THE ISSUE AND DELIMMA OF THE BAI BITHAMAN AJIL CONTRACT AS MODE OF ISLAMIC FINANCE

8/10/2019 THE ISSUE AND DELIMMA OF THE BAI BITHAMAN AJIL CONTRACT AS MODE OF ISLAMIC FINANCE

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ADVANCE FIQH MUAMALAT (IFE705)

THE ISSUE AND DELIMMA OF THE BAI BITHAMAN AJIL CONTRACTAS 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 TOSHARIAH PRINCIPLES;

(III) AT LEAST 5 PREVIOUS CASES WITH ITS ISSUES (OF THECASES) AND DECISION MADE BY THE COURT

PROVIDE YOUR OWN CRITICAL EVALUATION TO THE DECISIONS

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CONTENTS1. INTRODUCTION

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

SUNNAH OF RASULULLAH SAW3. 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 THEDECISIONS OF THE COURTS CASES 2


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INTRODUCTION Al Bai Bithaman Ajil (BBA)

(i) Literally means to make something into a known portion orpieces .

(ii) Technically, meansto defer the payment into several portions for adifferent 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 ispayable 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 towardsthe 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 requestedby 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 agreedby both parties and will remain unchanged until the end of the

payment period. The ownership of the property purchased will beunder the claim of the financier and will be handed over to thecustomer upon full payment. .

INTRODUCTION

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AL -QURAN :

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

And Allah has permitted trade and forbidden riba .

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 SAWbought a camel from him outside the city of Madinah whereby the payment wassettled later on in Madinah.

(b) In another Hadith, it was narrated by Aisha RA that the Rasulullah SAW boughta meal from one Jew with deferred payment, and Rasulullah SAW mortgagedhis iron shirt which is made from iron.

LEGAL EVIDENCE OF AL-BAI BITHAMAN AJILFROM 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 makethe full payment of the purchase price of the purchased goodsupfront so as to reduce the hardship and burden for the purchaserin providing the full payment of purchase price to purchase thegoods;

(ii) attracting potential purchaser by offering payment by way of creditfor the purchaser to purchase the goods for the immediate usageand make payment on affordable installment over an agreedperiod of payment which eventually lead to interest free sale

transaction; and

(iii) providing flexible modes of payment as under BBA, the deferredpurchase price would be settled by the purchaser through variousmodes of agreed installment payment between the seller and thepurchaser and thus, leads to smooth business transactionbetween 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 sellerand the purchaser, lawful and permissible or halal under Shariah, the seller is the owner of the subject matter and the subject mattercould be delivered to the purchaser which include the transfer ofownership; (BBA is subjected to the condition for transaction for non-ribawi items only. If involve ribawi items, the ribawi items have to beof 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 anddefinite language to be made in one session.

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CONCEPTUAL MODEL OFAL-BAI BITHAMAN AJIL

BBA is a sale of good with deferred payment at agreed selling price agreed by theseller and the purchaser.

Under BBA the goods is delivered by the seller to the purchaser on the spot. Thepayment of the purchase price by the purchaser to the seller is on deferred paymentor 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 itwas agreed between the seller and the purchaser. Thus, it does not involve anyattachment of interest or riba as in the conventional deferred installment paymentfor 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


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AL-BAI BITHAMAN AJIL AS A FINANCIAL FACILITY PRACTICE BYISLAMIC 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 theamount of financial facility required by the purchaser.

(b) The Property Sale Agreement (PSA), the customer undertake andguarantee to re purchase of the financed property for the Islamic bank atthe agreed selling price between the Islamic bank and the purchaser.

(c) Some other important documents to be executed by the purchaser for theIslamic would be the security documents for securing the installmentpayment 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 thepurchaser in favour of the Islamic bank, for the property under mastertitle 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


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AL-BAI BITHAMAN AJIL AS A FINANCIAL FACILITYPRACTICE BY ISLAMIC BANK IN MALAYSIA.

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THE LEGAL ISSUES OF AL-BAI BITHAMAN AJIL UNDERTHE 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 AdnanIssue : What is the amount to be paid? RM583,000.00 or RM265,000.00Decision : 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 Islamic

banks right over the default payment and not Shariah courts.(ii) Decision was based on the contractual relationship and agreement by

both 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 suchrepayment of the purchase price has occurred in April 1985? 11


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

Facts : Dato Nik obtained financing from BIMB by executing PPA, PSA andcharged 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 of

the 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 wasabandoned?

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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 atthat time for the sum of RM 346,000. Then, Zulkifli resigned and at his request, theBBA was restructured. Under the revised BBA the banks selling price of the housewas 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 theunexpired 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, asto 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/Bdefaulted in the payment of the bank selling price and AMFB applied foran order for the sale of property.

Issue : Tmn. Ihsan S/B argued the letter of offer, PPA, PSA and thecharge or assignment is financing in nature and not in accordance toShariah and involved riba . Decision : Court ordered sale by public auction of the chargedproperties .Principles : (i)T he claim price by the bank of the property must closeto the market price and cannot be more than that.

(ii) The BBA practice is not in line with the Islamic Banking Act 1983 orthe Banking and Financial Institutions Act 1989. The Sale

Agreement was therefore void. The bank cannot claim the sellingprice but only the balance of the selling price. 14


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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 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 Part

VII which covers matters pertaining to Islamic finance. Part VII, Chapter 1 ofthe CBA aims at resolving issues pertinent to Shariah matters (ZulkifliHasan, 2011).

Sections 51to 58 of the CBA further clarify and enhance the Shariah governance 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 ofShariah resolution and the Shariah 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 that

BBA 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 AppealIssue : Whether there is an obligation for the defendant to pay full saleprice stated in the Property Sale Agreement irrespective of a prematureterminationDecision : 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 default

cases(iii) The bank is allowed to claim balance sale price(iv) Court should not interfere with the contract if there is no vitiating

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CONCLUSION

BBA has attracted different and various interpretation of the courts in itsdecision which is finally demonstrate the level of understanding of people atlarge especially the judges on the subject of BBA as a mode of financingfacility by Islamic bank.

Possibility due to lack of knowledge of the judges and legal counselrepresenting 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 financingfacility, the modus operandi and the standard operating procedures for theapplication and management of BBA should be reviewed by the Islamicbanks or the authority so as to ensure that it is in conformity with the trueessence of Shariah principles and the Malaysian legal system as well.

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THANK YOU FOR KIND ATTENTION

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THE ISSUE AND DELIMMA OF THE BAI BITHAMAN AJIL CONTRACT AS MODE OF ISLAMIC FINANCE

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