UNIVERSITI TEKNOLOGI MARA

CAWANGAN JOHOR KAMPUS SEGAMAT

FACULTY OF BUSINESS MANAGEMENT

ISB 655
ISLAMIC BANKING AND
FINANCIAL SERVICES

BAY’ BITHAMAN AJIL (BBA)

PREPARED FOR:
Miss Mardziyana Mohamad Malom
ISB655 Lecturer
Class of BMB5P1

PREPARED BY:
Nur Razilah Bt Juhari
Nor Suriani Bt Abd Manan
Nur Asikin Bt Aziz @ Abd Aziz
BAY’ BITHAMAN AJIL (BBA)
Legal Documentation
CONTENTS
 Introduction
 Definition
 Legality of BBA
 Concept of BBA
 Tenets of BBA
 Scope of financing
 Objectives of BBA
 Modus Operandi
 Legal Documentation
 Application in BBA
 BBA vs Murabahah
 Issues on BBA
 Conclusion
Introduction
 BBA is the predominant concept for Islamic home financing
currently in Malaysia
 BBA has been practiced by almost all financial institutions in this
country since it was implemented by BIMB in 1983
 BBA practiced in Malaysia is seen not to be in compliant with the
Shariah principle as the bank does not take the risk of ownership
and liability on the property
 BBA is not acceptable by international scholars
 There are many issues regarding BBA includes the declaration of
High Court concerning the BBA financing contract is null and void
 However, on Mac 2009, Court of Appeal have announced the BBA
contract is valid and binding
 Definition

BBA is a sale contract in which the

payment of the price payable at a certain
particular time in the future
Legality of BBA
 O you who believe! Whenever you give or take credit for a stated
term, set it down in writing (Al-Baqarah 2: 282)

 O you who believe! Eat not up your property among yourselves in

vanities; not even by way of trade based in mutual consent (An-
Nisaa’ 4:29)

 It was reported that the prophet S.A.W had bought some food from
a Jew on a credit basis (with a delayed payment) and he S.A.W
pledged to him his steel armour. The legality of Buy’ Nasiah (BBA)
in this hadith indicates the legality of Buy’ Taqsit( sale through
installment payment) since this type of sale actually a sale with
deferred payment of the price. The main objective is to settle the
payment through several different installments with a specified
period of time. There is no difference in the Islamic ruling whether
it is made through one lump sum in the future or spread over
different period of time
Concept of BBA
• Buy’ bithaman Ajil (BBA), refer to sale of goods with
deferred payment
• It is a contract of deferred payment sale, at agreed
selling price which includes a profit margin agreed by
both parties
• Profits in this context is justified since it is derived
from the buying & selling transaction as opposed to
interest accruing from the principal lent out
• Also define as sell a property with a prompt delivery of
sold items to the purchaser while the payments is
postponed until a specified date in future
• Also called as Buy’ Bit Taqsit and Buy’ Muajjal
 Tenets of BBA
Tenet
 Buyer and seller
 Subject matter
 Price
 Aqad - ijab & qabul
Conditions
Sound mind
Attains the age of puberty
Intelligent
Exist at the time of transaction
Bank is owner of subject matter
Lawful and have value
Should able to delivered to buyer
 known by both parties
Known by both the seller and buyer
Specified the type of currency
Absolute, definite and decisive
language
Qabul must agree with the ijab
Ijab & qabul made one session
 Scope of financing
 Land or property financing
 houses, factory, land
 Vehicle financing
 Car, motorcycle
 Consumer financing
 computer, umrah, education, personal financing
 Refinancing asset
 working capital and renovation
 Objective of BBA
 To provide financing for potential buyers – enable
to fulfill responsibility without hardship.
 Aimed at permitting individual to acquire asset
without involve any interest.
 To smooth the progress of transaction.
Modus Operandi
BBA Home financing

3
ABC Islamic
Bank

4
ABC Islamic Bank Customer
1

Housing Developer
Modus Operandi
 STEP 1 Customer identifies the assets to be
purchased
 STEP 2 ABC Islamic bank, as agreed by the
customer, purchases the qualified
asset from the owner
 STEP 3 ABC Islamic Bank sells the asset to
financing customer
 STEP 4 Financing customer repays the
selling price by installment per
month
Legal Documentation
 Sale & Purchase Agreement (SPA)
 It is not part of documentation for the facility applied by client
 It is compulsory to customer signing the SPA as the customer must provide the bank with
this agreement before the application for financing can proceed
 the customer paying 10 per cent of the price & acquired the beneficial ownership of the
house
 Property Purchase Agreement (PPA)
 Agreement between customer and bank
 The customer apply to the Bank for a financing & Bank approve the application &
through the Customer’s request Bank will purchases the Customer’s Property at the
purchase price
 Customer shall take Takaful Mortgage Plan for the amount accepted by the bank
 The customer shall indemnify the bank against all loses, pay all charges, and other costs in connection of
PPA
Legal Documentation
 Property Sale Agreement (PSA)
 agreement between bank and customer which bank reselling the asset to the customer
upon deferred payment includes profit margin
 The PSA shall be signed after the signing of the PPA so as to allow the Bank to sell back
the asset to the customer
 Charge Document or Deed of Assignment
 agreement between the bank & customer whereby the latter agrees to assign all his right
and interest over the property to the former as security for the financing granted
 Charge document (issued IDT) & Deed of Assignment (IDT yet to be issued)
 Issued when Option of Defect (khiyar al-ayb) take place
 Property
Developer
5
Customer purchased asset
2 & signed SPA & paid down payment

1 Identify asset 6
Customer pays
by installment

Bank sells right of asset

to the customer at
agreed sale price (plus bank’s
profit margin) on deferred payment.
customer & bank will sign the PSA
3 4
Need financing – Bank will buy
asset based on original SPA
signed by customer & developer
using PPA. Right on asset transfer
to bank
Calculation on BBA
 Echa is planning to purchase a new single story house at
Parit Raja, Batu Pahat from a housing developer valued
RM150 000. She has two options under the concept BBA
home financing for 25 years:
i. 123 Islamic Bank charge fixed profit rate at 8% for the
entire period of financing
ii. ABC Islamic Bank’s profit rate charge is:
Tenor Profit Rate charged
1st year 2.5%
2nd year 3.5%
3rd year 6.5%
4th year – 25 years 8.25%
Calculation on BBA
i. 123 Islamic Bank charge fixed profit rate at 8% for the entire
period of financing (annuity factor for constant rate of return of
25 years at 8% is calculated at 0.007718161)
Annuity Factor i ( 1 + i)ⁿ i = 8/(100 * 12) = 0.006667
(AF) (1+i)ⁿ - 1 n = 300 installments

Monthly installment = Fin. Amount x AF

= 150 000 x 0.007718161
= 1 157.72
Selling Price = Monthly installment x fin. Tenor
= 1 157.72 x (25 x 12)
= 1 157.72 x 300
= 347 316.00
 Calculation on BBA
ii. ABC Islamic Bank
Tenor months Rate Annuity Monthly Selling Price
Profit Factor Payment
1st year 12 2.5% 0.0044861673 672.93 8 075.16
2nd year 12 3.5% 0.0050062357 750.94 9 011.28
3rd year 12 6.5% 0.0067520716 1 012.81 12 153.72
4th year – 25 264 8.25% 0.0078845014 1 182.68 312 227.52
years
300 Total Selling 341 467.68
Price
Why BBA?
Application on BBA
BIMB purchases the house at RM158 000
and pays the housing developer
2a
BAN I ISLAM BIMB sells the house to the customer at
RM200 000
3
2b
Customer repays RM200 000 by equal or
4
monthly installments

Payment to Customer
Housing Developer identifies a
RM158 000 house to be
(BIMB’s purchase purchased
price) (signs SPA)

Baiti Home Financing Scheme

Application on BBA
BIMB purchases the house at RM100 000
1
BIMB sells the house to the customer at
BAN I ISLAM RM130 000
2
3 Bank pays RM100 000 to the customer

Customer repays the selling price by

4
installments
Customer
Asset owned
by the customer
Types of asset acceptable:
1. House/ Shop-house
2. Land
3. Vehicle
4. Halal shares (quoted on Bursa Malaysia)
5. Halal unit trusts

Asset

Asset Refinancing
 BBA vs Murabahah
Aspect
Types & Purpose
Existence of Goods at POS
Average Period of Financing
Asset Measurement
Early Settlement
BBA
Acquisition & refinancing
Property. Cost disclosure.
Most goods exist except Property
Financing
Long Term
Market value
Majority (79%) requires full
settlement with rebate
Murabahah
Acquisition & refinancing
working capital & trade.
Most goods exist
Short term
Mark-up value
Majority (69%) requires full
settlement with rebate
 Issues on BBA
 Balance for early settlement is high
 High compared to conventional loan
 High amount being a burden to customer
 E.g.: Anisah buy a house for RM200 000. She has paid 10% down payment, RM20
000. The balance RM180 000 was financed by BBA. Annual profit rate is 10% and
period financing is 20 years

BBA Financing Conventional Loan

AF i ( 1 + i)ⁿ = 0.009649951434 Balance after 10years calculate based on
(1+i)ⁿ - 1 present value
Periodic Payment = AF x Purchase P.
= RM1737.04 = RM131 443.76*

Sale Price = RM416 889.35 *bank do not charge interest for the balance 10years

Balance after 10y = RM208 444.80

Issues on BBA
 Bank holds no such liability
 The Khiyar al-’Ayb or the option of defect is a legal right to customer to rescind the
BBA contract when a defect on the goods sold if found
 Customer may claim for defect and proceed the contract, or cancel the contract
 Based on the given rules on Khiyar ‘Ayb, it is apparent that an Islamic bank as a
selling party must hold all liability arising from all defective goods sold
 Practically, the PSA has already excluded all the liabilities on the part of the bank
(pg. 111)
 Bank has transfer relatively all the risks and liabilities to the customer thereby
leaving it
Issues on BBA
 BBA Financing: Selling of the non-existent
 BBA financing in Malaysia is applied over property under construction &
completed property
 Financing for house under construction is not allowed since the subject matter is not
existent (majority of jurist)
 Ibn Taymiyyah & Ibn al-Qayyim allowing the selling of non-existent subject matter,
provided that the parties to the contract are confident that the delivery is possible at
the future agreed time
 Will the application of BBA financing in Malaysia pass the test of certainty of delivery?
 With the rate of non-completion being so high, can we say that the parties are certain that delivery
is possible at the agreed time?
 What about the delay in delivery which has caused a lot of trouble to the house-buyers?
Issues on BBA
 Do profits from BBA contain ‘iwad?
 ‘iwad (equal countervalue or compensation) is the condition for a lawful sale
 On the spot or cash basis transaction, there is no problem of lawful & unlawful
gains because no time element involved
SUM OF CONTRACTUAL INTEREST RATE
Conventional BBA
Interest rate of deposits
Overhead Overhead
Credit or default risk
Profit margin Profit margin
 The legitimacy of the profit made is irrelevant, and it seems that the profit made on
the basis of time alone
 The extra profits in BBA cannot consider as risk of default because it is not about
‘iwad
Issues on BBA
 In other words, in any sale an equivalent counter value or ‘iwad shall
consists of three main elements, namely 1) cost of inputs 2) market risk
and liability and 3) effort or value added2 . In the case of an interest-
bearing loan, say RM10,000 at 10% interest rate per annum, we are
looking at an exchange of money worth RM10,000 in year 1 for
RM11,000 in year 2. The principle component, namely RM10,000
constitutes the cost of inputs while the extra RM1,000 represents the profit
created from the loan made to the debtor. However, this surplus or profit
does not implicate risk-taking, liability and value added services
discharged by the creditor. It does not contain ‘iwad and as such any
increment arising from it is tantamount to riba since by defination “Every
increase, which is without ‘‘iwad or an equal counter value is riba”.
Issues on BBA
 Floating Rate BBA
 BBA financing facilities is structured to be fixed rate financing
 fixed-rates method of financing might affect the competitiveness of Islamic banks,
and sometimes it is not a preferred mode of financing to some clients
 r↑ - customer deposit $ in conventional, apply financing in Islamic banks
 r↓ - customer deposit $ in Islamic banks, apply financing in conventional
 Cause funding mismatch to the Islamic financial institutions because their long-term
financing was funded by short-term bank deposits which can give variable returns
 2003 – BNM introduced Islamic Variable Rate Mechanism (IVRM), which use the
concept of ‘ibra (reward) to protect IB from losing money when r↑
 Issues on BBA
2008.
Malaysian Reserve, 11 Sept.
High Court announced the
,
BBA Contract is null & void
say the opposite to Islamic
Banking Act 1983.
Some of BBA Contract was
structurally faulty
Summary on Court Proceedings
Date: 31st March 2009
Time: Commencement at 9.45am
Court: Court of Appeal (Bilik Bicara
Panel: The Honourable Dato’ Md. Ra
2)
Dato’ Abdull Hamid bin Embong, Th
us bin Shariff, The Honourable
Haji Maarop
e Honourable Dato’ Ahmad bin

Highlight of the verdict: BBA Contract is valid & binding

- High Court Judge was wrong to compare BBA with loan agreements as BBA is a sale
agreement
- High Court Judge was wrong to apply principles of equity to BBA contract
- High Court Judge was wrong in computing day to day profit, as it in effect changed the facility
to a conventional loan
- It is in public policy to uphold the sanctity of a valid contract
- High Court Judge was wrong to interpret the religion of Islam as concepts that are acceptable
only if all four Mazhabs concur
- High Court Judge was wrong to disregard SAC rulings

Sources: Milenia Muslim

Conclusion
 The contract of BBA is not seen able to apply Shariah law as a means to
remove hardship (raf’ al-haraj) and preventing harm (daf’ al-darar) in
economic activities. Consumer welfare will be left unattended, which is
the worst crime one can commit when the business is run using an Islamic
label
 BBA financing tries to emulate loans for safety purposes, it has not been
able to fully observed the ‘true BBA contract’ that most Shariah scholars
had readily approved
 It is true the profit created from BBA is a consequences of waiting.
Shariah advisors seemed to have approves gains arising from time value
via BBA financing
References
Abdullah Alwi H. H. et al. (2005). TEORI dan APLIKASI KONTEMPORARI
Sistem Ekonomi Islam di Malaysia. Kuala Lumpur: Utusan Publications
Husniyati A. et al. (2008). Islamic Financial Services. Kuala Lumpur:
UPENA
Kamal K. et al. (2008). ISLAMIC BANKING A Practical Perspective.
Malaysia: Pearson Malaysia Sdn. Bhd.
Mohd Nasir, M. Y., & Amirul Hafiz, M. N. (2008). The principles and
practice of islamic banking & finance (4th ed.). Malaysia: Pearson
Malaysia Sdn. Bhd.
Milenia Muslim. BBA Sah – Mahkamah Rayuan (p.85). Mei 2009. THN. 7.
Bil 81. MMP Publications Sdn. Bhd
Saiful Azhar R. (2005). Critical Issues on ISLAMIC BANKING AND
FINANCIAL MARKETS. USA: Dinamis Publishing
Q&A
SESSION
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