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Murabahah is an alternative to interest-based financial transactions assumes importance

only when it is transacted on a deferred payment basis.This therefore, calls for a study of
the concept of postponement of payment in Murabahah. The terms of payment in the
classical Murabahah did not necessarily involve credit; they could be either cash or credit.
It may, however be pointed out that the legality of postponement of payment is one of the
general features of lawful sales term Bai Muajjal or Bai Bithaman Ajil (BBA) which
refers to sale of goods or property against deferred payment. Bunched with the
Murabahah, BBA would mean sale with an agreed profit margin over the cost price along
with deferred payment.

The complex type of contractual arrangement could create a number of issues relating to
the sale contract, credit price and legal implications of combining promise and agency with
the actual Murabahah contract. There are about 10 issues and controversies of BBA
contract that have been discussed in the class. Discuss any five (5) of them.



Murabahah means mark up sale. It is a sale contract in which the object of sale is sold at a price
equivalent to the cost price and profit margin. If the cost price equals $300 and the profit margin
equals $100, the murabahah price equals $400. Murabahah nowadays has been associated with
credit sale and this is totally not accurate.

There are two types of murabahah:
Cash murabahah a sale contract where the seller sells a commodity with a price equal to
the cost price and a profit margin. The purchased is settle in cash
Credit murabahah a credit salewith purchases settle by installment payments. The price
is equal to cash murabahah prices but a premium is added over the profit margin to reflect
time value of money. In Malaysia, short term credit murabahah is simply called
murabahah with payment payable lump sum. A long term credit murabahah is known as
al bai bithaman ajil.

BBA contract is a sale contract in which the payment of the price is deferred and payable at a
certain particular time in the future. BBA also referred to as the sale and purchase transaction for
the financing of an asset in a deferred and installment basis with a pre-agreed payment period.
BBA is employed by the bank to provide medium to long term financing to the clients who
intend to acquire following items: houses, land, motor vehicle, consumer good, shares and etc.
two main purpose of financing intended in the practice BBA are to finance the acquisition of an
asset and to provide liquidity.









2

BBA Financing
























1. Sign 2 document simultaneously
In BBA agreement, both party bank and cusomer required to sign Property Purchase
Agreement (PPA) to secure ownership before executing the Property Sale
Agreement(PSA). But the problem is this two agreements is sign simultaneously
between customer and Islamic bank.

This practices is invalid because in contract of exchange(muawadat), the same
individual cannot become an agent or representative of two different parties at the
same time(simultaneously). However, the bank can appoint the customer as its agent
or representative to purchase a house for himself. This act will lead to fraud because
probably the house does not exist and the application of BBA financing is merely to
acquire cash as a debt or loan.


2. The absence of Iwad
Interest is prohibited in Islam because it is seen as an unjustified means of profit and
wealth creation since the exchange of an equivalent for a higher non equivalent does
not require the creditor to hold market and systematic risks as the loans are
collatarized and secured by a third party guarantee. The creditor provides practically
no-value-added service to the debtor. For this reason, the Shariah requires all
legitimate exchange to contain Iwad an equivalent counter. According to Ibn al-
1. Customer identifies the
asset to be acquired
2. Bank purchases the
assets from owner on
cash basis
Bank
Customer
Owner of asset
3. Bank sells the asset to the customer
at a selling price + profit margin
4. The customer
repays the bank by
installments


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Arabi, he said that every increase which is without Iwad or an equal counter value is
riba. Iwad is therefore the basic trait or condition sine qua non of a lawful(halal)
sale. This is because a sale is necessarily an exchange of a value against an equivalent
value. It is mean that the price a consumer pays must be compensated with an
equitable return that he enjoys from the purchase.

Based on BBA transaction, the issue concern here is the availability of iwad(counter
value). According to Rosly, the Quran sanctions that trade (al-bay) because the profit
generated from trading incorporates risk-taking whereas the contractual profit from
loan transaction (riba) is risk free. In furthers, assert that al-bay implies the existence
of iwad required by the Shariah to be lawful profit in Islam. Three elements of iwad
that should exist are risk (ghrum), work, effort(ikhtiyar) and liability(daman). Iwad is
the necessary requirement to be fulfilled in trading as it injects a sense of equity and
justice into a business which makes it moral superior to an interest-bearing system.

There is no risk taking in the current BBA financing and hence does not merit the the
Quranic concept of bay. Daman (liability) should also exist in a trading transaction
whereby the supplier provides guarantees on the good sold. But in the current BBA
financing, customer is forced to face the financial burden of paying for the house
even before it is completed as he engaged in a debt contract with the bank at the
outset. By ignoring the concept of iwad, the BBA contract is not seen as conforming
to the maqasid al-shariah that removes hardship and preventing harm(daf al-darar) in
the economic sphere, thereby leaving the welfare of people unprotected.


3. House made under construction

In BBA financing for house under construction, the property that is transacted is not
in existence yet. This might contradict the ruling on the existence oF subject matter in
a sale contract. If the opinion of the majority of jurist is to be applied, the BBA
facility on property under construction is not allowed.

Even if the opinion of ibn Tamiyyah and Ibn al-Qayyim that allows the selling of
non-existent subject matters is to be followed, one central issue still remains their
opinion in allowing the selling of non-existent subject matter based on the near
certainty of delivery. Hence, they maintain that even though the subject matter does
not exist during the time of conclusion, the contract is still valid provided that the
parties to the contract are confident that the delivery is possible at the future agreed
time. But if take the opinion as a consideration, the new problem will occur when the
delay in delivery and will caused a lot of trouble to the house buyers




4. Beneficial ownership
A contract of sale in Islamic law require


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In BBA, the seller namely the bank is required to hold ownership before any asset
sale is made, so the profit generated from murabahah and BBA is halal as the sale
fulfills the requirement of ownership and by virtue of the asset, he is exposed to
market risk(ghorm). As the seller of the property, the bank is requested by the
shariah to hold ownership of the property and to carry all liabilities arising there from
including defects. But current BBA practices show that the banks acts as merely a
financier not as a seller and exempts itself from all liabilities of ownership. This is of
course ignores the shariah principles of al-ghrum bil ghunm( no reward without risk),
ikhtiyar (value-addition or effort) and al-kharaj bi daman(any benefit must be
accompanied with liability there by rendering the BBA profit to be implicated with
riba.


5. Delay and Delinquencies

For house pending completion or delay, where the transaction involves the
application, normally the purchaser or borrower may pay some portion of the price as
deposit. However, on payment of the deposit and on the execution of the sale and
purchase agreement with the developer, the purchaser applies for a housing
loan(BBA) from an Islamic bank to finance the balance purchase price and this will
effect by PPA and PSA as well a other document.

In issue relate to house pending completion, the issue of ownership of the purported
uncompleted house is still unresolved. In other words, the ownership is not a full
(milk ghair al-tam) and unconditional ownership but an incomplete ownership
(equitable or beneficial ownership). Incomplete ownership would not give any
absolute power or authority to the purchaser or borrower to sell the purported house
to Islamic bank even though his ownership of the house is still incomplete in order to
get the housing loan from Islamic bank, on the condition that the actual owner has
agreed to such an undertaking. This is not acceptable in Islamic law as the ownership
of the purchaser over the house is still incomplete which can justify the selling of the
house by the purchaser to the bank and for the bank to re-sell the house to purchaser.











Question 2 (25 marks)

Compare and Contrast between Bai Al-Inah and Bai Al-Tawarruq.


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Bai inah

Inah is the sale of an item at profit on deferred payment for its subsequent buyback by the
original. Bai inah also refer to trading whereby the seller sells his assets to the buyer at an agreed
selling price to be paid by the buyer at a later date. After that , the buyer immediately sells back
the assets to the seller at a cash price lower than the agreed sellind price.

The majority of Islamic jurisy state that there are three forms of trading categorized as bai inah
whereby it can be concluded that all the assets sold come from the financier. The financier will
sell a product to the buyer at an agreed price to be paid later. The financier then immediately
buys back the asset at a cash price lower than the deferred selling price.

Majority of the opinion said that bai inah was not permissible because it was the zariah(way) or
hilah(legal excuse) to legitimate riba. The hanafi mazhab was of the oopinion that bai inah was
permissible only if it involves a third party which act as an intermediary between the seller and
buyer. The Maliki and Hanbali mazhab was rejected bai inah and considered it valid. This
opinion is based on the opinion sad zariah that is aimed at preventing practices that could lead to
forbidden acts in like riba.


Bai tawarruq

Tawarruq means selling something on deferred basis and then buying it back in cash at a lower
prices than the deferred price. For example someone sells his commodity at a price that is
already known to be paid by the deferred payment. He then buys it at a lesser price than the
deferred price, it is known because of obtaining the money for sahib al-inah because al-ain is the
present property from the money.

Tawarruq technically is the purchasing of a commodity on credit by the mutawarriq and selling it
to a person other than the initially sell for a lower price on cash. Actually tawarruq is a sale
contract whereby a buyer buys an asset from a seller on deferred payment and subsequently sells
the assets to the third party for cash with a price lesser than the deferred price. This transaction
calls tawarruq because when the buyer purchases the asset on deferred terms, it is not the buyers
intention to utilize the benefit from the purchased asset rather to facilitate him to attain liquidity.

There have three forms of tawarruq :
- The person in need of cash purchases a commodity on credit and sells it to another for
cash without any party being aware of his need or intention.
- The person in need requests for a loan from a trader who excuses himself from lending to
him but is willing to sell a commodity to him on credit for its cash price. The mutawarriq
then sells it at any possible price be it more than the purchase price or less.
- The third form is similar to the second except that the trader sells the commodity to the
mutawarriq for a price higher than its market value against the delay in payment.



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Difference between Tawarruq an Inah


Tawarruq






Bay inah

















The different between tawarruq and inah is that in inah, one who requires liquidity purchases an
asset from a seller on credit thereafter sells it on cash basis at a price lower than the purchase
price to the seller himself. Tawarruq in the other hand, indicates an instance where a personwho
needs liquidity purchases an asset from somenone on credit and thereafter sells it usually for a
lower price to aperson other than the original seller that is to a third party.

For bay inah transaction, the term inah used because the particular asset purchased had found its
way back to the original seller and according to some jurist, this fact strongly indicates that the
Bank
Customer
1
2
3
4
1. Sold on deferred
payment at agreed
price
2. customer pays
cost +markup on
deferred term
4. bank pay spot
price for the assets.
Customer get cash
3. resell the asset to
bank


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asset had been utilized merely as a hibah or legal strategy for earning riba on the basis of which
the ruled the transaction prohibited. Different for tawarruq transaction, because it involves three
party and not buy back to same person, so the structure does not give ready indication of a hilah
adopted solely for circumventing riba. Since the asset in this case does not return to the original
vendor and is sold to a thir party, many have regarded the structure valid and acceptable.

Although bai inah is accepted in Malaysia, but it has not been accepted as shariah compliant
financing instrument in middle east as it is considered a legal fiction in that there is a buy back of
the goods on the part of seller therefore the sale and purchase transaction is merely to create a
debt obligation which is no different from or tends to lead to riba. But for tawarruq transaction,
its acceptable both in Malaysia and the Middle East.
However, the Fiqh Academy of the Organisation of Islamic Conference ("OIC Fiqh Academy"),
has, by its Resolution No. 179 (19/5) at its 19
th
Session held on 26-30 April 2009, held that
although classical tawarruq is permissible (so long as it complies with the requirements of sale
transactions), organised tawarruq and reverse tawarruq are not permissible.




















Question 3 (25 marks)

Bank B offers Islamic Banking services to its customers. One of the services it offers is its
Islamic Investment Account. The bank refers to you to certify that its practices in the
Islamic Investment Account are Shariah compliant. The practice is as follow:

1. The bank guarantees that whatever happens the capital invested by the customer will
be refunded in full.



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It is not shariah compliant because in mudharabah transaction, the profit and loss should be
bear by both party or by the capital provider and it not a loan transaction to guarantee the
loss. The current practice in Malaysia is to use partnership (mudarabah) as the underlying
contract in the Islamic investment account. Mudarabah is a contract of profit sharing
whereby the customer is the investor / capital provider and the bank is manager. The
customer and the bank will be sharing the profit according to certain ratio or percentage
agreed at the time of the contract. The financial loss, if any, will be borne by the customer as
capital provider.

In Malaysia, the practice is to have two types of Islamic investment account, the General
Investment Account (GIA), and the Special Investment Account (SIA). In GIA, the
mudarabah arrangement is of a general mandate (mudarabah mutlaqah) and the ratio of
profit sharing is more or less uniform / standard, advertised as a ready package between the
bank and the customer. In GIA, the minimum investment amount is lower than the SIA. In
SIA, the mudarabah arrangement is of a specific mandate (mudarabah muqayyadah), for
e.g., the customer can place restrictions to the bank as to the type of dealing, or project that
the bank can enter into with the capital. The ratio of profit sharing can be negotiated
between the customer and the bank. The minimum investment amount is higher than the
GIA.

The loss of the agent(mudharib) is by way of expended time and effort for which he will not
be given any remuneration. There is no restriction on the number of persons giving funds for
business or nay restriction on the working partners. Any ambiguity or ignorance regarding
capital or ratio of profit makes the contract invalid. If a mudharabah contract becomes
invalid for any reason the mudharib will be working for the necessary period as wage-earner
and will get ujratul-mithl(fair pay) for his job. He will not be given any share of the profit.

Loss if any, has to be borne by the financier. Loss means erosion of capital and no profit can
be recognized or claimed unless the capital of mudharabah is maintained intact. The
distribution of profit depends on the final result of the operations at the time of physical or
constructive liquidation of the mudharabah. Reserves can be compensated by the profit of
the future operation of the joint business or the reserves created in the past. If loss has
occurred in some transactions and profit has been realized in some others, the profit can be
used to offset the loss at the first instance then the remainder if ant shall be distributed
between the parties according to the agreed ratio.

2. The bank indicates a rate of potential profit based on its previous track record, but
clearly states that it is only an indicative rate and may change according to actual
profit made.

Yes, it is Shariah compliant because the indicative rate it just only the benchmark, not a real
use rate in the transaction.
In order to attract public attention to invest in one of these investment accounts, Islamic
banks will make known their indicative rate of return. The public must not be confused with


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the rate and misjudged it as similar as the conventional interest rate(which is fixed from the
beginning).

The rate is only analytical and prediction based which is normally in accordance to the
banks previous performance. Hence, the bank is not obligated to pay out the profit based on
the indicative rate but the effective rate or the actual rate of return at time of maturity of the
bank will conclude the actual amount of the profit which will be distributed to the investors.
The indicative rate is dissimilar to interest rate as conventional bank is obliged to pay out
exactly as advertised(whether the bank makes profit or not it make no difference) and all
money which is placed in the conventional accounts are based on loans whereas funds
which are put into an Islamic account are based on the mudharabah investment contract
which is approved by Shariah. No actual profit rate can be determined upfront otherwise it
will be considered as riba.

An indicative rate was introduce as an indicator to investors and depositors who want to
invest or deposit their money in Islamic banking institution. The indicative rate uses profit
rate declared by every Islamic banking institution for assets they hold aas the basis of
computation. In mudharabah contract, the actual profits distributed will only be known after
the contract has matured based on a pr-agreed profit sharing. In the context of Islamic
banking in Malaysia, generally most of the investment portfolios are in the form of fixed
return such as financing based on bai bithaman ajil concept and investment in securities
based on bay dayn concept.

The council in its 9
th
meeting held on 25
th
February 1999 resolved that the use of indicative
profit rate in mudharabah contract in Islamic banking is permissible subject to the following
conditions:
1. The Islamic banking indicative profit rate is only regarded as a reference of the expected
return that would be received.
2. If the actual profit rate received by Islamic banking at the time the contract mature is
different from the indicative profit rate agreed at the inception of the contract the profit
rate paid to the investor must be based on the actual profit rate.




3. The bank caused an advertisement to be put at the banks windows saying: Open an
investment account with us and get a free Nokia 8210.

Yes,it is shariah compliant. The bank who provide investment account can put
advertisement to their customer in order to attract interest from the public. But if in amanah
contract like qard, bank cannot give advertisement to the customer with clear ways or not.






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4. The bank also refuses investment from certain individuals and companies whose
income is questionable.

Yes, it is shariah compliant because the bank must make sure all their source of fund is clear
from prohibited elements.

The value of money and property determined from how they get in and how they expense it.
It is become prohibited from the hukmi not hissi. The haram elements not transferred to
another part.

Resolution from Shariah Advisory Council Bank Negara Malaysia:
SAC at the meeting datet 27 April 2006 has been decide that Islamic financial institution are
allowed to accept applications without need to investigate wether the customer is legitimate
source of funda, illegal or mixed with the lawful and lawful sources.
Although there are no restrictions for financial institutions to establish internal screening to
ensure that funding receives is based on Shariah.
















Question 4 (25 marks)

There are several natures of risks in the case of Ijarah practicing in Islamic Banks. The
natures of risk are as follows:


i. The bank has purchased the asset as per the undertaking by the customer, but the
latter refuses to take the asset on lease.

A binding promise to lease should be obtained drom the customer at the time of booking
or purchase the asset by the bank. Hamish Jidduyah also should be taken from the client.


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The bank can sell the asset in the open market and the actual loss can be recovered from
the Hamish Jiddiyah.

The transfer of ownership in all the above forms should be independent of the ijarah
contract and not an integral part of the transaction as a whole. The promise should be
unilateral and binding on the promisor and the other party must have the option not to
proceed. A new contract should be drawn up because ownership will not transfer merely
by virtue of the earlier promise. In ijarah transaction has separate documentation giving
the assets as gift contigent upo the condition that the remaining installments are paid, th
ownership will be transferred to the lessee if the condition is fulfilled without any other
document being singed.


ii. The customer may default in payment of the due rental. The bank might not be able
to recover even its investment; the asset is taken back, but it does not cover the loss.


An undertaking should be obtained from the customer to pay a certain amount to charity in
the case of late payment of rental. This amount will go to the charity account. Any actual
loss can be recovered from Hamisah Jiddiyah. Securitization or collateral can also be
realized.


Rental in respect of any lease contract when it becomes due takes the form of a debt
payable by the lessee. It will be subject to all rules prescribed for a debt. Therefore, a
charge from the lessee on the agreed rental would be riba prohibited by the shariah and
this could exploit this aspect and cause loss to the lessor by willful default. To provide a
deterrent, Shariah scholar allow that a donation or nay amount of penalty payable to
charity can be provided in the lease agreement, the amount of donation can vary according
to the period of default and can be calculated on a percentage per annum basis. Any
amount charged over and above the agreed rental must not become a part of the income of
the lessor and has to be given to charity. As this late payment penalty cannot become part
of the income of lessor banks, it is advisable that a suitable clause be incorporated in the
lease agreement to the effect that in cases of willful default, the bank will take possession
of the leased asset or enforce the collateral to recover its dues.



iii. Asset risk of major maintenance/destruction.

This risk can be managed through a takaful facility. Ijarah financing are subject to risks
related to real market risks arising from potential changes in asset pricing and in
maintenance and insurance or takaful costs and to the ability and desirability of the
lessess to pay the rental installments. In the case of total destruction of the asset, the
customer or sukuk holders will suffer the loss to the extent of their pro rata ownership.
Hence, ijarah sukuk may generate a quasi-fixed return since there might be default or
some unexpected expenses that could not be envisaged in advance. As such, the amount of


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rent given in the contractual relationship represented by ijarah sukuk represents a
maximum return subject to deduction on account of unexpected expenses.

The primary issue in this problem is regard in determining the effects of loss or damage
To the asset. It is usually stipulated in the agreement that the lessee will be provided with
a copy of the policy and he will observe the conditions of the policy. If the asset is
destroyed and there is a lack observance of the conditions of the takaful policy that has
barred the lessor from recovery, the lessee is held liable. If the claim paid by the takaful
company is less than the loss incurred by the Islamic bank, the remainder of the loss
cannot be charged to the lessee and the bank itself should bear the loss.


iv. The lessee may use the asset carelessly, requiring the bank to bear major
maintenance expenditure.

A trust receipt should be obtained from the customer to bind him to use the asset as a
trustee. It may be mentioned in the trust receipt that loss due to negligence of the customer
shall be borne by the customer himself.
If the leased asset is damaged to the extent that it is no more able to give usufruct, the
contract of ijarah is terminated. Similarly in the case of an impediment to achieving the
normally expected objective of the contract, the lessee can terminate the contract. In this
situation, the parties may adjust the rental to avoid injustice to the lessee, keeping in mind
the partial damage to the asset and possibility of beneficial use. If an unidentified unit of
asset is leased, the contract will not terminate and the lessor will be required to replace it
with another asset of the agreed specifications.

If the leased asset is totally destroyed, the ijarah contract concluded on a identified asset is
terminated. The leased asset is held by the lessess in a fiduciary capacity on behalf of the
lessor , he will be held liable for any damage or destruction of the leased asset due to
misconduct or negligence.

v. Sale of asset at maturity the customer may not buy.

Only those assets should be leased that have sufficient resale value that the bank could sell
them in the market. Alternatively, a separate promise to purchase at the end of the lease
term can be obtained from the customer. The client can conveys his requirement and
enters into MOU for stipulating the overall structure of the deal. The bank can takes an
undertaking from the lessee along with some earnest money(Hamish Jiddiyah) to ensure
that the client is serious in his dealing and will take the asset on lesser when purchased by
the bank.








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