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Introduction
Problem Statement
The application of Al-Bai Bithaman Ajil (BBA) Home Financing in Conventional
Banks and Islamic Banks is used considerably in Malaysia. However, it is argued that the
concept of Al-Bai Bithaman Ajil that is practiced in Malaysia is not a real BBA under the
BBA principles, it is rather considered Bay' Inah (sell and buy back) in character which is
contrary to a valid Islamic contract. Additionally, the Islamic banking transaction in
Malaysia has to be applied and implemented within the existing common law system of
courts and the regime of all other existing laws (includes substantive and procedural
laws).
Therefore, this study aims to highlight the issues surrounding Al-Bai Bithaman
Ajil Home Financing. This study shall identify whether the practice of Al-Bai Bithaman
Ajil Home Financing in Conventional Banks and Islamic Banks in Malaysia comply with
the real Islamic concept of BBA under Islamic Law. This is because the practice of BBA
contract in Malaysia has the characteristics of bay’ al-inah contract which is not a valid
Islamic contract. Furthermore, the decisions of Civil Courts in Malaysia relating to BBA
cases shall also be analysed and discussed critically.

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Objective of Study
The overall aim of this research is to analyse and evaluate the application and
practice of BBA Home Financing by the Banks in Malaysia. The objectives of this
research includes the understanding the concept of BBA in relation to home financing
and its application is Malaysia, determining whether BBA Home Financing in Malaysia
is practiced in compliance with Islamic Law and whether it is a sale contract or a loan
contract, also the study will analyse the legal aspect of BBA contract, and finally the
study will try to find alternatives for Home financing that are in compliance with
shari’ah.

I s l a m i c Fi n a n c i a l S y s t e m a n d E n v i ro n m e n t ( F I N
6640) | 9

Imam al-Ghazali also describes Maqasid al-Shari`ah in a view that benefits (masalih) that should be consistent and in line with the objective of the Shari`ah. The values which are dominant within the sphere of the Shari`ah. 1997). (Osmani & Abdullah. Does the practice of Al-Bai Bithaman Ajil Home Financing in malaysia comply with Islamic Law? 2. Dzuljastri & Fauziah (2011) also made a similar statement that the Shari`ah law prohibits any trading that involves the interest element or usury. 4. Are there other alternatives for Home Financing which is in compliance with Syariah? 5 Literature Review Home mortgage is defined as a loan given by financial institutions and secured by a mortgage on real property and provide a schedule of payments of interest as well as repayments of the principal to a bank (Tse. usury. Is Al-Bai Bithaman Ajil Home Financing in Malaysia is considered a real sale contract or loan contract? 3. are expressed not only in the details of Islamic transactions but in the extensiveness of its role in realizing the Maqasid al-Shari`ah (Abozaid & Dusuki. the establishment of the Islamic home financing is triggered by the nature of conventional home mortgages. cars or other appliances. ambiguity. However. cheating etc. Does the Malaysian legal system help resolve BBA contract disputes under shari’ah law? To study and analyse the decisions of Civil Courts as regards to Al-Bai Bithaman Ajil Home Financing cases. the Islamic banks limit to transactions that are free from interest. since the basic purpose of Islamic I s l a m i c Fi n a n c i a l S y s t e m a n d E n v i ro n m e n t ( F I N 6640) | 9 . 2010). According to Abdul Karim Al-Zaidan. Maqasid al-Shari`ah refers to an act of achieving and protecting the benefits and good (masalih) for the sake of human beings. Likewise.[Document title] 4 Research Questions 1. Whilst conventional banks deal with interest in financing homes. according to Alam et al (2012). 2007).

BBA is a facility provided by the financier (the Islamic bank) to a customer to buy a house. which results in high cost and poses a burden to I s l a m i c Fi n a n c i a l S y s t e m a n d E n v i ro n m e n t ( F I N 6640) | 9 . United Kingdom and Australia. variable or mixed rate which is set by the financier (Aris et al. The Islamic bank capitalizes its profit up front in the sale of the property to the customer who in turn is required to pay a fixed sum until the tenure ends. BBA is similar to debt financing. Indonesia and Brunei whereas the MMP is widely practiced in the Middle East. (2008). Bank Islam Malaysia Berhad (BIMB) implemented the BBA in Malaysia... convenience (hajiyyat) and refinement (tahsiniyyat). According to the Muslim scholars. at a price plus profit margin (Meera and Abdul Razak. In 1983. for home financing. Hence. the benefits (masalih) of Maqasid al-Shari`ah can be categorized into three which are necessities (dharuriyyat). In the first category of Maqasid al-Shari`ah which is necessities (dharuriyyah). there are five key components that require to be protected and one of them is the property or wealth (maal) protection. United States. According to Razak et al. 20 years. in order to achieve the highest objective of Shari`ah in protecting the wealth and property.[Document title] legislation is to protect the interest of people against harm (mafsadah). Thus. it is important to ensure the implementation of the system is in line with the ultimate objective of Shari`ah (Maqasid al-Shari`ah) which is to protect the property and the just distribution among the society. The BBA is the more popular concept in countries like Malaysia. Among the more dominant home financing products in Islamic are the al-Bay’ Bithaman Ajil (BBA) and the Musharakah Mutanaqisah Partnership (MMP) contracts. 2005). At the initial stage of the BBA. at an either fixed. Islamic banks have adopted several products to keep them free from the elements prohibited by the Shari`ah. over a tenor of say. In relation with Islamic finance. (Aris et al. the financier will buy the house from the customer at a price equal to the financing amount and sells it back to the customer. Canada. 2012). 2012). the Islamic finance system is required to oblige several key principles that have been underlined in Shari`ah commercial law and to promote justice in its application.

and share exactly the same economic substance and consequences. MM is not widely used in Malaysia but is regarded as one of the modes of financing in Pakistan Islamic banks. the bank leases its share in the house ownership to the customer under the concept of ijarah (leasing). its conditions and other Shari`ah principles related to this contract. thereby rendering the BBA profit to be implicated with riba (Meera & Razak. even though their form may be different (Abozaid & Dusuki. 2005). the customer enters into a partnership (musharakah) under the concept of Shirkat al-milk (joint ownership) agreement with the bank. The International Fiqh Academy of OIC in its 15th session has made a discussion on MM where the Shari`ah scholars have discussed the fundamental characteristics of this contract. they serve exactly the same contractors’ purposes. Abozaid & Dusuki (2007) also mentions that in Bay` al-`Inah applications. its permissibility in the Shari`ah. However. Usmani (2002) has described the characteristics of MM in Pakistan and made a detailed discussion on the operational method of house financing in Meezan Bank. This contract combines two basic Islamic concepts. Here. “Ikhtiar” (value-addition or effort) and “al-Kharaj bil Daman” (any benefit must be accompanied with liability). it is evident that the concept of Bay` al-`Inah ignores the Shari`ah principle of “al-Ghorm bil Ghonm” (no reward without risk). Musharakah Mutanaqisah (MM) on the other hand is based on the concept of diminishing partnership. Meezan Bank of Pakistan has been implementing this mode of finance for house financing. Bay` al-`Inah here is resorted to as a legal device (hilah) to circumvent riba-based financing. (International Fiqh I s l a m i c Fi n a n c i a l S y s t e m a n d E n v i ro n m e n t ( F I N 6640) | 9 . if any. in reality the Islamic bank merely acts as a financier who provides money without taking any risk and without being involved in the investment process. as the word ‘bay`’ suggests. but as far as the substance is concerned Bay` al-`Inah-based financing and the conventional riba-based financing are the same. First. Secondly. 2007).[Document title] one’s family obligation. BBA uses the concept of Bay’ al-Inah which is said to be one of the most controversial products of Islamic banking and finance (Abozaid & Dusuki. the Islamic bank is to act as a trader selling or buying. 2007).

This leads the financiers and the customers in difficulties. Islamic banking and finance have become the important element in the financial institutions since they have been introduced in the 1980s. Up until today. Furthermore. the profit rate in BBA is fixed as it is a fixed selling price which cannot be changed. (2012) stated that MM is still not favourable among the practitioners. Smolo (2007). 2004). They argued that the current practice of BBA does not change the interest based system as it follows the similar computation formulas to the interest based system where the profit rate is quite similar to the interest rate in the market. However.[Document title] Academy of OIC. However. 6 Proposed Model 1 Situational analysis 2 Marketing objective Nowadays. the majority of house financing in Malaysia is still using BBA and MM only acts as an alternative product. Meera & Abdul Razak (2005) argued that MM is a better alternative to BBA home financing. The steadily increasing pattern since its establishment shows that Islamic products have been accepted among the people especially the Muslims. Usmani (2005) has defined the MM contract and described its mode of applications in home financing. Aris et al. Al-Kawamelah (2008) made a detailed explanation of MM and its Shari`ah ruling. It is said to be less attractive to bankers because the MM does not charge interest of advance profits. It also shows the level of awareness among the Muslims on how important it is to avoid riba’ as it is one of the prohibitions in Islam. trade and business services while maintaining Shari`ah principles. As such the banks cannot make money as MM is purely based on rental payment. They compared between BBA home financing and MM home financing and concluded that MM is more Shari`ah compliant. there are a lot of Islamic products that have been introduced since the emergence of Islamic banking. in his dissertation made comparison between the BBA and the MM. In the context of Malaysia. even the Muslim scholars have tried I s l a m i c Fi n a n c i a l S y s t e m a n d E n v i ro n m e n t ( F I N 6640) | 9 .

Yet. it can slowly make the Islamic banking institutions change their home financing contracts which currently uses Bai` Bitham al-Ajil or Bai` al-`inah contract to the new contract Musharakah Mutanaqisah. Based on our research. having a home is considered as part of Daruriyyat in the Maqasid Shari`ah. Thus. Furthermore. if the product can be accepted in the market after going through the marketing activities. For example. since this contract is still considered quite young in the market. extensive marketing is needed to create awareness about its existence. the Musharakah Mutanaqisah is the suitable contract to be used in the home financing. in order to create a healthy environment between the customers and the Islamic banks. however arguments are still being sparked among Muslim jurists on the permissibility of the product in Islam. Thirdly. Besides that. it also aims to create the product competitiveness in the market. Hence. it aims to gain interest and support from the Muslims as well as non-Muslims within the region to use the Musharakah Mutanaqisah home financing contract. in the context of home financing in Malaysia. the concept of Bay al-`inah has been extensively used in most of the Islamic banks which give the same impact as mentioned above. I s l a m i c Fi n a n c i a l S y s t e m a n d E n v i ro n m e n t ( F I N 6640) | 9 . it creates confusion among the customers on the permissibility of the products. One of the marketing objectives of the Musharakah Mutanaqisah is to gain 35% of market share by 2016.[Document title] their best in producing Islamic products in-line with the Shari`ah. These objectives have been derived from the SMART approach in the marketing tools as follows:  Specific – The primary need of the Muslim customers is to avoid riba` in their transactions.

 Achievable – These objectives can be achievable by having strong technical support and commitment of all personnel involved in implementation of the marketing strategies as well as operation. with regular progress updates which will be reported every month to track level of success of this product in the market and the impact of this product to the customer financial as well as Islamic banking profitability. we are assuming that the market share will be increased by 15% as it can attract more investor from the Middle East country.[Document title]  Measurable – Based on the World Islamic Banking Competitiveness Report 2013 – 2014. 3 4 5 Target markets Product concept Integrated marketing communications I s l a m i c Fi n a n c i a l S y s t e m a n d E n v i ro n m e n t ( F I N 6640) | 9 .  Realistic – These objectives are realistic as the marketing resources are in place to conduct the segmenting and targeting exercise and access to information required. Strong Shari`ah and accounting educational background of the marketing staff can also be an added value to the Islamic banking Institution in delivering precise information to the customers. After implementing this product in the market. the Malaysian Islamic Banking industry has dominated 20% market share with the it even growing faster than conventional banking. Strong knowledge of the marketing team is also vital in order to make the important elements in the contract be properly implemented.  Time Specific – The increase in market share is to be achieved within 24 months.

Confidentiality of bank Based on the research above. 4. the current I s l a m i c Fi n a n c i a l S y s t e m a n d E n v i ro n m e n t ( F I N 6640) | 9 . Hence. 2. Based on this finding also. According to Haronet. it is important to assign the human resources in the proper places so that it can satisfy the needs of the customers. there are five factors that Muslims need to consider in selecting the bank for them to deal with. 5. which are as follows: 1. Reputation and image of the bank 4.[Document title] 6 Place and distribution An important element in the marketing mix is place and distribution. on the other hand non-Muslim customers ranked the following as the main factors in order for them to select their banks to deal with: 1. Fast and efficient services 3. 3. According to the Dr. recognizing the distribution strategy is also the key of successful in Islamic banks. 2005). Fast and efficient services Speed of transactions Friendliness of bank personnel Confidentiality of bank Knowledge about the needs of customer However. Al (1994). In addition. there are is a contrast on the criterions on choosing a bank where the Muslim customer prefers bank staff that understands and acknowledges the customer needs whereas the nonMuslim customer prefers to select a bank based on its reputation and image. Wan Nursofiza (May. Speed of transactions 5. The strategic location of the information resources will enable the customer to have easy access to the product as well as information related to the product. it will make the marketing goals to be achieved without much difficulty. Friendliness of bank personnel 2.

7 Cash flow budgeting Analysis and Findings Conclusion References Appendices I s l a m i c Fi n a n c i a l S y s t e m a n d E n v i ro n m e n t ( F I N 6640) | 9 . we will also place a knowledgeable person in marketing or customer service in order to ensure the information can be delivered clearly to 7 8 9 10 the relevant parties. Besides that. we would use the approach of doing a nationwide road show in order to reach the target market.[Document title] practice of the Islamic banks is by introducing mini-branch as well as kiosks which provides the basic information of the banking facilities to the customers. Since our product is still new and needs very strong support from the customers.