1.0 INTRODUCTION

In Malaysia, there are numerous financial instruments and concepts available for customers to choose, which one is suited to them. Financial instruments that available in Islamic Banks in Malaysia are divided into two main components which are known as deposit; and loans and advances. Bay’Bithaman Ajil (BBA) and Murabahah are 2 types of Islamic financing product offered by banks in Malaysia and were introduced in 1983. The Islamic financing product of Murabahah was introduced to meet the above Quranic verse interpretation. It should be noted that BBA is a Murabahah product but the product name of BBA was given by BBMB to differentiate between a short term (below 12 months) and long-term (above 12 months) tenor financing products. Murabahah is for short term meanwhile BBA is for a long term financing products.

2.0 BAI’ BITHAMAN AJIL (BBA)

2.1 DEFINITION

The Majallah refers to BBA as the Bai’ al Muajjal. In Pakistan the term is called Bai’ al-Muajjal, in Bangladesh it called bay’al-Muazaal. BBA means a "deferred payment sale". It is a sale contract in which the payment of the price is deferred and payable at a certain particular time in the future. It is a mode of Islamic financing used for property, vehicle, as well as financing of other consumer goods. It can be implicated in any sale contract, including Musawamah and Murabahah but it is not applicable for a Salam contract, as the payment of Salam must be settled in full at the beginning of the contract.

Technically, this financing facility is based on the activities of buying and selling. The furniture that you wish to purchase for example, are bought by the bank and sold to you at an agreed to price, after the bank and you determine the tenure and the manner of the instalments. The price at which the bank sells you the furniture will include the actual cost of the furniture and will also incorporate the bank's profit margin. There is no interest charged and the extra price compensates the bank for its profit. Instalments remain fixed over the period of the contract and no adjustment is made if interest rates fluctuate. The fixed monthly instalments are determined by the selling price, repayment period and the percentage margin of financing. Therefore it is obvious that it is not the kind of sale contract but it refers to the manner of payment via a deferred payment basis, be it a lump sum payment or instalments. In modern banking practise, BBA has been referred to as the sale and purchase transaction for the financing of an asset on deferred and instalments basis with pre-agreed payment period. In short BBA is deferred sale agreement whereby a bank purchase and sells a property to the same customer. The Bank allows him to pay sale price on a deferred basis and normally by periodic (monthly) instalments.

2.2 THE LEGALITY OF BBA

In general there is no issues arises from the practise of deferring the payment of the sale price. The legality through the sale contract is considered sufficient by jurists to allow BBA. It is reported in one of the Hadith by a companion, Jabir, that the Prophet, (PBUH) bought a camel from him outside the city of Madinah whereby the payment was settled later on in Madinah. Another Hadith was narrated that the Prophet (PBUH) purchased a quantity of grain from a Jew on the basis of deferred payment and he pledged his armor by way of security.

The dispute, however, arises from the practice of increasing the price due to the deferment in the payment. According to the majority of jurists, increasing the price in BBA due to the deferment in payment is allowed. For instance, 1) Al-Kasani said “The price may be increased based on deferment.” 2) Ibn ‘Abidin said: “A price is increased based on deferment.” 3) Ibn Rushd said: “The time has been given a share in the price”. 4) Al-Nawawi said: “Deferment earns a portion of the price.”
All these quotations connote one important principle, the increment of price is allowed in case of deferment of price in a sale contract. They also uphold that such an increase is permissible because it is against the commodity and not against money. An increase against deferred payment is only considered to be amounting to riba’ where the subject matter is money on both sides. They, therefore, allow a seller to fix two prices of a commodity that is cash price and credit price and give an option to a buyer to buy a commodity at any of the two prices.
Those who disallow the practice of BBA argue that BBA opens the back door to interest based transactions. They argue that if the difference between spot and deferred prices of a commodity is to be recognised, logically we cannot reject interest, which in fact is based on the difference in value of money between spot and deferred. This has been expressed by Sidiqi: “I would prefer that bay’ al-muajjal be removed from the list of permissible methods altogether. Even if we concede its permissibility in legal form, we have the overriding legal maxim that anything leading to something prohibited stands prohibited. It will be advisable to apply this maxim to bay’ al-muajjal in order to save interest-free banking from being sabotaged from within.”
In the case whereby the practice of bay’ al-muajjal is unavoidable, he further suggested: “Should some pressing situations defy any other solution, we can at least confine the use of bay’ al-muajjal specifically to them as a temporary measure, while prohibiting its use in other situations.”
Beside this, there is a fear that the practice of BBA amounts to the prohibited “two sales in one”, as mentioned in the Hadith: “The Prophet prohibited two sales in one.”
One of the interpretations of the Hadith deduces that it is a sale contract with two different prices that is one price in spot payment and the other deferred. However, this interpretation is disputable. First, this interpretation is not the only interpretation in the Hadith. Another interpretation in the Hadith is the jumbling together of two contracts, in a way that the conclusion of one contract is contingent upon the conclusion of the other. Even if the first interpretation is to be accepted, it does not affect the practice of BBA, because in BBA practice, the offer is caused upon one price only, so does the acceptance.

2.3 CONCEPT AND APPLICATION OF BBA

The concept of BBA refers to the sale of goods on deferred payment basis at a mark-up credit price, which includes the profit margin agreed to by Bank and the customer. The packaging involves a combination of sales, profit margin and deferment, conducted between two parties. The sales (bai’) between the customers and the bank; a cost plus sale including a stated profit margin (murabahah); deferred payment (al-ajal); and involves one party selling asset at a higher deferred price, and buys it immediately for a lower cash price (bai’al ‘inah). The process of BBA involves a sale and purchase agreement between buyer and the original seller or developer in case of home financing, which includes a payment of a deposit to the seller. Subsequently, a property purchase agreement (PPA) involves the bank agreeing to buy the house from the customer for the cost of the financing followed by the Property Sale Agreement (PSA) is signed immediately afterward with the bank selling the property back to the customer including its’ profit margin. As a result, the transfer of the title occurs between the original seller and developer and the buyer in this case is the customer. The buyer then takes out a family takaful mortgage plan for the value of the bank’s Purchase Price (financing).
The practice of BBA in Malaysia is the bank finances the customers who wish to acquire a given asset but to defer the payment for the asset for a specific period or to pay by instalments. The bank first determines the requirements of customer in relation to his period and manner of payment. Then, the bank purchases the asset concerned and subsequently sells the relevant asset to the customers at an agreed price which comprises the actual cost of the asset to the bank and the bank’s margin or profit, and allows the customer to settle the payment by instalments within the period and in the manner so agreed.
The contract of BBA has been utilized by the bank to provide the customers with medium and long term financing to acquire such items which may include land properties, houses, motor vehicle, furniture, stock and shares. It is actually a very simple contract whereby bank purchases the items on cash basis and sells such items on a deferred payment basis to customer who requires financing. It is to be noted that the practice of BBA in Malaysia is the same as what has been practice in Pakistan and Bangladesh, and as the same as the practice of Murabahah in the Middle East countries and other countries such as Indonesia. BBA financing is applicable to retail financing as well as to corporate financing.

2.4 LEGAL DOCUMENTATION OF BBA FACILITY IN MALAYSIA

For the BBA facility, basically there are three main agreements involved. There are:

2.4.1 Sale and Purchase Agreement

It is not part of the documentation for the facility applied by the client. It is however, among the most important agreements in obtaining such a facility from banks. For example, Mr. Rosli intends to buy a house from a seller. Based on the Third Schedule of Housing Developers (Control and Licensing) Regulation 1989, the Sale and Purchase Agreement (Principal Agreement) will be signed between the two parties. Accordingly, Mr. Rosli would have to pay 10 per cent of the price of the property. The signing of this agreement is compulsory, as the customer must provide the bank with this agreement before the application for financing can proceed.

2.4.2 Property Purchase Agreement (PPA)

PPA is an agreement made between the customer and the bank whereby the banks first sells the property to the customer and the customer purchases the property from the bank at the sale price to be paid upon deferred payment terms subject to the terms and conditions therein contained. The most significant wording of this agreement normally reads:

“The customer has applied to the Bank for a financing and the Bank has approved the said application and the Customer has agreed to enter into this Agreement with the Bank, whereby the Bank, at the Customer’s request purchases from the Customer the Property at the purchase price ……”

2.4.3 Property Sale Agreement (PSA)

PSA is an agreement entered into between the customer and the bank whereby the customer sells the property to the bank and at the bank at the request of the customer, purchases the property at the purchase price which is equivalent to the facility amount subject to the terms and conditions contained therein. The most significant wording of the agreement normally reads:

“The Bank hereby agrees to sell and the customer hereby agrees to purchase the Property at the Sale Price upon the terms and subject to the conditions herein contained.”

The Property Sale agreement shall be signed after the signing of the Property Purchase Agreement so as to allow the Bank to sell back the asset to the client. The manner, in which the payment of the price to be made will be detailed, based on the agreement reached between the Bank and the client.

2.5 ISSUES RELATING TO BBA.
2.5.1 Ownership
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 prophet’s hadith: “Do not sell what is not with you” means not to sell what one does not own (la tabi’ ma laysa ‘indaka) at the time of sale.”
Therefore, under BBA, which is deferred payment sale, the seller is supposed to have an ownership over the property of which he wanted to sell. Under the Property Purchase Agreement, the customer is supposed to have that ownership. There is an argument that sale and purchase agreement (through the payment of ten percent deposit), has created a beneficial ownership in favour of the customer. Although this principle is just an equity principle, but it is still considered as good for the customer to sell his beneficial ownership to the bank under the Property Purchase Agreement. However, whether or not the Sale and Purchase Agreement can create beneficial ownership is still a contentious matter.
It has been argued that since BBA is actually a kind of sale contract, the transfer of ownership and taking of possession must truly happen. In terms of the practice of BBA in Malaysia, the execution of PPA and PSA in the facility should result in transfer of ownership, irrespective of whether the registration of the transfer is made or otherwise. However, in the case of Dato’ Haji Nik Mahmud bin Daud v Bank Islam, where the issue arisen was whether the execution of PSA and PPA amounted to a transfer of ownership of the Malay reserved lands in question. The court in this case held that it was never the intention of the parties to involve any transfer of ownership and that the executions of the PPA and PSA were part of the process required by Islamic banking procedure. Here, the court found that Dato Hj Nik Mahmud was all along the registered proprietor of the properties as no transfer was being affected. Although justice and equity have been carried out in this case, the judgement caused conflict with the concept of BBA whereby the contract should result in transfer of ownership of the property. Therefore, it is shows that the issue of ownership still remain questionable.
2.5.2 Contract
Based on BBA house financing, the relevant financing documents are PSA and PPA. These two agreements are very important where they regulate the contract between the bank and the customer. Under this situation, the bank purchases the asset concerned and subsequently sells the relevant asset to the customer at an agreed price comprising the actual cost of the asset of the bank plus the bank’s margin of profit.
The issues arise because the practice for the sell and buy back does not reflect the real BBA. This is because the ultimate intention for BBA is to acquire an asset or property, whereas for this practice (sell and buy back), the ultimate intention under PSA and PPA is simply to obtain cash money to be paid to the house developers. The intention to obtain the money reflects the concept of Bay’ al-Inah. Bay’ al-inah is generally known as sale based on the transaction of Nasi’ah (delay). The prospective debtor sells to the prospective creditor some objects for cash which is payable immediately buys simultaneously the same object for a greater amount for a future date. Thus the transaction amounts to a loan. The difference between these two prices represents the interest. Such contract was evolved in the eraly period of Islam and it exists for the fundamental reason that a loan for interest is forbidden because it is equivalent to usury (riba). In this contract, there is an economic interest for both the borrower and the lender, which at the same time circumvents the prohibition of usury. The issue which concerns us here, is how does Islamic law view such contract: whether the sales be allowed prima facie, or disallowed because the motive behind the sales is to legalize that which is illegal or usurious.
In Islamic law, Bay’ al-inah is only permissible under the Shafi’is and Zahiris, where they argued that since the contracts fulfilled all the requirements of a valid sale, they cannot be nullified by mere assumption of the existence of an illegal ulteior intention to circumvent the prohibition of riba. According to them, legal judment can only be given based on the expressed or manifest intention, not the hidden intention which is left to be judged by God.
Therefore, according to Shafii school such sales are allowable because, in the words of Imam Shafii, contracts are valid (Sahih) by the external evidence that they were properly concluded: the unlawful intention (niyya or qasd) of the parties is immaterial, it does not invalidate their act, unless expressed in that act. Al-Shafii considered that the intention of the parties is taken into account only when the invalid intention is explicitly mentioned in the contract. However, both the Shafiis and Zahiris considered Bay’ al-Inah as discourages (makruh) despite acknowledging its validity.
On the other hand, for the other schools of law (majority’s view) namely Malikis and Hanbalis disallow it and consider Bay’ al-Inah is void, because it is a legal trick to circumvent the prohibition of riba (usury). This argument is based on the concept of plugging the door to harm (sadd al dhariah), or perhaps comparable to modern-day cocept of closing flood-gate.
Besides that, the main arguments of those who are against BBA is that it opens the back-door towards interest-based transactions. They argue that if we accept the difference between spot and future prices of commodities, we cannot logically reject interest, which is also an identical difference between the spot and future prices of a commodity called money. Hence they argue that BBA is a mere stratagem to avoid the name of interest and yet retain its substance. The report of The Council of Islamic Ideology (Pakistan) on the Elimination of Interest, for example, sounded a not of caution in this regard in these words: “However, although this mode of financing is understood to be permissible under the Shariah, it would not be advisable to use it widely or indiscriminately in view of the danger attached to it of opening a back door for dealing on the basis of interest.”
Siddiqi has also expressed his sentiments in the matter in the following words: “I would prefer that Bay’ al Mu’ajjal be removed from the list of permissible methods altogether. Even if we concede its permissibility in legal form, we have the overriding legal maxim that anything leading to something prohibited stands prohibited. It will be advisable to apply this maxim to Bay’ al Mu’ajjal in order to save internet-free banking from being sabotaged from within.”
Another argument forwarded by the opponents of Bay’ al Mu’ajjal is that it is what was intended by the prophet in His Hadith: “The Prophet s.a.w prohibited two sales in one single sale.”
The Hadith is subjected to many interpretations by the jurists that are with regards to the meaning of “two sale in one single sale”. Among the interpretation of the phrase is, the sale of a commodity with two different prices, i.e. one for the spot price and the other with two different prices (spot and future prices) in one transaction is prohibited.

2.5.3 Selling of thing which is non-existent.

Under the current practice of BBA, the customer is selling non-existent or incomplete existence of a house to the bank and vise versa. This situation is actually contrary to the Shariah requirements for the conditions of subject matter. In sale contracts, subject matter is among the most essential elements of the contract. Failure to meet such elements for the subject matter may render the sale contract void. Even if the opinion of Ibn Taymiyyah and Ibn al-Qayyim that allows the selling of non-existent subject matter is to be followed, the ruling is based on the near certainty of delivery. They maintain that even though the subject matter does not exist during the time of conclusion, the contract is still valid provided that the parties to the contract are confident that the delivery is possible at the future agreed time.
2.6 CASES RELATING TO BBA IN MALAYSIA.
There are some decided case law which have held that the concept and application of Bay Bithaman al-Ajil (BBA) in house financing is void as the transaction involves riba’ element, an element which is prohibited under Islamic Law. The first case is Arab-Malaysian Finance Bhd v Taman Ihsan Jaya Sdn Bhd & Ors (Koperasi Seri Kota Bukit Cheraka Bhd, third party) [2008] (High Court). The BBA in house financing, according to the court in this case, is regarded as a loan transaction and not a sale and purchase transaction. Further, the BBA prescribed that if the borrower defaulted on the loan, the defaulting borrower is to repay to the bank the whole total of the sale price which is usually double/higher than the purchase price of the property in the sale and purchase agreement entered into by the borrower (customer/purchaser) and the housing developer. The BBA was held not only contain the riba’ element, its nature and operation were also deemed inequitable and unjust to purchasers/borrowers.
In Malayan Banking Bhd v Ya’kup bin Oje & Anor [2007] (High Court of Kuching), Hamid Sultan JC (as he then was) held that in the order for sale involving BBA documents, the defaulting borrower should be entitled to a rebate against the whole loan amount due together with the interests which become payable on his default to service the monthly installment. Thus, the term in the Property Sale Agreement (PSA) and the charge document as well as the annexure which prescribes that if the borrower defaults, he shall be required to pay the total amount of the loan together with the profit margin for the whole repayment of installments period, was inequitable and repugnant to Islamic law. The whole amount of debt together with the profit margin chargeable on the borrower should be equitably limited to the length of repayment period which he has occupied, enjoyed or used the charged property, not the blanket amount for the whole repayment of installments period as prescribed in the PSA, charge document and annexure. Hamid Sultan JC ordered that the plaintiff should amend their affidavit in support for the order for sale to the effect that the amount due by the defaulting borrower should be subject to substantial rebate taking into consideration the length of period the defaulting borrower has enjoyed possession and occupation of the charged property and applied the installment amounts which the borrower had paid to the lender bank against the total loan amount and profit margin due.
Similar findings were made in Affin Bank Bhd v Zulkifli bin Abdullah [2006] 3 MLJ 67 (High Court in Kuala Lumpur) and Malayan Banking Bhd v Marilyn Ho Siok Lin [2006] MLJU 283 (High Court in Kuching).
However, the above findings of the court were contrary to the earlier decisions of the court involving BBA in Bank Islam Malaysia Bhd lwn Pasaraya Peladang Sdn Bhd [2004] 7 MLJ 355 (High Court in Alor Setar), Bank Islam Malaysia Bhd v Adnan bin Omar [1994] 3 CLJ 735, Dato’ Hj Nik Mahmud bin Daud v Bank Islam Malaysia Bhd [1996] 4 MLJ 295 (High Court in Kota Bharu), Dato’ Hj Nik Mahmud bin Daud v Bank Islam Malaysia Bhd [1998] 3 MLJ 393 (Court of Appeal at Kuala Lumpur) and Bank Kerjasama Rakyat Malaysia Berhad v Emcee Corporation Sdn Bhd [2003] 1 CLJ 625 (Court of Appeal), where in these cases courts allowed the plaintiff banks’ applications to recover the whole sale price for the whole tenure of the loan repayment as the outstanding debts together with the profit margin due by the defaulting defendant borrower, under BBA, without taking in account of the length of repayment period on part of the defendant borrower has occupied or enjoyed the property in question.
Nevertheless in a recent historic decision by the Court of Appeal on 26 August, 2009, the Court of Appeal upheld the decisions of the courts in Pasaraya Peladang, Dato’ Haji Nik Mahmud and Emcee Corporation. There were 9 cases (See Bank Islam Malaysia Bhd v Lim Kok Hoe & Anor and other appeals [2009] 6 MLJ, 839 (Court of Appeal at Putrajaya)), brought to the Court of Appeal involving Bank Islam Malaysia Berhad as the appellant. The issue involved BBA and in these 9 cases, the judge in the High Court decided that BBA was contrary to the religion of Islam as it involved riba’ transaction. However, the judge in the Court of Appeal (Raus Shariff, JCA on behalf of the court and the other judges, Abdul Hamid Embong and Ahmad Maarop, JJCA concurring) held that the learned judge in the High Court erred in holding that BBA was contrary to the religion of Islam as it involved riba’. According to Raus Shariff JCA, BBA is not a riba’ transaction, instead it is a sale transaction under Islamic Law. Further, according to Raus Shariff JCA, the High Court judge was not competent to decide the matter, i.e whether BBA is in compliance with Islamic law. The competent persons are those Islamic jurists conversant in Islamic law and in reference to Islamic banking and finance in Malaysia, the Bank Negara Shariah Advisory Committee (Bank Negara SAC) and Shariah Advisory Borad of the Islamic Banks (SAB of the Islamic banks). Further, the High Court judge in the 9 cases had not observed the doctrine of stare decisis (judicial precedent), where before these 9 cases were adjudicated, there were Supreme Court and Court of Appeal cases (Adnan bin Omar v Bank Islam Malaysia Berhad (unreported) (Supreme Court), Datuk Haji Nik Mahmud (Court of Appeal) and Emcee Corporation (Court of Appeal) which held that BBA is valid under Islamic law.
In addition, the High Court's judgment in Bank Islam Malaysia Berhad v Azhar Osman & Other Cases [2010] dealt with four cases which were sent to the High Court by the Court of Appeal for determination of the quantum of the plaintiff bank’s claim. These cases were from a second quorum of the Court of Appeal hearing appeals from the High Court decision in Arab-Malaysian Finance Bhd v Taman Ihsan Jaya Sdn Bhd & Ors; Koperasi Seri Kota Bukit Cheraka Bhd (Third Party) And Other Cases [2009] 1 CLJ 419. The Court of Appeal had agreed with the decision of the earlier quorum in Bank Islam Malaysia Berhad v Lim Kok Hoe And Other Appeals [2009] 6 CLJ 22 which had held that Bai Bithaman Ajil (“BBA”) contracts are valid and enforceable. After hearing submissions by the Bank's counsel and considering the statements of accounts tendered by the Bank, the learned High Court Judge in this case, Rohana Yusuf J, inter alia, held as follows, in BBA contracts, despite stipulating the full sale price as being payable, the bank grants ibra or rebate on a termination due to breach or for prepayment. In an application for an order for sale, the bank must state the sum due and payable at the date on which the order is made, which sum must deduct the unearned profit of the bank. A BBA contract is not a sale transaction simpliciter. Despite the written term of the agreement, the bank in reality does not enforce payment of the full sale price upon a premature termination. It always grants rebate or ibra based on unearned profit. The bank should not be allowed to enrich itself with an amount which was not due. Therefore where the BBA contract was silent on the issue of rebate, by implied term, the bank must grant a rebate and such rebate shall be the amount of unearned profit. Accordingly, the amounts awarded by the judge to the Bank in respect of the claims under the writs of summons were subjected to deductions of unearned profits, if any, upon full realisation and in respect of proceedings commenced by originating summons, the Bank was required to state the amount outstanding after deducting unearned profit as of the date on which an order for sale was obtained.

This decision delivered on 28 January 2010 has caused some confusion in the Islamic banking industry as it does not seem to follow the Court of Appeal decision in Lim Kok Hoe. The apparent contradictions between the High Court's decision in Azhar Osman and the Court of Appeal's decision in Lim Kok Hoe can be seen as follows whereby the High Court Judge held that a BBA contract is not a sale transaction simpliciter whereas the Court of Appeal held that it is a sale agreement. The High Court Judge in Azhar Osman looked for implied terms despite there being clear written terms whereas the Court of Appeal held that the court has a duty to uphold the sanctity of the contract. The High Court Judge relied on equitable grounds whereas the Court of Appeal held that the court should not rewrite the terms of the contract.

In addition thereto, the High Court Judge ruled that the Bank must grant a rebate and such rebate shall be the amount of unearned profit. This is not consistent with the then applicable Bank Negara Malaysia Shariah Advisory Council’s ruling made on 22 April 2002 which resolved that Islamic banking institutions may incorporate an undertaking in the transaction documents to provide ibra to customers who make early settlement. The granting of ibra is not mandatory. In any event, it is the granting of ibra and not the deduction of unearned profit. It is however noted that the Shariah Advisory Council has on 20 May 2010 ruled that Islamic banking institutions are now obliged to grant ibra to customers for early settlement of financing based on buy and sell contracts. The determination of the formula for ibra is to be standardised by Bank Negara Malaysia.

The reasons behind the High Court Judge’s decision appear to be out of concern that the customers should not be taken advantage of by the bank and that the court’s protection is needed to safeguard their interests. However, the question is whether the bank has taken advantage of the customer. It would not appear to be so because the Judge had found that the bank in reality does not enforce payment of the full sale price and does grant a rebate. So the bank does not in reality enrich itself. Ultimately, the issue at hand is upholding the sanctity of the contract entered into between the parties. Therefore, it can be says that the issue relating to BBA still become an issue as there were different decisions from the courts in Malaysia.

2.7 MUSHARAKAH MUTANIQISAH AS AN ALTERNATIVE TO BBA

Over the years, controversial cases on BBA house financing have emerged and are increasing in numbers. This posed problems to the consumers, financiers and also the regulators. To overcome this, Musharakah Mutanaqisah house financing concept was introduced by the Islamic financial institutions. Musharakah Mutanaqisah has been suggested to replace the BBA in Islamic Banking business in Malaysia.

Musharakah Mutanaqisah is based on the concept of diminishing partnership. This contract combines two basic Islamic concepts. First, the customer enters into a partnership (musharakah) under the concept of Shirkat al-milk (joint ownership) agreement with the bank. Secondly, the bank leases its share in the house ownership to the customer under the concept of ijarah (leasing). The customer, as an owner tenant, promises to acquire periodically the Islamic banking institution’s ownership in the property. The customer pays rental to the Islamic banking institution under ijarah, which partially contributes towards increasing their share in the property. In other words, the portion of the payment proceeds or monthly instalments received from the customer shall be used towards the gradual acquisition of the Islamic banking institution’s share in the jointly owned property. At the end of the ijarah term and upon payment of all lease rentals, the customer would have acquired all the financier’s shares and the partnership will come to an end with the customer being the sole owner of the house. The concept of Musharakah Mutanaqisah could help the people to reduce the reliance on other financing facilities such as the BBA, Murabaha etc.

To be better understanding on why Musharakah Mutanaqisah has been said as better alternative to replacing BBA, we should look further on the differences between BBA and Musharakah Mutanaqisah. The Musharakah Mutanaqisah contract is seen as a joint ownership structure whereas the BBA is a debt-type financing. As a financing structure, the Musharakah Mutanaqisah is more flexible than the BBA as the customer can own the property earlier by redeeming faster the principal sum of the bank without the need to compute rebates, as is the case with the BBA. Furthermore, many may be of the opinion that the BBA is similar to a conventional loan. The Musharakah Mutanaqisah is accepted internationally as Shariah compliant whereas the BBA is recognized predominantly in the east like in Malaysia and so on. Under the BBA, the selling price of the property by the bank does not reflect market value since the mark-up for the deferred payment is quite substantial. In the Musharakah Mutanaqisah, the value of the property always reflects market price and rental is determined by market rental values. In the case of default, partners in the Musharakah arrangement are free to leave a partnership anytime. Thus, the bank has to note this and incorporate the compensation clause applicable when a customer leaves the partnership. The lessee in an Ijarah arrangement will cease to pay rent once he stops deriving benefit from the use of the property and any decision relating to the disposal of the acquired property must be approved by both Musharakah partners. In BBA on the other, the transacted property will be disposed off through public auction in the event of default.

The return of the BBA is based on a fixed selling price. However, under the Musharakah Mutanaqisah, the bank need not be tied to a fixed profit rate throughout the financing tenor. This is because the rental rate can be revised periodically to reflect the current market situation. The bank can manage the liquidity risks better as rental payments can be adjusted at the end of each subcontract period. This is not possible under the current fixed-rate BBA as the profit rate is constant throughout the tenor of the financing. In comparison, under the BBA concept, the customer would most likely end up paying about four times the original cost. This may burden the lower-income group in particular. The Musharakah Mutanaqisah can be seen as more just as there is no interest charge or advanced profit involved. It is based on the concept of rental payments and redeeming the bank’s shares in the property.

3.0 MURABAHAH

3.1 DEFINITION OF MURABAHAH

The word Murabahah was derived from the word ‘al-ribh’ which means profit. Murabahah is a sale of goods at a price covering the purchase price plus profit margin agreed upon between the contracting parties. In Murabahah, the seller discloses the purchase price of a commodity and the profit charged over that commodity. For example, a seller informs the buyer that he purchased a commodity at RM 100, and that he will charge RM 10 as profit over and above the original price. It is also permissible to fix the profit in percentage, for example 5% of the cost of that commodity.

In other meaning, Murabahah is the sale of goods at a price covering the purchase price plus a profit margin agreed upon by both parties concerned. Murabahah transforms a traditional lending activity into a sale and purchase agreement under which the lender buy raw materials, goods or equipment required by the borrower for resale to the borrower at a higher price agreed upon by both parties.

Murabahah contract is an unconditional contract of sale between the seller and buyer, where the goods, cost price, mark up and payment date are clearly defined, agreed and documented. The important element is that the price in Murabahah should be mutually agreed upon based on the cost and margin.

Murabahah is basically a trust sale (bay al-amanah) in which the buyer depends and relies upon the integrity of the purchaser as regards the cost he mentions to buyer. Thus, it is the moral and legal obligation of the seller to be honest and truthful in stating the price at which he purchased the goods, and if he succeeded in obtaining a discount or rebate, it should also be acknowledged and accounted for the benefit of the purchaser.

3.2 LEGALITY OF MURABAHAH

The legality of Murabahah is deduced from the Quran, the Sunnah of the Prophet Muhammad (SAW), the consent of the majority of Muslim jurists and Qiyas (analogy).

3.2.1 The Quran

The Quran generally allows the sales contract. Among others, the Quran says to the effect that “…and Allah permitted trade and prohibited usury” (2:282).

3.2.2 The Sunnah of the Prophet Muhammad (SAW)

There is no direct juristic authority from the Sunnah of the Prophet (SAW) on the legitimacy of Murabahah sale. It is deemed permissible based on the general permissibility of sale in Islamic law. The Prophet Muhammad (SAW) was reported to have said: “The best earning is what man earns with his own hands and from a permissible trade” (Narrated by Hakim).

3.1.3 The Consent of the Majority Muslim Jurists
Islamic jurisprudence literatures indicate that the legitimacy of Murabahah is based on the consent of the majority Muslim jurist.

3.1.4 Analogy (Qiyas)

Since the Prophet Muhammad (SAW) has approved the Tawliyah sale (sale based on cost price), the sale on mark-up will be equally permissible on the basis of analogy on the Tawliyah sale. The determination of cost and making the cost known to the buyer are common in both the Tawliyah and Murabahah sale.

3.2 CONDITIONS OF MURABAHAH

The conditions of Murabahah contracts are:

3.2.1 Disclosure of original price

It is necessary for the validity of Murabahah transaction that the second purchaser (Murabahah purchaser) should have knowledge of the original price. This means that the seller should disclose price of the commodity. If the price is not disclosed in the session of contract, and contracting parties leave the majlis, the contract will be invalid.

3.2.2 Fixation of profit

The profit should be fixed and added to the cost price and be mentioned in the contract.

3.2.3 Ascertainment of price

Murabahah is valid only where the exact cost price can be ascertained. If the exact cost is not known, the commodity cannot be sold on Murabahah. Instead it will be sold without reference to the cost. This is applicable to cases where a person has purchased two or more things in a single transaction, and he does not know the price of each object separately.

3.2.4 Validity of first contract.
The first contract should be a valid contract. But if the first contract is fasid i.e irregular, then the second sale is not permitted on the basis of Murabahah because Murabahah is resale of a thing for similar price with the addition of profit, and the irregular sale is not allowed with the stated price. It is allowed only with the legal value, i.e the market price.

3.3 PROFITS IN MURABAHAH

The amount of profit charged can be in several forms, for example:

Ratio : Charge RM100 for every RM1000
Percentage : Charge 15% profit from cost
Fixed amount : Charge fixed amount of money

Minimum amount of profit recommended is the amount that can sufficiently cover payment of business zakat (2.5%) and other expenses bear by the trader. There is no limit to the amount of profit the traders can legitimately charge the customers since no evidence that specifies any amount permitted for the traders to do so.

For the purpose of mark up, Hanbalis deem that the actual expenses incurred as regards the commodity, the object to Murabahah, can be added to the capital (price) provided that the purchaser is made aware of the amount of these expenses and their origins. Shafiis insisted on the additional requirement that the fee earned, in principle by the vendor, or the fee that should have been paid to a third party, had he not volunteered to perform a work gratis, cannot be added to the Murabahah price unless that is specifically accepted by the purchaser.

3.4 APPLICATION

Islamic financial institutions aim to make use of Bay al-Murabahah in circumstances where they will purchase raw materials, goods or equipment etc. and sell them to a client at cost, plus a negotiated profit margin to be paid normally by instalments. This form of contract is widely used for import finance. So the bank sells a commodity to the client for a predetermined amount or rate of profit over and above the total costs.

In Islamic bank, Murabahah is applicable in import transactions in the form of Letter of Credit and for working capital financing for purchase of stock and inventories, spare parts etc.

In the Islamic financial services industry, Murabahah is adopted in a transaction whereby three parties are involved, namely the Islamic Financial Institution (IFI), the supplier and the customer. The Murabahah credit sale of a specified asset by an IFI to the customer is at a disclosed mark-up price based on the IFI‟s cost of financing the purchase.

Murabahah was among the earliest of financing concept being implemented in Bank Islam Malaysia Berhad since its founding. In its first financial report in 1984, products which are based on Murabahah concept are used to finance trades such as letters of credit and working capital financing. According to BNM records in 2008, there are nine generic concepts of Murabahah (including BBA and Comoditi Murabahah) offered by Islamic banking in Malaysia. These products include various categories such as property financing, commodity financing, credit facilities and others.

The study found that the implementation of the Murabahah financing in Malaysia, no matter whether it is a long-term financing (assets financing) or a short-term financing (trade financing) have been applied along the Bay 'al-'Inah and Bay' al-Tawarruq. The concept of al-'Inah and Murabahah are practiced in products such as Cash Line facility-i, Credit Revolving facility-i, Refinancing Credit Export-i, Letter of Credit-i and Capital Working Financing-i. However the concept of Murabahah and Bay' al-Tawarruq is practiced in commodity Murabahah and Personal financing-i products. The components of profit rate applied in Islamic banking in Malaysia are similar to one another, in which cost of fund, overhead, risk premium and profit margin are included in the cost of Murabahah financing, yet the rate of inflation is not included in these components. At the same time Islamic banks will refer to the OPR issued by Central Bank of Malaysia. Most Islamic banks in Malaysia adopt two types of profit rate which are in accordance to fixed rate and variable rate. For variable rate, the bank will set the ceiling price in the contract of akad (solemn) with the customers, in which this akad will be made at the highest price, while the rate of profit under the contract is considered as a form of ibra ' from the Islamic banks to customers.

Islamic banks in Malaysia do not use the inflation rate as a component in calculating the price of Murabahah financing. However, they use the cost of fund which is determined by Islamic banks respectively. The cost of fund for Islamic banking is about the amount of profit should be considered to funder, the amount of profit is not guaranteed in the contract, the cost which is used by Islamic banks in financing either through the Mudarabah saving account or other shareholders fund and the Islamic Inter-Bank Money Market (IIMM). The amount of profit is calculated as a cost of fund which later being used by Islamic banks as a component of profit rate in Murabahah financing. As for conventional banks, the cost of fund is the interest rate issued by the bank for loan.

4.0 COMPARISON BETWEEN BBA AND MURABAHAH

Murabahah and BBA are the two most practised sale contracts in Islamic finance in Malaysia. Murabahah is a contract of sale and purchase transaction for the financing of an asset whereby the cost and profit margin (mark-up) are made known to and agreed upon by all parties involved at the commencement of the contract.

The pre-condition of a valid Murabahah is that the seller must disclose to the buyer the actual cost price of the asset that is intended to be sold to the customer. The failure to do so may render the contract null and void. The purchase price can be paid by way of a bullet payment or deferred lump-sum or an instalment basis.

The deferred payment basis is the criterion that makes Murabahah appear similar to BBA as BBA involves the provision of finance for the purchase of an asset on deferred payment basis. The difference between the two is that in BBA, disclosure of the cost price is not a condition. In Malaysia, the Murabahah contract is usually used for short term financing in which the payment period is usually up to 5 years, whilst BBA is used for long term financing. Hence BBA is commonly seen in purchase of property or in Islamic Private Debt Securities (BAIDS) which involve longer tenures of financing.

5.0 CONCLUSION

Islamic law offers a wide range of contracts that can be utilized for Islamic finance transactions. The increasing complexity of modern financial transactions will lead to greater innovation in the development of new financing products based on the existing Shariah contracts. These innovations should be encouraged so long as no Shariah principle is violated.

--------------------------------------------
[ 1 ]. “The Application of Bay’ Bithaman Ajil (BBA), online, available at www.kantakji.com, accessed on 15 April 2012, p 1
[ 2 ]. Ibid
[ 3 ]. Nibra Hosen, “Al-Bai Bithaman Ajil (BBA) Application in Islamic Banking System and Its Implication Upon Default Payment” (2010), online, available at http://nibrahosen.multiply.com, accessed on 14 April 2012
[ 4 ]. Ibid
[ 5 ]. Nooraslinda et al., “Islamic House Financing: Comparison between Bai’ Bithaman Ajil (BBA) and Musharakah Mutanaqisah (MM)” (2011) AJBM Vol. 6(1), online, available at www.academicjournals.org, accessed on 14 April 2012, p 268
[ 6 ]. Ibid
[ 7 ]. “The Application of Bay’ Bithaman Ajil (BBA), online, available at www.kantakji.com, accessed on 15 April 2012, p 2
[ 8 ]. “The Application of Bay’ Bithaman Ajil (BBA), online, available at www.kantakji.com, accessed on 15 April 2012, p 3
[ 9 ]. Nibra Hosen, “Al-Bai Bithaman Ajil (BBA) Application in Islamic Banking System and Its Implication Upon Default Payment” (2010), online, available at http://nibrahosen.multiply.com, accessed on 14 April 2012
[ 10 ]. Ibid
[ 11 ]. Ibid
[ 12 ]. “The Application of Bay’ Bithaman Ajil (BBA), online, available at www.kantakji.com, accessed on 15 April 2012, p 10
[ 13 ]. Fakihah Azahari, “Islamic Banking: Perspective on Recent Case Development” (2009) 1 MLJ, online, available at www.itreasury.net, accessed on 15 April 2012, p 5
[ 14 ]. Ibid
[ 15 ]. Ibid
[ 16 ]. Ibid
[ 17 ]. HaniraHanafi and Nor Hasniah Kasim, “Islamic House Financing: The Viability of Istisna’ Compared to Bay’ Bithaman Ajil (BBA)” (2006) Jurnal Syariah, online, available at www.um.edu.my, accessed on 14 April 2012, p. 41
[ 18 ]. Ibid
[ 19 ]. (1996) CLJ 582
[ 20 ]. Ibid
[ 21 ]. Ibid, p.42
[ 22 ]. Ibid
[ 23 ]. Ibid
[ 24 ]. Ibid
[ 25 ]. Ibid, p.43
[ 26 ]. Ibid
[ 27 ]. Ibid
[ 28 ]. “The Application of Bay’ Bithaman Ajil (BBA), online, available at www.kantakji.com, accessed on 15 April 2012, p 22
[ 29 ]. 5 MLJ 631
[ 30 ]. 6 MLJ 389
[ 31 ]. Nuarrual Hilal Md. Dahlan, “Issues in the House Financing through BBA”(2010), online, available at www.nuarrualhilal.wordpress.com, accessed on 15 April 2012.
[ 32 ]. Ibid
[ 33 ]. Ibid
[ 34 ]. 5 CLJ 54
[ 35 ]. Oommen Koshy, “Mandatory Rebate upon Early Termination of BBA contracts” (2010), online, available at www.skrine.com, accessed on 12 April 2012
[ 36 ]. Ibid
[ 37 ]. Nooraslinda Abdul Aris et al., “Islamic house financing: Comparison between Bai’ Bithaman Ajil (BBA) and Musharakah Mutanaqisah (MM)”(2011), Afr. J. Bus. Manage. , online, available at www.academicjournals.org, accessed on 15 April 2012, p 269
[ 38 ]. Noreeta Mohd Nor, “Musharakah Mutanaqisah as an Islamic Financing Alternative to BBA”(2008), online, available at www.mifmonthly.com, accessed on 14 April 2012, p. 23
[ 39 ]. Ibid
[ 40 ]. Google Translate, online, available at http://translate.google.com/ accessed on 28 April 2012
[ 41 ]. Dr. M. Tahir Mansuri, Islamic Law of Contracts and Business Transactions (Adam Publishers & Distributors 2006), p.211
[ 42 ]. Ibid at 2, p. 212
[ 43 ]. The Practices of Shariah Principles in Instrument of Islamic Financial System: An Overview
[ 44 ]. Mat Isa, Mohd Pisol and Ibrahim, M Yusof and Mohd Hashim, Hezlina (2011) Shariah on Direct and Indirect Cost in Murabahah (International Journal of Basic & Applied Sciences)
[ 45 ]. The Principles and Practices of Shariah in Islamic Finance, online, available at http://www.bnm.gov.my/guidelines/05_shariah/01_murabahah_02.pdf accessed on 29 April 2012
[ 46 ]. Dr. M. Tahir Mansuri, Islamic Law of Contracts and Business Transactions (Adam Publishers & Distributors 2006)
[ 47 ]. Ibid
[ 48 ]. Ibid
[ 49 ]. Ibid
[ 50 ]. Ibid
[ 51 ]. Mat Isa, Mohd Pisol and Ibrahim, M Yusof and Mohd Hashim, Hezlina (2011) Shariah on Direct and Indirect Cost in Murabahah (International Journal of Basic & Applied Sciences)
[ 52 ]. Ibid
[ 53 ]. Ibid
[ 54 ]. Islamic Finance Contracts & Products, online, available at http://skrine.com/index.php?option=com_content&view=article&id=283&Itemid=353, accessed on 29 April 2012