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ADVANCE FIQH MUAMALAT (IFE705)

THE ISSUE AND DELIMMA OF THE BAI BITHAMAN AJIL CONTRACT

AS MODE OF ISLAMIC FINANCE EMPHASIZING ON –

(I) CONCEPTUAL MODEL OF AL-BAI BITHAMAN AJIL;

(II) THE IRONY OF AL-BAI BITHAMAN AJIL ITS FACING

CONTRIBUTING TO THE ACCUSATION TO BE CONTRARY TO

SHARIAH PRINCIPLES;

(III) AT LEAST 5 PREVIOUS CASES WITH ITS ISSUES (OF THE

CASES) AND DECISION MADE BY THE COURT

PROVIDE YOUR OWN CRITICAL EVALUATION TO THE DECISIONS

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CONTENTS

1. INTRODUCTION

2. LEGAL EVIDENCE OF AL-BAI BITHAMAN AJIL FROM AL-QURAN AND

SUNNAH OF RASULULLAH SAW

3. THE OBJECTIVES OF AL-BAI BITHAMAN AJIL

4. TENET OF AL-BAI BITHAMAN AJIL

5. CONCEPTUAL MODEL OF AL-BAI BITHAMAN AJIL.

6. AL-BAI BITHAMAN AJIL AS A FINANCIAL FACILITY

PRACTICE BY ISLAMIC BANK IN MALAYSIA.

7. THE LEGAL ISSUES OF AL-BAI BITHAMAN AJIL

UNDER THE MALAYSIAN LEGAL SYSTEM

7.1 Bank Islam Malaysia Berhad v. Adnan Bin Omar

7.2 Dato' Nik Mahmud b Daud v. Bank Islam Malaysia Berhad

7.3 Affin Bank Bhd v Zulkifli b Abdullah [2006]

7.4 Arab Malaysian Finance Berhad V. Taman Ihsan Jaya Sdn Bhd

7.5 Bank Islam Malaysia Bhd v Azhar bin Osman and other cases

8. CONCLUSIONS – GROUP VIEWS ON AL-BAI BITHAMAN AJIL BASED ON THE

DECISIONS OF THE COURTS’ CASES2

INTRODUCTION

Al Bai Bithaman Ajil” (BBA)

(i) Literally means “to make something into a known portion or

pieces”.

(ii) Technically, means“to defer the payment into several portions for a

different time period, and every portion that is due is called al-qist”.

BBA a sale of contract in which the payment of the purchase price is

payable at a certain particular time in the future.

BBA is also known as -

(i)Bay’ al-Nasiah which means as “waiting”;

(ii)Bay’ al-Taqsit which means as “installment”;

(iii) Bay’ Muajjal which means “deferred payment sale”; or

(iv) Al-Bay’ Li Ajal: If the payment is deferred as one lump sum towards

the end of a particular period.

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In the middle east countries, the term used is Bay’ al-Taqsit

Bank Negara Malaysia defines :

“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.”.

INTRODUCTION

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AL-QURAN :

Al-Quran from surah Al-Baqarah, 2: 282.:

با م الر ه البيع وحر وأحل اللـ

‘And Allah has permitted trade and forbidden riba’.’

ين آمنوا إ ذا تداينتم ب دين إ لى أج ي ا أيها الذ ى فاكتبوه سم ل م

‘O you who believe! Whenever you give or take credit (tadayantum) for a stated term,

set it down in writing.’

SUNNAH :

(a) It is reported in a Hadith by a Companion, Jabir, that the Rasulullah SAW

bought a camel from him outside the city of Madinah whereby the payment was

settled later on in Madinah.

(b) In another Hadith, it was narrated by Aisha RA that the Rasulullah SAW bought

a meal from one Jew with deferred payment, and Rasulullah SAW mortgaged

his iron shirt which is made from iron.

LEGAL EVIDENCE OF AL-BAI BITHAMAN AJIL

FROM AL-QURAN AND SUNNAH OF RASULULLAH

SAW

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THE OBJECTIVES OF AL-BAI BITHAMAN AJIL

The objectives of BBA -

(i) providing financing for the purchaser who could not afford make

the full payment of the purchase price of the purchased goods

upfront so as to reduce the hardship and burden for the purchaser

in providing the full payment of purchase price to purchase the

goods;

(ii) attracting potential purchaser by offering payment by way of credit

for the purchaser to purchase the goods for the immediate usage

and make payment on affordable installment over an agreed

period of payment which eventually lead to interest free sale

transaction; and

(iii) providing flexible modes of payment as under BBA, the deferred

purchase price would be settled by the purchaser through various

modes of agreed installment payment between the seller and the

purchaser and thus, leads to smooth business transaction

between the seller and the purchaser.

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TENET OF AL-BAI BITHAMAN AJIL

Seller and purchaser, where both of them must be of sound mind,

attain age of puberty and intelligent;

Subject matter, exist during the time of purchase, known by the seller

and the purchaser, lawful and permissible or halal under Shari’ah,

the seller is the owner of the subject matter and the subject matter

could be delivered to the purchaser which include the transfer of

ownership; (BBA is subjected to the condition for transaction for non-

ribawi items only. If involve ribawi items, the ribawi items have to be

of different categories and types).

Price, must be known by the seller and purchaser where the

payment must be made in the currency agreed by both of them; and

Aqad which are ijab and qabul, must be absolute, decisive and

definite language to be made in one session.7

CONCEPTUAL MODEL OF

AL-BAI BITHAMAN AJIL

BBA is a sale of good with deferred payment at agreed selling price agreed by the

seller and the purchaser.

Under BBA the goods is delivered by the seller to the purchaser on the spot. The

payment of the purchase price by the purchaser to the seller is on deferred payment

or postponed to an agreed future either–

(i) equally fixed installment;

(ii) incremental (mutazayidah) installment;

(iii) a full purchase price payment at an agreed future date for payment; or

(iv) diminishing installment (mutanaqisah).

Any increament of the selling price of goods under BBA is a profit for the seller and it

was agreed between the seller and the purchaser. Thus, it does not involve any

attachment of interest or riba’ as in the conventional deferred installment payment

for example Riba’ Nasiah.

The selling price offer by the seller to the purchaser is either in form of -

(i) Bay’ Musawwamah (normal contract of sale); or

(ii) Bay’ Mudharabah (cost plus contract)

BBA is not applicable for Bay’ Salam 8

AL-BAI BITHAMAN AJIL AS A FINANCIAL FACILITY PRACTICE BY

ISLAMIC BANK IN MALAYSIA.

Agreements for BBA financing facility -

(a) The Property Purchase Agreement (PPA), Islamic bank purchase the

property from the purchaser at the purchase price, which usually the

amount of financial facility required by the purchaser.

(b) The Property Sale Agreement (PSA), the customer undertake and

guarantee to re purchase of the financed property for the Islamic bank at

the agreed selling price between the Islamic bank and the purchaser.

(c) Some other important documents to be executed by the purchaser for the

Islamic would be the security documents for securing the installment

payment of the facility amount are as follows –

(i) Legal Charge, for the property with individual titles; or

(ii) Deed of Assignment and Power of Attorney executed by the

purchaser in favour of the Islamic bank, for the property under master

title and has yet to be issued with individual titles; and

(iii) any other Islamic financing documents as required by the

Islamic bank, for instance, takaful on the property or

the provision of guarantors by the purchaser. 9

AL-BAI BITHAMAN AJIL AS A FINANCIAL FACILITY

PRACTICE BY ISLAMIC BANK IN MALAYSIA.

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THE LEGAL ISSUES OF AL-BAI BITHAMAN AJIL UNDER

THE MALAYSIAN LEGAL SYSTEM

Bank Islam Malaysia Berhad v. Adnan Bin Omar [1994] 3 CLJ, 735

Facts: BIMB granted a loan of RM265,000.00 secured by a charge over aland for resale amount of RM583,000.00 (in charge document) payable in180 instalments by Adnan

Issue : What is the amount to be paid? RM583,000.00 or RM265,000.00

Decision : Both parties had the same intention when executed PSA & thecharge document which amount to be secured was RM583,000.00(including the profit margin BIMB).

Principles :

(i) Its civil courts jurisdiction in relation to the recovery of the Islamicbank’s right over the default payment and not Shari’ah courts.

(ii) Decision was based on the contractual relationship and agreement byboth parties.

(iii) Issues : Has the Court has exercised justice to Adnan as the amountRM583,000.00 secured by the property under the facility wasanticipated or forecasted to reach such amount on 2 March 1999 andnot during the date of the breach of such

repayment of the purchase price has occurred in April 1985?11



Dato' Nik Mahmud b Daud v Bank Islam Malaysia Berhad [1998] 3 CLJ605

Facts: Dato’ Nik obtained financing from BIMB by executing PPA, PSA and charged a Malay reserve land as seurity.

Issue : whether there was an actual transfer of right or interest from Dato’Nik to BIMB as BIMB is not a Malay.

Decision : No evidence of the land was being transferred to BIMB. The so-called sale transaction in BBA facility is in fact a credit device instrumentand not a bona fide sale transaction.

Principles : (i) BBA practice by Islamic bank in Malaysia involves element ofgharar. The very basic tenet of BBA contract is a sale transaction whichtransfer of ownership of the property. BIMB is never a registered owner ofthe property its sell under PSA.

(ii) Issue : The sale of property under contructions where the ownership ofthe property is not being transferred by the developer to the purchaser.How is the purchaser sell the property to Islamic bank under PPA?

Which party be responsible to complete the property if it was abandoned?

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Affin Bank Bhd v Zulkifli b Abdullah [2006] 1 CLJ 438

o Facts: Zulkifli bought a double storey link house through BBA from his employer at

that time for the sum of RM 346,000. Then, Zulkifli resigned and at his request, the

BBA was restructured. Under the revised BBA the bank’s selling price of the house

was RM992,363.40 payable over a period of 25 years

o Issue : (i)What is the amount Zulkifli has to pay the bank in the event of default

(ii) In the event of a default before the end of tenure, could the bank claim as

part of the sale price or bank selling price the profit margin for the

unexpired tenure of the facility

o Decision : Granting the order for sale and reducing the amount of repayment

Principles : (i) If the customer is not given the full tenure to pay the selling price,

then the bank is not entitled to claim for the bank's profit margin for the full tenure, as

to allow the bank to do so would mean that the bank is able to a earn a profit twice

upon the same sum at the same time.

(ii) The profit margin charged on the unexpired part of the tenure is unearned profit

and not actual profit, and therefore cannot be claimed under BBA.

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Arab Malaysian Finance Berhad V. Taman Ihsan Jaya Sdn Bhd & Ors;

Koperasi Seri Bukit Cheraka Berhad (Third Party) [2009] 1 CLJ 419

o Facts: Tmn. Ihsan S/B obtain BBA facility from AMFB. Tmn. Ihsan S/B

defaulted in the payment of the bank selling price and AMFB applied for

an order for the sale of property.

Issue : Tmn. Ihsan S/B argued the letter of offer, PPA, PSA and the

charge or assignment is financing in nature and not in accordance to

Shari’ah and involved riba’.

Decision : Court ordered sale by public auction of the charged

properties.

Principles : (i)The claim price by the bank of the property must close

to the market price and cannot be more than that.

(ii) The BBA practice is not in line with the Islamic Banking Act 1983 or

the Banking and Financial Institutions Act 1989. The Sale

Agreement was therefore void. The bank cannot claim the selling

price but only the balance of the selling price. 14



Arab Malaysian Finance Berhad V. Taman Ihsan Jaya Sdn Bhd & Ors;Koperasi Seri Bukit Cheraka Berhad (Third Party) [2009] 1 CLJ 419

o Legal implication:

Due to the potential significant impact on the Islamic finance industrybecause of the case of Arab Malaysian Finance Bhd v TamanIhsan JayaSdn Bhd & Ors, the Malaysian government took a further step in enhancingthe legal framework by passing the Central Bank of Malaysia Act 2009 (Act701) (“CBA”). Unlike the earlier Act, the CBA inserts a new provision in PartVII which covers matters pertaining to Islamic finance. Part VII, Chapter 1 ofthe CBA aims at resolving issues pertinent to Shari’ah matters (ZulkifliHasan, 2011).

Sections 51to 58 of the CBA further clarify and enhance the Shari’ahgovernance framework for Islamic Financials Intitutions in Malaysia (seeHasan, 2010: 105-108). The CBA provides a clear and precise legalframework for Islamic finance, particularly regarding the legal status ofShari’ah resolution and the Shari’ah Advisory Council (SAC) as the highestauthority on Islamic banking and finance.

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Bank Islam Malaysia Bhd (BIMB) v Azhar bin Osman and other cases [2010] 9MLJ 192

o Facts: Two sets of appeal went to Court Of Appeal. It was decided thatBBA contact was valid and enforceable. The cases were sent back toHigh Court to decide on the quantum of claim and amount due. BIMBwas unsatisfied with the decision and appealed to Court of Appeal

Issue : Whether there is an obligation for the defendant to pay full saleprice stated in the Property Sale Agreement irrespective of a prematuretermination

Decision : Claim to recover full sale price was granted

o Principles : (i)BBA are sale contracts and the court must give full effectto the same

(ii) Ibra’ is applicable in early settlement cases and not in defaultcases

(iii) The bank is allowed to claim balance sale price

(iv) Court should not interfere with the contract if there is no vitiatingfactors to do so

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CONCLUSION

BBA has attracted different and various interpretation of the courts in its

decision which is finally demonstrate the level of understanding of people at

large especially the judges on the subject of BBA as a mode of financing

facility by Islamic bank.

Possibility due to lack of knowledge of the judges and legal counsel

representing the clients on BBA but this various judgments by the Courts is

assisting the development of BBA in the Malaysian legal system.

It is suggested that if BBA is to continue its role as a mode of financing

facility, the modus operandi and the standard operating procedures for the

application and management of BBA should be reviewed by the Islamic

banks or the authority so as to ensure that it is in conformity with the true

essence of Shari’ah principles and the Malaysian legal system as well.

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THANK YOU FOR KIND ATTENTION

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