BISS5033

Islamic Financial Contracts and

Maxims
Bai Bithaman Ajil in Malaysia Building Society Berhad
(MBSB)

Prepared by:
Naim bin Abdul Rahaman (821928)

Prepared for:
Assoc. Prof. Dr Asmadi Mohamed Naim

CONTENTS

INTRODUCTION

Chapter 1: HOUSE FINANCING

1.1

Definition

1.2

Mortgage Law

Chapter 2: BAI BITHAMAN AJIL

2.1

Definition

2.2

Legality of Bai Bithaman Ajil

2.3

Pillars of BaiBithaman Ajil

2.4

Transaction of Bai Bithaman Ajil

2.5

Differences between Conventional and Islamic House Financing

Chapter 3: BAI BITHAMAN AJIL IN MBSB

3.1

About Malaysia Bulding Society Berhad (MBSB)

3.2

Products Offered in MBSB

3.3

Islamic Home Financing in MBSB

10

3.3.1

Requirements

10

3.3.2

Application

11

3.3.3

Loan Repayment

12

Chapter 4: SHARIAH ISSUE IN BAI BITHAMAN AJIL

4.1

Bai Bithaman Ajil resembles Riba Nasiah

13

4.2

Assets Ownership

13

4.3

Banks Auctioning in Claiming the Balance

14

4.4

Early Settlement Rebate

14

CONCLUSION

16

REFERENCE

17

APPENDICES

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Introduction
House is defined by a building for human habitation, especially one that consists of a
ground floor and one or more upper storeys.1 If there are people living in a house, they called
as a household. We can rent the house for our shelter, or having our own house. However, in
order to have our own house, we need money for it, even money is used for paying the rent.
For a really long time, people need to apply for a conventional house loan to purchase a
house, or through some private financial institution.
In this study, we will study on the conventional housing loan, and the Islamic product
for housing loan, called as Bai Bithaman Ajil (BBA). For the research purpose, an Islamic
financial product has been taken from a financial institution in Malaysia, Malaysian Building
Society Berhad (MBSB). Then we will compare the differences between the conventional and
Islamic housing loan.
Nowadays, many countries added the Islamic house financing in their financial
institutions as one of tool to attract customers to purchase a house, just like in Malaysia. We
can see in Maybank, where they implement a Shariah compliant product called as
MaxiHome-i, which is based on BBA. Since the introduction of Islamic financing products, it
has become as competitive as conventional financing products.

1 Oxford Dictionary.
1

Chapter 1: Housing Finance

1.1Definition
Housing finance, by a quick glance, is a loan or financing given to the person who are
applying it in order to buy themselves a property, so that they can use it as their shelter to live
or as their investment by renting it to other, of anything they want to do based on their
intention. The purpose of a housing finance system is to provide the funds which homebuyers need to purchase their homes. This is a simple objective, and the number of ways in
which it can be achieved is limited. Notwithstanding this basic simplicity, in a number of
countries, largely as a result of government action, very complicated housing finance systems
have been developed. However, the essential feature of any system, that is, the ability to
channel the funds of investors to those purchasing their homes, must remain. (Mark Boleat,
1985).
A conventional housing loan is offered by a bank. However, it is not being insured by
the government, or federal government.2 Thus, it makes the risk higher for the bank, that is
why some requirement, or qualification to get the loan is stricter. It is different from the
Islamic home financing product, as we know, in the involvement of interest in the loan
financing.
Normally, this conventional type of home financing follows the model that were laid
down by the country where the bank operates, or sometimes it follows its main branch, or
headquarters model. Therefore, in the objectives of the conventional bank to maximize their
profit, they will by any means offer a model of home financing loan that can get the highest
profit. That is the reason on the involvement of interest.

1.2Mortgage Law
For this type of house financing, they follow a law specially made for them, known as
Mortgage Law. In some places, like in the United States of America, they did not use the term
house financing, instead they use the term mortgage. In the Mortgage Law, they defined a
mortgage as a security interest in real property held by a lender as a security for a debt,
usually a loan of money.3 According to the law, there are two parties involved, which is the
2 http://budgeting.thenest.com/conventional-mortgage-loan-mean-4051.html
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borrower, or also known as the mortgagor, he is the one who gives the property or mortgage
to the lender (mortgagee).
A lender is the first party that is an investor, or a financial institution that lends money
to the borrower for purchasing a house, or property. As for the lender, they have the rights to
sell the house or property bought by the borrower, only if the borrower fails to pay the loan.
Commonly, the mortgage, or house will be sold with the land. So, even the borrower transfers
the ownership to someone else, or rented it to someone else, the bank, the lender, still has the
right to sell the house if the borrower fails to pay off the loan. However, once the debt is paid
fully by the borrower, he can discharge, and has the right to discharged bank from have the
ownership of the house.
A borrower or mortgagor is the one who owes a debt with the lender. Generally, the
borrower need to meet the obligation of the underlying loan in order to redeem the house. He
is the person that wants to buy a house, but he could not afford to pay it in full amount. So, he
need to borrow the money, or make a loan with the lender, any financial institutions.
Typically, the borrowers are an individual, or a landlord, or a businessperson that are
purchasing a property by the way of a loan.

3 https://en.wikipedia.org/wiki/Mortgage_law
3

Chapter 2: Bai Bithaman Ajil

2.1Definition
Bai Bithaman Ajil (BBA) is a sale contract which a payment of the price is deferred
and it is payable at a certain period. Literally meaning is to make something into a known
portion or pieces. But technically meaning, as mentioned before, it is to defer a payment into
several portions for a different time period. The payment is payable at a certain particular
time in the future. The contract works like a murabahah contract, only the payment is based
on deferred basis.
Bank Negara Malaysia (BNM) define BBA as:
BBA as deferred payment sale whereby the property requested by the client is bought by the
financier, who subsequently sells the goods to the client at an agreed price, including a mark-up
(profit) for the Islamic bank. The selling price is fixed and agreed by both parties and will
remain unchanged until the end of the payment period. The ownership of the property
purchased will be under the claim of the financier and will be handed over to the customer
upon full payment..

This type of contract is the most popular type of financing. In some books for some
scholars, BBA also referred as bai al-Taqsit, which is a sale with an installment payment. In
other book, they refer BBA as bai al-Muajjal. It means that it is a sale with a deferred
payment. Mostly used in Hanafis school of thought. Some others referred as bai al-Nasiah, a
sale with delayed payment, and also bai al-Aajil, a deferred sale.

2.2

Legality of Bai Bithaman Ajil

We can refer the legality of BBA from Al-Quran, in the verse 275 of Surah al-Baqarah:

From the evidences above, Allah has said that He permitted trade, or sale and purchase.
However, He has prohibited the involvement of riba. On the verse 282, Allah said that if we
want to give or take a debt, it is still possible, however, we must make an agreement, write it
down on a contract. So that, both parties, the one who give debt, and the one who take debt,
agreed on some particular matters. Moreover, both parties can have the benefit because both
of them have the contract agreement.
But, the must made a trade based on mutual consent. It is based on the surah An-Nisaa,
verse 29:

There is also some evidence taken from Hadith. The most popular evidence taken for
this deferred payment contract is on a hadith narrated by al-Bukhari and Muslim:
Narrated by Aishah R.A., the Prophet Muhammad bought some foodstuff on credit for a
limited period and mortgaged his armor for it.4

According to the majority of jurists, if we want to increase the price in the BBA, but
only for the deferred payment, it is allowed. As said by some jurists, Ibnu Rushd said that
The time has been given a share in price. Al-Kasani also said that The price may be
increased based on deferment. As for Ibnu Abidin, A price is increased based on
deferment.
From their sayings, we can see an important principle where the increased in price is
allowed. However, it is only on the case of deferment price is their agreed contract. The other
4 Sahih al-Bukhari, 2509; Book 48, Hadith 2; Vol.3, Book 45, Hadith 686.
(http://sunnah.com/bukhari/48/2)
5

reason is that the increment in price is permissible because of it is against the commodity, not
against the money. If the price increased against the money, then it will involve to riba.
According to Dr. Zaharuddin Abdul Rahman (2010)5, the BBA concept is normally not
so much different with the concept of bai al-inah. The definition of al-inah, according to
him, is too wide, because there are too many definitions given by scholars from some schools
of thought. However, we are all already know that Hanafi, Maliki and Hanbali schools of
thought reject this type of contract, but only Shafie accepted al-inah.

2.3Pillars of Bai Bithaman Ajil

There are five pillars for BBA; seller, buyer, subject matter, price, and aqad. A seller
and a buyer is the most important pillar, where if there are only one of them, there will be no
contract agreed. Both of them must be of sound mind, reach the age of puberty or already
mukallaf, and intelligent.
While for the subject matter, during the time of purchase, it must be existed. It is also a
need for the seller and buyer to know, which house or property they will get into the contract.
Moreover, the subject matter must be a lawful under the act of sale purchase and permissible
or halal from Shariah point of view.
The price of the subject matter, must be clearly known by the seller and buyer. The
payment, must be made in the value, and currency, that both of them agreed for. And the last
pillar is aqad which are basically ijab and qabul, the offer and acceptance. It must be decisive,
absolute and in a definite language to be made in one session.

2.4

Transaction of Bai Bithaman Ajil

5 Contract and the Products of Islamic Banking, Kuala Lumpur.

6

Buyer

From the diagram above, we can clearly understand that this type of financing contract
is strictly between seller and buyer only. A buyer, first he need to identify which house he
wants to buy. Then, once he confirms on which house, he made an agreement with the seller,
or the bank, on making the loan to buy the house. The bank first determines the requirement
of the buyer in relation to his manner and period of repayment. After the deal has been made,
the bank will then purchase the house. After purchasing it, the bank will sell it back to the
buyer or the customer on a cost price plus the profit margin.
The buyer received the house from the seller and make the payment to the bank on the
instalment basis. The buyer need to pay the amount on the specified period agreed between
him and the bank.
The example of a house financing between the bank and the buyer can be seen as
diagram below for a simple understanding.

2.5

Differences between Conventional and Islamic House Financing

The basic difference between the conventional house financing and Islamic house

financing is the involvement of interest. As we know, Islamic finance prohibit the

involvement of riba. Whether it is in any form, Islamic house financing does not levy interest.
The other difference is that the conventional house financing follow the rules and
model laid down by the country or the state in where the bank operates. While Islamic house
financing follows the rule laid down by Al-Quran and As-Sunnah, as per Shariah. Moreover,
the bank that lend the money must follow Islamic business rules or Fiqh Muamalat.
The Islamic principle used for such a kind of transaction is based on Surah al-Baqarah,
verse 279:

In this verse, it explained that the reason on an Islamic framework used in Islamic bank
is not on the debtor-creditor relationship. Contradict with the conventional bank, they are
based on the relationship between debtor and creditor where it is the depositors and the bank
8

is in one hand, and on the other hand is between the borrower and the bank. The price of
credit is considered by the interest.

Chapter 3: Bai Bithaman Ajil in MBSB

3.1

About Malaysia Building Society Berhad (MBSB)

Malaysia Building Society Berhad or known as MBSB, is a one of the oldest financial

institution in Malaysia. It was named as Federal and Colonial Building Society Limited back
in 1950. They changed their name in 1956 to Malaya Borneo Building Society Limited
(MBBS), with the major shareholder is Malaysian government.
Before it was listed in the Kuala Lumpur Stock Exchange on 14 March 1972, or
nowadays known as Bursa Malaysia, the company become an incorporation in Malaysia
under the Companies Act 1965. The incorporation was held on 17 March 1970. Currently, the
Employees Provident Fund (EPF) or mostly known as Kumpulan Wang Simpanan Pekerja
(KWSP) is currently the financial holding company of MBSB.
Under the Banking and Financial Institution Act 1989 (BAFIA), this company was
defined as a Scheduled Institution. The company allowed to undertake a financing business in
the absence of a banking license since 1 March 1972 when they were granted as the Exempt
Finance Company by Ministry of Finance. As a financial provider, MBSB offers an
innovative services and financial products throughout its nationwide branches for both
individuals and corporate.

3.2

Products Offered in MBSB

MBSB offered many products in different categories. Those categories are named as

Retail Business, Corporate Business, Wholesale Financing, and Deposit.

Under the Retail Business, there are four main products offered:
a)
b)
c)
d)

Personal Financing-i
Property Financing
Wealth Management
Commercial Property Financing

For the corporate Business, seven categories of products are offered:

a) Contract Financing
b) Property Development Financing
c) Corporate Financing
10

d)
e)
f)
g)

Commercial Property Financing

Oil Palm Plantation Financing
Equipment Financing-i
Project and Property Management

In the Wholesale Financing, they specialized in two projects, which are:

a) Private Finance Initiative
b) Structured Business
The last categories of products offered is on the Deposit:
a) Savings
b) Fixed Deposit

3.3

Islamic Home Financing in MBSB

The product that will be discussed in this study is on the home financing that are based

on Islamic financial contract, which are Bai Bithaman Ajil. As we discussed before, this type
of contract is based on the deferred payment. This contract is under the category of Retail
Business, under the sub-category of Property Financing.
MBSB named their product as MBSB My First Home Scheme-i6. This product is
aiming towards the young adults to own their first home. It is designed to provide up to 10%
financing facility. The Shariah contract implement in this is BBA where it is a contract of sale
of a property like a house, with the basis of deferred payment, and the customer will need to
pay on installment basis with an agreed payment period.
The financing tenure given to the customer is up to the age of 75, or they can make a
loan for 35 years. It will use whichever is earlier. If the customer reaching the period of 35
years first, then the contract will end up there.
By the way, there are some special benefits to the customer who wants to get a home
financing loan from this company. The first benefit is that there is no maximum income limit
to them. The second benefit is on the valuation fees. It is up to RM6,000. It also subsidized
legal. The processing fee can be waiving. And lastly is on the ceiling rate. It is protected by
the Effective Cost of Fund-i (ECOF-i) fluctuations and rising financing rates.

6 See Appendix 1.
11

3.3.1Requirements
There are some requirements to be meet by the customer. The first requirement is the
customer must be a Malaysian citizen, that aged 40 and below. They can be a joint applicant
like a business partner, or an individual. However, for this product, it is obliging for the first
time buyer only. The last requirement that is compulsory is that the customer must be an
employee. As the required eligibility, the applicant must be an employee in the same
company for at least 6 months from the date he started his job. He also must be a degree
holder, graduated, or if he is a non-degree holder, at least his working experience is 3 years in
total.
For the property to be bought by the customer, he only can buy any property, that is
valued between RM100,000 to RM500,000. The property need to be located in Penang, Ipoh,
Klang Valley, Selangor, Melaka, Kuantan, Negeri Sembilan, Johor, Kota Kinabalu or
Kuching, whether it is already completed or still under construction. However, they can also
find a property that is purchased from any MBSBs bridging developers. And lastly, the
owner must be occupied.

3.3.2

Application
To apply for the home financing offered by the company, firstly, the customer need to

open the webpage from MBSB itself 7 and then use the loan calculator given. The calculator
will allow him to calculate on how many do the customer need to repay every month. It is
based on the amount of loan taking from the MBSB.
Once the customers identified the amount of the property, then they can apply through
the website, or download the application form.8 Fill up the forms, and go to the nearest
branch. After that, the mortgage consultant, or the person in charge for taking the home
financing application, will assist them with the loan application.

3.3.3Loan Repayment

7 http://www.mbsb.com.my/retail_home_financing_first_home_scheme_i.html
8 See Appendix 2.
12

There are many methods given by the MBSB to repay the loan. The common way to
pay back the loan is by visiting the physical branches. But still, they offer many modes of
repayment, as below:
a) Online transfer Transfer from MBSB account via online.
b) Interbank GIRO Transfer through any participating banks branch or by online
banking.
c) Standing Instruction Facility Automatically deduct from the bank account
every month.
d) MBSBs ATM Transfer from MBSB account via ATM machine.
e) Express Payment Machine Pay by cash deposit or check at any MBSB
branches.
f) Mail Payment Write a check and statement, enclosed it into an envelope and
mail it to MBSB.
g) Phone Banking Using T-PIN, issue an instruction to deduct from bank
account.

13

Chapter 4: Shariah Issue in Bai Bithaman Ajil

4.1

Bai Bithaman Ajil resembles Riba Nasiah

Riba nasiah is derived from the word nasaa. Literally it means to delay or to

defer. On simple definition, riba nasiah is a type of riba, or interest, where a buyer, he
bought something from a seller, but on the deferred payment, but on the day he need to pay,
he maybe doesnt have enough money or other problem that he failed to pay money on time.
When the buyer failed to pay, the seller then charges some amount on it for the late
payment. Because of the nature of riba is injustice to the buyer, and just give benefit to the
seller, the act of charging some amount for the late payment is called as riba, or specifically
riba nasiah. Because of these factors that BBA is resembling riba nasiah in the way of the
increment of the purchase price if the buyer could not pay it on time within the agreed period.
As written by Dr. Asmadi9, the riba involved when the buyer bought something on debt, but
then he could not afford to pay it back on the agreed period. It occurs in the transaction
between some institution that sells something on debt and deferred payment.
According to majority of jurists, including Al-Kasani, Ibnu Abidin and Al-Nawawi,
they said that the price may be increased, however, it is based on the deferment. Ibnu Rushd
give his opinion on this matter that the increased in price is not a riba, and it is justifiable.
The Academic Fiqh of OIC (Majma al-Fiqh al-Islamy) has issued a resolution, on
number 7/2/65, they stated that Baial-Taqsid is permissible as an Islamic contract to be
transacted.

4.2Assets Ownership
The issue arises when the customer wants to get the ownership of the property. But,
until he does not pay the property to the bank in full amount, he cannot retrieve the ownership
of the property. Before it is being sold back to the customer, it is the matter of legal and
beneficial ownership of the property.
Regarding this issue, the Malaysia Shariah Advisory Council give the flexibility on the
registration of the ownership based on legal title. This is because it is regarded as a
procedural requirement and the formality. So, according to Shariah, even though the
9 Q & A Muamalat, 2016, pg. 67.
14

ownership has yet given to the buyer, he can sell the property or rent it to someone else as
Shariah only refers this matter to the contract and its possession, and not the legal registration
of the title or ownership.

4.3

Banks Auctioning in Claiming the Balance

In some case, the customer is unable to pay back their debt for some period to the bank

or any financial institution that they agreed into. Therefore, the bank has the right to sell the
house, or auctioning it, in order to cover the balance that the customer is unable to pay. This
is the matter whether or not the bank can auction their customers property on the BBA basis.
From Islamic points of view, the collateral, or someone that become a guarantor for the
customer if the customer unable to pay back, will supposed to cover the debt. If the collateral
still cannot cover the payment, the bank has the right to claim the balance of the customers
debt, from the customer.

4.4

Early Settlement Rebate

Sometimes, the customer has the money. But due to some circumstances, they still need

to depend on the loan to buy the house. Maybe because of the commitment to the business
that they need to use the money, or any situation they need to face. Therefore, when they
were taking a loan, maybe they can pay up early than the contract agreed. For example, they
agreed to pay it full until 35 years, but they got some extra profit in their business, so they
can settle it early by five years.
The issue is known as give discount and receive soon or dawa taajjal. Some
jurists give their opinion about this. They said that it is permissible to arrange such condition
on give discount if the customer can pay up the full amount early. However, majority of
jurists including the four madhhabs, they do not allow it, only in the condition of discount to
the earlier payment. Islamic Fiqh Academy of OIC also give the same view as majority
jurists.
On 24th April 2002, the BNM Shariah Advisory Council conclude in their 24 th meeting
that the Islamic financial institution can give discount or ibra to the customer if they made an
early settlement on the basis of public interest (maslahah). The cause can be stipulated under
15

the method of payment. However, in their 32 nd meeting on 27th February 2003, they added up
more on the condition of rebate. In the context of BBA contract, it is permissible if the bank
itself offered the ibra to the customers. If the bank has bind the condition within the contract,
the bank bound to fulfill its promise.

16

Conclusion
As for the conclusion, we can see that the principles used by the conventional bank
provide the house financing to the customers can differs much with the principles used by the
Islamic bank. The biggest different is that conventional bank ultimate goal is to maximize
their profit, but the Islamic bank ultimate goal is to get the blessing of Allah.
However, as we can see, there are many issues arise in the BBA because of the nature
of BBA is a contract of sale, not a financing facility even its function as a financing facility. It
should be stressed out again that BBA is a sale contract. The practices of BBA in Malaysia is
different with some other countries. As such, it need to carry all the necessary features of a
contract of sale like arkan al-Aqd (essential elements), syurut al-Aqd (conditions) as well as
the legal effect of the contract.
To conclude it, the setting of some foreign Islamic financial institutions in Malaysia is
expected to accelerate more the Islamic financial products development process. And maybe
some new products have been offered in some side of the world, in other countries, might be
introduces in Malaysia, soon, hopefully.

17

References

Al-Khin, Dr. Mustofa, Dr. Mustofa Al-Bugho, and Ali Asy-Syarbaji. 2005. Kitab Fikah Mazhab
Syafie (Jilid 6). Kuala Lumpur: Pustaka Salam.
Auda, Jasser. 2010. Maqasid Al-Shariah as Philosophy of Islamic Law: A System Approach. Petaling
Jaya: Islamic Book Trust.
Naim, Dr. Asmadi Mohamed. 2016. Q&A Muamalat: Pencerahan 48 Kekeliruan Isu Jual Beli
Semasa. Petaling Jaya: Galeri Ilmu Sdn. Bhd.
Nyazee, Imran Ahsan Khan. 2003. Islamic Jurisprudence. Petaling Jaya: The Other Press.
Zuhayli, Wahbah. 2003. Financial Transactions in Islamic Jurisprudence. Damascus: Dar al-Fikr.

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Appendices
Appendix 1: Brochure.

19

Appendix 2: Aplication form.

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