Although the validity of the Al-Bai’ Bithaman Ajil Islamic (BBA) contract is no longer in question in Malaysia, the syariah interpretations of the Islamic finance tool is still being debated. The differing views, however, can only lead to further innovation of Islamic finance products.

To recap, in two rulings last week, the Court of Appeal overturned a High Court ruling that the BBA contract and a similar Islamic finance tool — the Bai al-Ina — were not syariah-compliant. The main point of contention in the previous rulings had been that the profit element of the BBA and the Bai al-Ina amounted to usury, which is prohibited in Islam. Banks involved in the cases were Bank Islam Malaysia Bhd, Arab-Malaysian Finance Bhd and Bank Kerjasama Rakyat Malaysia Bhd.

BBA is a contract of sale and purchase of an asset, in which the payment price is deferred and paid in instalments within an agreed period of time. The sale price includes a profit margin. The structure is used in Malaysia largely for home financing. The Bai al-Ina, meanwhile, is a contract where a financier sells an asset to a customer on a deferred payment, after which the financier immediately repurchases the asset for cash at a discount.

According to Bank Negara Malaysia, BBA contracts at Islamic banks here totalled RM35.33 billion as of February 2009 compared with RM27.57 billion a year earlier.

The dispute over the validity of BBA contracts arose last year, when High Court Judge Datuk Abdul Wahab Patail, in a collective agreement for 11 cases involving Bank Islam Malaysia and Arab-Malaysian Finance as plaintiffs, ruled that the sale element in BBA was “not a bona fide sale”. Abdul Wahab viewed the contract as a financing transaction instead of a sale, with the profit charged by the banks seen as contrary to syariah law as it resembled interest payments too closely.

Abdul Wahab ruled that since some BBA contracts in the cases heard were structurally faulty, defaulters would not need to pay more than the original financing amount they had received. This would have denied the banks the profit portion of the transactions. The latest ruling, however, enables banks to realise profits from the sale transactions.

Although most Islamic bankers here had expected the rulings to be overturned, these cases highlight the differing schools of thought on syariah teaching.

Dr Humayon Dar, CEO of syariah-advisory services provider BMB Islamic UK Ltd and member of the syariah board at Hong Leong Islamic Bank Bhd and Hong Leong Tokio Marine Takaful Bhd, tells The Edge: “When as a syariah adviser I started looking into BBA-based Malaysian Islamic financial products, like home finance and personal finance, I had no problems in identifying the Bai al-Ina structure hidden in BBA.

“While acceptable to a select group of Malaysian Shafi’ite scholars, the vast majority of scholars from all corners of the world view Bai al-Ina as a contract that is not entirely in the spirit of Islamic prohibition of interest. The way Bai al-Ina is conducted is only marginally different from interest-based transactions. Having said that, Bai al-Ina has played a constructive role in the development of Malaysian Islamic financial markets.”

Meanwhile, the head of CIMB Islamic Bank Bhd, Badlisyah Abd Ghani, says one cannot say one interpretation of a syariah-based concept is right while another is wrong. “In Islam itself, we have different schools of jurisprudence, such as Hanbali, Maliki and Shafi’i. The differences are limited, but as long as interpretations are based on syariah, they are valid and enforceable,” he explains.

While the previous ruling on BBA contracts had little impact, with CIMB Islamic Bank choosing to continue to offer its BBA products and proceed with business as usual, the new ruling has brought certainty back to the market, Badlisyah tells The Edge.
Although most Islamic banks here are still sticking to the BBA concept, RHB Islamic Bank Bhd has been phasing out products and services based on BBA and Bai al-Ina since last year in an effort to adopt “globally accepted syariah principles”.

BMB Islamic’s Humayon says BBA is practised only in Southeast Asia — Malaysia, Indonesia and Brunei. “Elsewhere in the Islamic world, another contract called Tawarruq is practised. Many Malaysians consider Tawarruq an inefficient form of Bai al-Ina as it attempts to replicate the latter by incurring more transaction costs,” he says. Tawarruq is where the bank sells commodities to the customer on deferred payments at cost plus profit. The customer then sells the commodities to a third party on a spot basis and gets instant cash.

Bank Negara itself has not asked the Islamic banks here to discontinue the use of the BBA and Bai al-Ina structures. It is understood, however, that the central bank has told the Islamic banking players here to expand the utilisation of other principles to offer a variety of Islamic finance products.

As CIMB Islamic’s Badlisyah puts it, syariah is rich enough to facilitate the innovation of Islamic finance products. With the argument on the validity of BBA over, the local Islamic banking fraternity can now focus on creating sophisticated products to cement its position as a global Islamic finance hub.



This article appeared in the Corporate page, The Edge Malaysia, Issue 750, April 13-19, 2009.