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BAI BITHAMAN AJIL (BBA)

(1.0) INTRODUCTION
The most popular type of financing by almost every Islamic bank in Malaysia is Bay
Bithaman Ajil. For example, in 1984 Bank Islam Malaysia Berhad, of the total new financing
granted, 77.6% was granted under the principle of BBA and 9.7% under murabahah. Thus BBA
and Murabahah financing constituted 87.3% of total financing granted. In 1997, BIMB used
BBA and Murabahah as its main income-generating products of up to 90.5% of total assets.
Almost the same percentage is also to be found in other banks. The heavy reliance in this type of
financing warrants further focused discussion.
The discussion in this chapter focuses on the concept of BBA, modus operandi of BBA
and legal issues that might arise from its application as well as a study of some of the clauses in
the documentation of the BBA contract in Malaysia.












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(2.0) DEFINITION
Bai Bithaman Ajil house financing concept was introduced in Malaysia by Bank Islam
Malaysia Berhad upon its establishment in 1984. The product is an alternative to the
conventional housing loan offered by most conventional banks as it is said to be Shariah
compliant and free from the elements of riba, gharar and maysir. Since its introduction, many
views, studies and comments have been made on the concept of the product which is claimed to
be unacceptable by other Muslim countries.

As an alternative product to the conventional housing loan, the BBA house financing
need to be enhanced and stand at par to remain competitive. Over the years, controversial cases
on BBA house financing have emerged and are increasing in numbers. This posed problems to
the consumers, financiers and also the regulators. To overcome this, Musharakah Mutanaqisah
house financing concept was introduced by the Islamic financial institutions. This paper aims to
identify both Islamic concept of house financing and provides insight of the pros and cons.










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(3.0) LEGALITY OF BAI BITHAMAN AJIL
In general, no issue arises from the practice of deferring the payment of sale price. The
legality cast over the sale contract in general is considered sufficient by jurists to allow BBA.
Besides, it is also reported in one Hadith by a Companion Jabir that the Prophet bought a camel
from him outside the city of Madinah whereby the payment was settled later on in Madinah.
Also another Hadith was narrated that the Prophet purchased a quantity of grain from a Jew on
the basis of deferred payment and he pledged his armour by way of security.
The dispute, however, arises from the practice of increasing the price due to the
deferment in the payment. According to the majority of jurists increasing the price in BBA due
to the deferment in payment is allowed. For instance:
Al-Kasani said: The price may be increased based on deferment.
Ibn Abidin said: A price is increased based on deferment.
Ibn Rushd said: The time has been given a share in the price.
Al-Nawawi said: Deferment earns a portion of the price.

All these quotations connote one important principle, the increment of price is allowed in
case of deferment of price in a sale contract. They also uphold that such an increase is
permissible because it is against the commodity and not against money. An increase against
deferred payment is only considered to be amounting to riba where the subject matter is money
on both sides. They, therefore allow a seller to fix two prices of a commodity that is cash price
and credit price and give an option to a buyer to buy a commodity at any of the two prices.




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(4.0) MODUS OPERANDI OF BBA FINANCING IN MALAYSIA
Basically, BBA financing is employed by the bank to provide medium to long term
financing to the clients who intend to acquire the following items:
Houses / shop houses
Land
Motor vehicle
Consumer goods
Shares
Overdraft facility
Education financing package
Personal financing
Other suitable and acceptable goods
It is obvious from the above-mentioned list of probable financing facilities that might be
offered to the customer that in some cases of financing the purpose is to acquire a certain asset
such as buildings, lands and motor vehicles. However, in certain cases of financing the purpose
is to make available to the customer a certain amount of cash. Hence, the two main purposes of
financing intended in the practice of BBA in Malaysia, are to finance the acquisition of an asset
and to provide liquidity. It is within the purview of the second purpose that refinancing has also
utilised the BBA mode of financing as far as the Malaysian practice is concerned.






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2 4 3
1
Figure 1 (BBA Modus Operandi)
Step 1 - Customer identifies the asset to be purchased.
Step 2 Maybank, as agreed by the customer, purchases the qualified asset from the owner.
Step 3 Maybank sells the asset to financing customer.
Step 4 financing customer repays the selling price by the installment per month.








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(5.0) Issues Faced by BBA
(1) Penalty for late payment:
When performing BAL (sale), the seller can take into account different factors, including the
time of payment. However, this can be done only at the time when the sale is taking place and
cannot be extended later in case of default by the buyer (Usmani, 2002, pp. 44-48). However,
even though the penalties should not be there in the Islamic banking system, yet Islamic banks
do charge penalties for the late payments and defaults.
(2) Ghaban-e-Fahish:
Bank has charged excessive price with deception in order to get more profit. This will burdened
the buyers and not aligned with Islamic teaching to ease the public.
(3) Issue of Default:
In the event of default, under a conventional loan, a defaulter has to pay only the loan amount
plus accrued interest and other charges. Moreover, the sum that the borrower has to pay is
limited to the period from the release of the loan until full settlement thereof. Besides that, once
the property is disposed at market value, there is usually little that the customer has to add. On
the contrary, under the BBA scheme, the bank claims the loan amount as well as the profit
margin thereon for the full tenure of the facility. Thus, the bank here claims a profit on the
unexpired tenure as well. Since the customer is to pay the full amount for the full tenure, he
should be allowed to benefit for full tenure as well. Likewise, the profit charged for unearned
tenure is against the principles of BBA, and as such it cannot be considered as actual profit and
claimed under the BBA

(6.0) Vulnerability of the BBA Contract
BBA, in its true sense, is a sale contract and therefore, profit earned from BBA is Halal. The
uniqueness of BBA facility lies in its selling price. This price (i.e. the price of goods sold through

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BBA) is fixed throughout the contract period, and it cannot be changed since the changing of the
price would make the contract null and void (Rosly, 2005, p.122).
In case of conventional banking and finance, interest rate on loans can be adjusted at any time
in line with market forces. This means that when the overall interest rate is rising the borrowers
will pay higher interest rates monthly and when an interest rate is falling, they will pay lower
interest rates on a monthly basis. We see that the loan price is determined by the interest rate
which is further on dictated by the market forces. In other words, the loan price is flexible and
can be adjusted according to the market conditions at any particular time.
However, this is not the case with BBA facility. Here, the price is fixed for the whole duration
of the contract. It cannot be changed, even if the cost of the underlying product has changed. The
price of a product under BBA is set upfront at the beginning of the contract period. This price
consists of the cost of that product bought by a bank and profit margin. The difference between
the original price (i.e. market price) and selling price represents the legitimate profit the bank
earns over the installment period.
(6.0.1) Rising Interest Rate and Inflation
Even though the BBA contract is interest-free', still people will observe its vulnerability in
case of rising and/or falling interest rate. This shows that BBA contacts are somehow linked,
tied, and/or dependent on the movement of interest rate. Here people are going to see what
happens when the interest rate goes up. Let say that a central bank announces an increase in the
interest rate or that the inflation takes place in the economy. Once this happens, the cost of funds
will increase reciprocally. As result, the conventional banks will increase the interest rate on the
loans and by doing so they will protect themselves from the adverse effect of rising interest rate
and/or inflation.
This increase in demand for BBA is something that is desirable. However, it is a difficult
situation for Islamic banks, since they have locked their profit margins already. This means that
Islamic banks lack necessary funds to increase BBA financing. Due to the increase in the interest
rate, the rate on deposits also increases in case of conventional banks. Consequently,
conventional deposits are more attractive to the customers than the Islamic deposits which yield

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relatively less return. To increase the rate of return on new deposits, for Islamic banks, is not a
wise solution. This extra hibah, if given, would cut the profits of the Islamic banks, since they
cannot generate revenue due to the locked-in BBA financing.
Finally, Islamic banks will face a serious problem. In order to generate more deposits they
will have to borrow from inter-bank money market. However, the cost of these funds is higher
than hibah given by Islamic banks.
(6.0.2) Falling Interest Rate
When this happens, people could expect an increase in the borrowing by the household and
business sector. The increase in borrowings will increase the consumption and investment.
Finally, this will lead to the increase in the GOP. When this happens, Islamic banks will again
face some serious problems. This decrease in the interest rate will lead to decline in demand for
BBA financing, since BBA financing would be relatively more expensive option than
conventional loans. Remember that BBA price and therefore, profit margin cannot be changed,
while the interest rate on loans can be either increased or decreased.
On the other side, the fall in the interest rate will cause the interest rate on conventional
deposits to go down. When this happens, the rate of return on Islamic deposit will be relatively
higher than the interest rate on conventional deposits. As a result we would see some of those
conventional deposits being transferred to Islamic banks. A lower demand for BBA facilities
combined with higher supply of Islamic deposits will lead to the excess liquidity. Islamic banks
will be overburdened by deposits that they are unable to invest. Here again we see the
convergence between the Islamic and conventional banks taking place.

Cutting the hibah and dividend rates will increase the profit of Islamic banks. Islamic banks
will gain, while its customers using BBA facilities will lose. They will still have to pay higher
installment and they will not be able to enjoy the decrease in the interest rate. In the short-run,
the profit will remain the same if the option (b) is applied. BBA customers will lose again as
stated above. In the long-run, Islamic banks may lose. If they keep the hibah at the initial level it

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will attract new deposits. Therefore, the supply of Islamic deposits will go up while there will be
a big problem to use BBA for new contracts due to relatively higher cost.

7.0 Views from Major Scholars
Shaykh Ahmad Kutty, Dr. Yusuf AI-Qaradawi and Dr. Monzer Kahf, 5 among other
contemporary scholars, allowed the installment sale. In their views, it is a necessity for the
people and without allowing the installment sale it would put the hardship on them in
performing their everyday life activities, and that is contrary to the Qur'anic verse stating " ...
Allah intends every facility for you He does not want to put you to difficulties ... " (AI-
Qur'an, al-Baqarah: 185). Furthermore, the Holy Quran says: "And strive in His cause as ye
ought to strive (with sincerity and under discipline): He has chosen you and has imposed no
difficulties for you in religion ...












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Conclusion
Based on what we have said so far it can be concluded that BBA as a mode of finance, even
though being allowed by Shariah scholars, is of a questionable validity because of the modus
operandi or mechanism implemented in Malaysian Islamic banks. The extensive use of BBA
contracts and overdependence of Islamic banks on debt-based modes of financing will result in
convergence of Islamic bank into conventional, interest-based, banks. Therefore, its usage (the
way it is practiced in Malaysian banks) as a mode of finance should be minimized as much as
possible, if not eliminated from Islamic banks. By doing so, Islamic banks will move closer to
the real objectives of Shariah (maqiisid al- Shariah).
The real BBA is not taking place nowadays. There are currently no two contracts
implemented when financing through .It is believed Islamic banks need an innovative approach
to the current situation. Without new instruments Islamic banks will face difficulties in
sustaining their growth, development and coping with the increasing competition. The best way
out of the above mentioned problems faced by BBA financing lies in the diversification of the
financing products offered by Islamic banks.










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REFERENCE
Web Site
Othman, R. (2012, January 11). Islamic House Financing : Comparison between Bai' Bithaman Ajil &
Musyarakah Mutanaqisah. Retrieved April 20, 2014, from
http://www.academia.edu/1764915/Islamic_house_financing_Comparison_between_BaiBithamin_Ajil_
BBA_and_Musharakah_Mutanaqisah_MM_



BSN. (2009, July 27). Property Financing via Al-Bai' Bithaman Ajil (BBA) concept . Retrieved April 20,
2014, from http://www.iproperty.com.my/news/994/property-financing-via-al-bai-bithaman-ajil-bba-
concept


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