DIFFERENCE BETWEEN BAI’ BITHAMAN AJIL (BBA) & MUSHARAKAH

MUTANAQISAH (MM)

In Islamic house financing, the dominant products used in a sale and purchase transaction are
Bai’ Bithaman Ajil (deferred payment sale) and Musharakah Mutanaqisah (diminishing
partnership). BBA is a facility provided by the financier, that is, the bank to a customer to
own a house, over a tenor of financing, e.g. 20 years, at a rate (either fixed, variable or
mixed) determined by the financier. The financier initially buys the house from the customer
at a price equal to the financing amount and sells it back to the customer, at a price plus profit
margin. While, Musharakah Mutanaqisah (MM) 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 main differences between the joint ownership Musharakah Mutanaqisah and debt-type
Bai Bithaman Ajil financing are, first, there are two separate contracts under the MM method.
The first is a musharakah where the client is a partner and the second one is an ijarah which
involves the leasing of the property. The BBA, on the contrary, follows the murabahah
concept of buying and selling of property. Second is, Under BBA, the selling price of the
house does not reflect the market value since the mark-up for the deferred payment is quite
substantial. On the contrary, the value of the house under MM always reflects the market
price and the rental is determined by the market rental values. Third, the return to the BBA is
based on a fixed selling price (that uses the prevailing interest rate as the benchmark). But
under MM, the financer 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 current market conditions.
Indeed, as argued earlier, the rental can be tied to some economic variables like Rental Index,
House Price Index etc. Fourth, The MM is a more flexible financing structure than the BBA
as the customer can own the property earlier by redeeming faster the principal sum of the
financier, without the need to compute rebates as in BBA. Fifth, in the event of payment
defaults, the penalty charges under BBA can be challenged, while under MM, defaults will
cause the equity of financier to remain constant and therefore entitled to higher rental
portions when payments made later. Lastly, the MM is accepted internationally as Shari’ah-
compliant whereas the BBA is recognized predominantly in the east, i.e. in Malaysia,
Indonesia, Brunei etc.

Based on this, I prefer Musharakah Muntanaqisah contract because it is more flexible and can
own the property earlier by redeeming earlier the principle sum of the bank without the need
to compute the rebates rather than Bai Bithaman Ajil contract which is more complicated,
and buyer only can own the property right after the full payment of the full tenor has been
made. Besides, MM has no interest charge or advanced profit involved as it is based on the
concept of rental payments and redeeming the bank’s shares in the property.