ISSUES IN BAY AL-INAH AND BAY AL-DAYN AND PROPOSAL FOR OTHER

CONCEPTS AVAILABLE IN ISLAMIC COMMERCIAL LAW TO BE EMPLOYED AS

ALTERNATIVES IN CONTEMPORARY ISLAMIC FINANCE
ABSTRACT
The application of bay al-inah (sale and repurchase back) and bay al-dayn(sale of debts) is
making the Islamic financial industry lost its identity. The issues are serious to the Islamic
financial market movement, as it is not about minor details of religious practices (furuq) but sadly
dealing with the fundamental (usul) of religion. This time it is riba or usury. Its application in
Islamic financial market is partly caused by the lack of knowledge in riba that is both definite and
decisive. For this reason, it is critical to put things straight and get to the basics again. This project
paper endeavours to explore the critical issues in regard to both instruments and other concepts
available in Islamic commercial law that can be employed as alternatives.
1.0

Introduction

One critical task of Islamic banking is to ensure that the behaviour of fund providers and users
compliance with the Quranic spirit of justice (adl) and cooperation (taawun). Driven by the profit
motive, Islamic banks today have rationalised the application of murabahah[1] and bay bithaman
ajil[2] (BBA) leading to a wholesale recognition of positive time preference. However, the worst
scenario would be the application of bay al-inah[3] and bay al-dayn[4] likes in Malaysia has
further driven Islamic banking and finance towards losing its identity as a system. The Islamic
financial products introduced to satisfy the customers tastes and preferences and also the Islamic
banks attitudes for being risk-adverse, the principle of al-ghurm bil-ghunm (no pain, no gain) has
been isolated from financing. This point holds true for bay al-inah and bay al-daynor
combination of both products as they are intended to satisfy the customers desire for fixed income
and risk-free investments. As lending has been the traditional approach in banking, Muslims
thought that only bai al-inah, murabahah and BBA serve as the best alternative to lending. The
same may apply in the design of salam[5] and istisna[6] financing, where Muslims may see them
as a loan instead of sale and purchase contract.
The same applies to the banking firms; for example, in the practice of al-ijarah, al bay (financial
leasing instead of true leasing) is usually applied. In this way financiers do not bear the risks of
ownership and other obligations attached to it. The banking firms for being risk-adversegenerally
perceived the application of mudarabah[7] and musyarakah[8] as risky ventures, in turn, resorts
more into application of bai al-inah, murabahah and BBA, to suit to customers preferences.
The bay al-inah and bay al-dayn issues are serious to the Islamic financial market movement,
as it is not about minor details of religious practices (furuq) but sadly dealing with the fundamental

(usul) of religion. This time it is riba or usury. For this reason, it is critical to put things straight.
This means getting back to basics. This project paper endeavours to explore the critical issues in
both concepts and to propose other concepts available in Islamic commercial law to be employed
as alternatives.
2.0

Critical issues in bay al-inah and bay al-dayn

2.1

Bay al-inah

Bay al-inah is generally defined as sale-based on the transaction of Nasiah (delay). The
(prospective) debtor sell to the (prospective) creditor some asset for cash which is payable
immediately; the debtor immediately buys simultaneously the same asset for a greater amount for
a future date. Thus, the transaction amounts to a loan. Technically, the application of bay alinah involves two set of transactions; (i) al-bay al-mutlaq[9] (cash sales), and (ii) murabahah or
BBA (deferred sale), both of which are executed after one another. The process could take place
in the reverse form too whereby the deferred sale is preceded by a cash sale and vice versa (known
as reverse inah), but in both ways each party gets what it intended to achieve. It is worth noticing
that the contract of murabahah and BBA is instrumental in making the bay al-inahtransaction
possible.
Bay al-inah trade is not found in any classic Islamic commercial law. However, bay al-inah is
a legal sale in the Shafii Mazhab, in which it says the intention or niyyah is not a significant
element in determining the validity of a contract. According to Shafii Mazhab, such sales are to
be allowed because in the words of Imam Shafii, contracts are valid (sahih) by the external
evidence that they were properly concluded; the unlawful intention (niyyah or qasd) of the parties
is immaterial, it does not invalidate their act, unless expressed in that Act. Imam Malik and other
medinite jurists hold these transactions as invalid or void. They consider the second transaction
along with the first, and regard the grounds viable enough to suspect that the purpose is to exchange
an amount of money with a higher amount that is deferred, which forms a prohibited riba. The
same opinion is shared with Hanbali and Hanafi jurists.
Generally, those who oppose bay al-inah have does so primarily on the assumption that there
exists an agreement between the parties to carry out the two sales in that order, so that the process
results in one of the parties invariably ending up obtaining immediate cash against a future
obligation settling a higher amount. It seems that both parties are pretentious and have no
commitment to the sale contract. The fact that both parties have no intention of using the asset as
any consumer does betrays one principle of contract in Islam, namely the objective of contract
(maudu ul aqdi). In the case of banking firms; the sale and resale contracts initiated by either the
bank or the customer saw no event by which either party has assumed risk-taking and valueaddition in rationalising the profit taken. In both transactions, each party has made a prior

guarantee that in every sale there will exist an automatic resale. As such, neither is exposed to
market risks and liability arising from, say defective goods sold, if any. Bay al-inah is just a legal
device (hilah) that using Islamic commercial law (i.e. through trade and commerce) to obtain cash
without implicating riba; to make forbidden thing permissible. The object of sale comes into play
by virtue of a trick to get away with interest payments and receipts. Impliedly, bay alinah implicates back door for interests.
2.2

Bay al-dayn

Dayn or debt is basically a liability of a person to pay certain amount of money or in kind and the
obligation will reside until it is completely discharged. Dayn is more general than qard (loan)
whereby, in qard contract, creditor lends money or item to the debtor on a condition that the debtor
will return the value of the money to the lender at a specific time. Thus, this is the source for dayn to
arise. Therefore, the qard is only a type of dayn. Bay al-dayn (debt trading) in Islamic commercial
law point of view is referring to the principle of selling the dayn which results from muawadhat
maliyyah contracts (exchange contracts) such as murabahah, BBA, ijarah and others. In Islamic
commercial law, dayn can be traded only at par under the purview of hiwalah (transfer of debt).
There is no room to profit from a debt trading. According to most of Hanafis, Hanbalis and Shafis
jurists, bay al-dayn is not allowed to a non-debtor or a third party at all. Such opinions are based
on the forbidden sale ofbai al-kali bil kali[10] (a debt that is paid by debt) and a sale of gharar[11],
which implicates the sale of a thing which the seller does not possess; debt is intangible asset in
nature.
Zahiris maintained that the sale of debt is disallowed to third party or even to the debtor himself.
Hanafi Mazhab looked at bai al-dayn from the aspects of potential risks to the buyer, debtor and
the nature of the debt itself. Thus, Hanafis also disallowed bay al-dayn to the third party regardless
of the types of debts because the risks cannot be overcome in the context of debt selling. This is
because the debt is in the form of mal hukmi (intangible assets) and the debt buyer takes on a great
risk because he cannot own the item bought and the seller cannot deliver the item sold. Contrary
to that, Shafiis maintain that the sale of a debt is allowed if it is confirmed debt (dayn mustaqir)
and was sold in exchange for ayn(goods) that must be delivered immediately. Furthermore, the
debt sold must be traded at par value. Ibn al-Qayyim, a Hanbali jurists confirmed that bai aldayn is completely in agreement with Shariah and there was no general nas or ijmak (consensus
on legal opinion) that prohibited it. What was stated was the prohibition of bay al-kali bil kali.
Thus, bay al-dayn for deferred payment is not allowed. The Malikis also shared the same view
with Ibn al-Qayyim except that Malikis imposed eight conditions to be fulfilled in order to protect
the rights of the debt buyer, to avoid debt selling before qabadh and to avoid riba. The study shows
that the ikhtilaf (differences of opinion) among past Islamic jurists centred on the ability to deliver
the items sold. As for Hanafi jurists, the prohibition for the sale of dayn to third party for the fear
that the buyer will have to bear great risks holds the truth in it. This is especially true if there is an

absence of supervision and control. The fifth condition set by Maliki Mazhabfor bay aldayn relates to the exchange of ribawi items: the debts can only be sold at par value.
In the Malaysian context, the trading of Islamic debt securities instruments (or Islamic bonds) is
regulated by the Central Bank of Malaysia and Securities Commission to safeguard the parties
involved. Therefore, the conditions set by the Maliki Mazhab and the fears of risks by
HanafiMazhab are overcome by the regulation and surveillance set by these regulators. In the case
of Islamic bonds as practiced in Malaysia, a bond that matures at par value can be sold at a discount
before maturity. For example, the creditor (i.e. investor) is forced to sell at a discount the Islamic
bond for liquidity purposes. But in the capital market, practically no non-debtor will buy debt at
par value, unless he can make some capital gain from it. A bond worth RM1,000 (par value) may
be sold for RM920 to the third party. Likewise, the third party can sell the bond at a profit before
maturity. If he anticipates that the interest rate is falling (this in turn will increase the bonds price),
he can sell it at the higher price than RM920. If he anticipates the interest rate will rise (this in turn
will decrease the bonds price), he may sell it immediately or hold the bond till maturity and
redeem it at par. In this way, he still making profit of RM80 (RM1,000 - RM920 = RM80).
What practically happened is that Malaysian jurists hold the view that the sale of securitised debts
is similar to the sale of properties: the process of securitisation of the debts will glue the bonds or
papers to some underlying assets and thus can automatically qualify itself as property (al-mal).
Hence, the characteristics of debt securities are now different from currency or money
(ribawi item). Since a property can be sold at any price, thus, the Islamic bond as a property can
be disposed at any price agreed upon by the contracting parties. In a contract of sale, the subject
matter or object of sale must generate usufruct (manfaah) to the buyer. For example, people buy
food for consumption or buy houses to protect them from the heat or cold. But the bond or dayn in
this sense is not the commodity or property, but only a legal right to a loan (i.e. right to future cash
flow arising from loan repayments) represented by a piece of document in the form of papers or
certificates. The underlying of it is more of a future monetary claim. Thus, the bond or dayn is
indeed money in nature, not property. Therefore the sale of dayn must only be made at par value.
Even if the underlying debt was not the result of a moneylending transaction (qard), the question
of riba arises if it was sold not at par value. Islam does not recognise money as a subject-matter of
trade. Money has no intrinsic utility; it is only a medium of exchange; each unit of money is 100%
equal to another unit of the same denomination, therefore, there is no room for making profit
through the exchange of these units inter se. When the bonds are sold at a discount or premium,
the sale of dayn is similar to the unequal exchange of money for money; it implicates riba alfadl[12]. Hence, any profit created from the sale of dayn is unlawful.
3.0

Other concepts available in muamalat to be employed as alternatives

3.1

Musyarakah mutanakisah or diminishing musyarakah

Musyarakah is applicable in different modes of financing for Islamic banks. Musyarakah can be
used as for project financing, to finance import and export, as working capital of a running business
or to purchase assets (e.g. motor vehicle or house). In fiqh[13], the concept ofmusyarakah is used
in much wider sense. However, in the context of Islamic banking operations, we are concerned
with one type ofmusyarakah, that which is known in fiqh as inan (unequal-shares) partnership
i.e. sharikat inan fi al-mal[14] since it is this form which is seen to be the most appropriate for
Islamic banking environment. Musyarakah financing can be utilised for purely commercial
purposes which are usually of a short term nature, or for participation in the equity of medium to
long term projects. The type of musyarakah available are; (a) commercial musyarakah, (b)
decreasing participation or known as musyarakah mutanaqisah, and (c) permanent participation.
Application ofmusyarakah will let more involvement of Islamic banks in the sense of a real
business venture.
Musyarakah mutanaqisah or diminishing musyarakah is a new instrument
for
musyarakah
products
and
was
introduced
in
Egypt.
Another
term
for musyarakah mutanaqisah is musyarakah muntahiyah bittamlik. It is a form of partnership
contract whereby the Islamic bank agrees to transfer gradually (by way of selling its shares in one
payment or in instalments based on terms agreed by both parties) to the other partner its (the
Islamic banks) share in musyarakah, so that the Islamic banks share declines and other partners
share increases until the latter becomes sole proprietor of the venture. Therefore, the bank and its
clients can participate either in a joint ownership of a property or an equipment, or in a joint
commercial enterprise. The share of the bank is further divided into number of units and it is
understood that the client will purchase the units of the share of the bank one by one periodically,
thus increasing his own share until all the units of the bank are purchased by him so as to make
him the sole owner of the property or commercial enterprise. The majority of the current Islamic
jurists are unanimous in accepting it as one of the halal (permissible) instruments. This is because
it has features that do not contradict the nas and general principles of the Shariah. These features
are as follows:
inan company (form of partnership, in which each partner contributes both capital and work);
promise from the financial institution to sell its share of the company to its partner; and
the institution sells all of its partner fully or partially.
Diminishing musyarakah has taken different forms in different transactions. For example, say A
wants to participate into one business venture, say restaurant, but he is short of fund. He approaches
one of the Islamic banks, say B and ask if the bank agrees to participate in the business venture.
After analyzing the business plan and track record of A, B agrees to participate because B
believed the business is viable. Total working capital of the business is RM100,000 : 80% will be
financed by B whilst A has to come out with another 20%. At the same time, the share of B

is further divided into eight units, each unit representing 10% ownership of the restaurant. The
agreement states that every 1 month, A will purchase one unit of the share of B. When the
restaurant is operated, it generated net profit of RM5,000 on a daily basis. Since B has 80% share
in the restaurant, it is agreed that 80% of the net profit earned will be given to B and the remaining
20% will be retained by A who has 20% share in the restaurant. This means that RM4,000 is
earned by B and RM1,000 by A on a daily basis. After 1 month, A purchases one unit from
the share of B. Consequently, the share of B is reduced to 70% and the share of A is increased
to 30%. Therefore, from the date of purchased, A will be entitled to RM1,500 being 30% from
the RM5,000 daily net profit earned whilst B will be entitled RM3,500 being 70% from the
RM5,000 daily net profit earned. This process will go on until after the expiry of eight months,
whereby the whole restaurant will be owned by A and B will take back its original investment
on top of profit distributed as aforesaid.
Islamic financial institutions (IFIs) in Europe have been using diminishing musyarakah as the
mode for house financing. For example, the client wants to purchase a house but need additional
funds. Thus, he approaches one of the financiers who agree to participate in joint arrangement to
buy the house with him. The condition is the financier will finance 80% from the price whilst 20%
will be borne by the client. At the same time, the share of the financier is further divided in eight
equal units, each unit representing 10% ownership of the house. The agreement states that every 3
months, the client must purchase one unit of the share by paying 1/10th from the price of the house.
After purchasing the property jointly, the client uses the house for his residential requirement and
pays to the joint owner for using their ownership in the property. After 1 month, the client
purchases one unit from the share of financier. Consequently, the share of financier is reduced to
70% and the share of client is increased to 30%. Hence, the rent payable to the financier is also
reduced to that extent. For the next 3 months, the client will purchase another unit of the share;
this will reduce the financier share to 60% whilst increasing his share in the property to 40%.
Consequently, the portion of rent paid to the financier is also reduced by that portion. This process
goes on in the same fashion until after the end of two years (i.e. 24 months), the client purchases
the whole share of the financier reducing the share of financier to zero and increasing his own
share to 100%. The financier will get back his investment along with rental income distributed to
him as aforesaid.
Application of diminishing musyarakah can also be used in the capital market. For example, ABC
Holdings buy a property worth RM125 million and sells it to XYZ Holdings for RM150 million
based on the principle of BBA within 120 months. As ABC Holdings requires liquidity, it can get
the project investors involved by issuing sukuk[15] based on musyarakah mutanaqisah. For that
purpose, ABC Holdings puts in its share (the smaller part, say 10%)
in musyarakah mutanaqisah for the purchase of the property (which costs RM125 million). The
investors hold the majority part (90%). ABC Holdings will then buy back all the shares from the

investors every month according to the amount and duration agreed upon i.e.120 months. This will
end at the point when ABC Holdings owns all the shares back.
3.2

Mudarabah contract

Mudarabah is a contract between two parties whereby one party called rab al-mal (investors)
entrusts money to second party, calledmudarib for the purpose of conducting the trade.
The mudarib contributes his labour and time and manages the venture according to the terms of
the contract. One of the essential characteristics of this contract is that the profit, if any, will be
shared between the investor and the mudarib on a pre-agreed proportional basis. The loss, if any,
should be borne by the investor alone. Another essential characteristic is that the capital provider
or investor is not allowed to interfere in the management of the business. He may have the right to
oversee, monitor and supervise the way the business is run, its progress, its prospects and others,
but the day-to-day control of the business is the sole right of the mudarib. It is worth noticing that
the arrangement in mudarabah contract fits well with the structure of venture capital.
Mudarabah contract can be applied in various ways in conducting banking, trade and finance. The
arrangement is normally be used in IFIs to set-up the investment accounts. The funds
under mudarabah contract for investment accounts holders (IAHs) include both unrestricted and
restricted IAH funds. For unrestricted IAHs, the funds will be invested at IFIs discretion, normally
in the same asset pool as that in which shareholders funds of IFIs and those from current accounts
are placed. On the contrary, the funds of the restricted IAHs are invested in asset pools that are
separately designated and distinct from shareholders funds.
IFIs can also participate in venture capital with entrepreneurs by using mudarabah contract for
project financing. IFIs provide financing to the projects and the entrepreneurs as the mudarib act
as the mangers of the project. The IFIs do not interfere in the day-to-day functioning of the project.
The profit is to be shared between the parties according to an agreed ratio determined ex-ante, but
the losses will be completely borne by the IFIs.
Mudarabah can also be used to finance import and export. For example, mudarabah structure can
be used in the issuance of Letter of Credit (LC) which is normally used in the import and export
transactions by the bank. For example, the client is about to import/ purchase stocks from oversea
suppliers. He can informs the bank of his LC requirements and negotiates terms and conditions of
the mudarabah financing for this LC. The client will then places a deposit with the bank
under wadiah[16] principles and the full amount of the cost of the goods to be imported/ purchased
as per mudarabah agreement. As such, he will appoint the bank as the mudarib. The bank, acting
as the mudarib, establishes the LC and pays the proceeds to the negotiating bank utilizing the
clients deposit. After disposing the goods, the bank will share with the client the profit from the
venture according to the terms and agreement of the venture.

4.0

Conclusion

One of the most important characteristics of Islamic financing is that it is an asset-backed

financing. The conventional / capitalist concept of financing is that the banks and financial
institutions deal in money and monetary papers only. Islam, on the other hand, does not recognise
money as a subject-matter of trade. Money has no intrinsic utility; it is only a medium of exchange;
each unit of money is 100% equal to another unit of the same denomination, therefore, there is no
room for making profit through the exchange of these units inter se. Because of lack of
understanding in money, the current issue on sale of dayn has arisen. For these reasons, it is critical
for us to get to the basics again. We are not only need to know what leads to riba, we also need to
know are the basic components of Islamic legitimacy in Islamic commercial contracts, so that
therell be no more hilah is used to legitimize what is forbidden in Islam. The application of bay
al-inah andbay al-dayn is making the Islamic financial industry lost its identity.
The bay al-inah and bay al-dayn issues are serious because it is dealing with the fundamental
(usul) of religion which is riba or usury. Bay al-inah is just a legal device (hilah) that using
Islamic commercial law (i.e. through trade and commerce) to obtain cash without implicatingriba.
The object of sale comes into play by virtue of a trick to get away with interest payments and
receipts. However, the main purpose ofbay al-inah is to legitimize riba which is forbidden in
Islam. In Islamic commercial law, sale of dayn at par value is permissible since this is equal to the
exchange of equivalence for equivalence (mithlun bi mithlin) and the debt must be confirmed debt.
There is no room to profit from a debt trading. However, what is happening in the capital market
like in Malaysia, is sadly discouraging and directly contradicts to the principle of Shariah. The
selling of bonds at premium or discount is equivalent to the unequal exchange of money with
money, thus, implicates riba al-fadl to arise. Now, it is the time to seek other alternatives for bay
al-inah and bay al-dayn such as musyarakah andmudarabah contracts. It is only when we get to
the basics; maqasid al-Shariah or the objectives of Shariah can be achieved.

References :
Dr. Zainal Azam Abdul Rahman. 2003. Islamic Securities Play A Key Role. The Star. Tuesday 3 June
2003. Pp 22.
Dr. Zainal Azam Abdul Rahman. Currency Fluctuation And Its Effects On Debts And Obligations In
Islamic Law. Jurnal Undang-Undang. Pp 21-38.
Dr. Zainal Azam Abdul Rahman. Krisis Mata Wang Dari Perspektif Islam. Mingguan Malaysia.
Rosly, Saiful Azhar. 2005. Critical Issues on Islamic Banking and Financial Markets: Islamic
Economics, Banking and Finance, Takaful and Financial Planning. Kuala Lumpur: Dinamas
Publishing.

Munawar Iqbal and David T.Llewellyn. 2002. Islamic Banking and Finance: New Perspectives On
Profit-Sharing and Risk. United Kingdom. Edward Elgar Publishing.
Resolutions of The Securities Commission Shariah Advisory Council. 2nd Edition.

[1] Murabahah : Sale at specified margin. However, the term is now used to refer to a sale
agreement whereby the seller purchases the goods desired by the buyer and sells them at an agreed
marked-up price, the payment being settled either in instalments or in lump sum.
[2] Bai bithaman ajil : Trading at cost plus specified mark-up. A variation form
of murabahah (sale at specified margin) with purchase payments is deferred and payable at a
certain particular time in the future (e.g. via installments).
[3] Bai al-inah : Sales and repurchase back. Refers to trading whereby the seller sells his assets
to the buyer at agreed selling price (with a specified mark-up) to be paid by the buyer at a later
date. After that, the buyer sells back the assets to the seller at a cash price, lower than the agreed
selling price.
[4] Bai al-dayn : Sale of debt or liability. According to large majority of fuqaha (jurists who give
opinion on various juristic issues in the light of Quran and the Sunnah), debt cannot be sold except
at its face value.
[5] Salam : A sale whereby the seller undertakes to supply some specific goods to the buyer at a
future date in exchange of an advanced price fully paid on the spot.
[6] Istisna : A contract whereby a manufacturer (contractor) agrees to purchase (build) a deliver
a well-described good at a given price on a given date in the future.
[7] Mudarabah : A profit and loss sharing contract in which one party provides the financial capital
and the other manages the enterprise. While profit is shared, loss is borne by the financier.
[8] Musyarakah : Similar to mudarabah contract, with the difference that both partners participate
in the management and the provision of capital and share in profit or loss.
[9] Al-bay al-mutlaq : A general sales. Normally, the meaning resorts to the cash sales.
[10] Bai al-kali bil kali : A debt sale that is paid by debt. It is a type of credit sale in which on the
date of the discharge of the debt, the debtor seeks extension with the promise to pay something in
addition. The creditor then sells the debt again to the debtor for another period and increases the
price. In this case, the debtor did not receive anything in exchange when being charged for
extending the period of payment.
[11] Gharar : Literally means deception, danger, risk and uncertainty. Technically, means
exposing oneself to excessive risk and danger in a business transaction as a result of uncertainty
about the price, quality, quantity of the counter-value, date of delivery, the ability of either the
buyer or the seller to fulfill his commitment or ambiguity in the terms of deal.
[12] Riba al-fadl : Riba pertaining to trade contracts. It refers to an exchange of different quantities
(but different qualities) of the same commodity.

[13] Fiqh : The science of understanding of divinely-revealed law. Islamic jurisprudence covering
all aspects of life including economic.
[14] Sharikat inan fi al-mal : A form of partnership which is termed as limited investment
partnership.
[15] Sukuk : Refers to a financial paper showing entitlement of the holder to the amount of money
shown on it. It is a form of financial note.
[16] Wadiah : A contract whereby a person leaves a valuables with someone for safekeeping. The
keeper can charge a fee, eventhough in Islamic culture it is encouraged to provide this service froo
of charge or to recover only the costs of safekeeping without any profit.