Muslims who deal with Islamic banking for religious purposes. To this kind of people, no matter how interest rates move, they will remain with Islamic banks as they believe that having a loan with interest from conventional banking amounts to riba. However, there are clients who prefer Islamic banks due to certain other considerations. To them they will stay with Islamic banks as long as the rates of payment are competitive compared to that of conventional banks. Once the rate of payment is higher, they will shift to conventional banking. In this case, the fluctuation of interest rate matters a lot and will definitely affect their preference. If interest rates are climbing, these clients would choose fixed rate financing facility, in which BBA (and

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also istisna) is prominent, to lock the payment for the protection of themselves against the increasing trend of interest rates. But when the interest rates are in a decreasing mode, they will convert their financing to interest-based financing facilities for a relatively lower payment. So, the fluctuation of interest rates in the market will definitely, affect the demand for BBA and other Islamic fixed-rate modes of financing. Besides, the fixed-rate modes of financing have also resulted in a funding mismatch to the Islamic financial institutions because their long-term financing was funded by short-term bank deposits which can give variable returns. It is a disadvantage to Islamic banks as they have locked their financing profit rates over a long period, while at the same time they have to give a competitive rate of return to their depositors, or otherwise these depositors will shift their deposit to the conventional banks who can offer a better rate of return. So, Islamic banks will be placed in a very difficult situation. It has to maintain a competitive rate of return and at the same time cannot change the profit rate of the concluded fixed-rate contracts. It is argued that this fixed-rate and price-rigidity factor has rendered Islamic banks to be very vulnerable to economic and interest-rate volatility. As an innovation, Bank Negara Malaysia via its working group, comprising representatives from Bank Negara Malaysia and the industry had come out with the first variable rate financing product based on the concept of BBA. Under this BBA financing with ibra features, the selling price of the asset sold to the customer on deferred terms would be fixed at a profit rate known as the ceiling profit rate. However, contrary to the BBA fixed rate, the periodical installments of this financing will fluctuate and vary depending on certain benchmarks and the spread on the customer for a particular period. Say, for instance, if the original monthly installment is RM 1,000.00, but the financing payment plus profit rate of that month (calculated based on certain benchmarks such as BLR plus margin) is

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lower, certain ibra will be given to the client, in order to reduce the monthly installments to match that of the current market level. If the interest rate increases beyond the monthly installment payment (BLR plus margin) the effective profit rate will remain at the ceiling rate. This means that the client will only have to pay the installment at not more than the ceiling price that has been agreed upon upfront. It means that the ibra will be given on a monthly basis and will differ from one month to another. On the maturity of the financing, the total installments are calculated and should not exceed the original selling price. Any shortfall will be treated as an ibra (rebate) given to the client. It is hoped that such variable rate financing products will be able to reduce the vulnerabilities of Islamic banks, especially in a dual banking environment where the Islamic banking system operates in parallel with a conventional financial system. The flexibility of this financial instrument has also manifested the compatibility of the Shariah in providing a necessary mechanism to manage and mitigate risk in the modern financial setting.

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It should be stressed again that BBA is one type of sale contract. As such, it has to carry all the necessary features of a sale contract, including its essential elements (arkan), conditions (syurut) as well as the legal effect of the contract. Among the most important legal effects that must really be appreciated are the transfer of ownership and the rule of taking possession. The practical applications of BBA financing, in Malaysia as well as in some other countries has been extensively discussed in this chapter. It is rightly submitted that the term BBA as used in Malaysia is different from the term in other countries. The practice of BBA financing in Malaysia, if the whole procedure is to be considered based mainly on bay al-Inah, is different from the practice of other countries. Beside this issue, the practice of BBA in Malaysia inherits some other issues such as the issue of qabd, selling of non-existent property, some clauses in legal documentation, etc. Lately, BNM has taken the lead to initiate alternatives to the practice of BBA, namely musharkah mutanaqisah (diminishing partnership) and AITAB (ijarah thumma al-bay). The setting-up of some foreign Islamic banks in Malaysia is anticipated to accelerate the products development process and new products which have been offered in other parts of the world might be introduced in Malaysia soon.

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Abdul Aris, N., Othman R., Mohd Azli, R., Arshad, R., Sahri, M., & Yaakub, A. (2012). Islamic house financing: Comparison between Bai Bithamin Ajil (BBA) and Musharakah Mutanaqisah (MM). African Journal of Business Management. 6(1), 266-273. Salamon, H. (2004). The Islamic banking system in Malaysia: concept, operation, challenges and prospects. Islamic Banking: An International Perspective. IIUM Islamic economics collection, 5235, 75-94 Rosly, S. A. & Sanusi, M. (2001). Some issue of Bay al-Inah in Malaysia Islamic financial markets. Arab Law Quarterly. 16(3), 263-280. International Shariah Research Academy for Islamic Finance (ISRA). (2012). Islamic financial system: principles & operations. Malaysia, Cagamas berhad. INCEIF CIFP Module on Applied Shariah In Financial Transactions

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