WHY ARE YOU STILL ASKING ME ABOUT BBA AND BAI AL INAH?
It remains a mystery when people ask me why Malaysia continues to offer Bai Bithaman Ajil (BBA) and Bai Al Inah products, as according to them, these structures are based on elements of Hilah (trickery). It is a mystery because starting from 2012/2013 period, the instructions on Interconditionality issued by BNM to Islamic Financial Institutions requires that the provisions of “mandatory buy-back” must not appear in financing contracts such as Bai Inah and BBA. Because of this, Malaysian Islamic Banks have slowly weaned itself from such products and have since moved to other Islamic contracts.
WE ARE STILL READING OLD BOOKS AND ARTICLES
In general, I still find that some learning institutions are incorrectly teaching students that the contracts are still alive and well in the Malaysian market. The text books used are still ones that predates 2011 and really, this is a disservice to students. When they come for interviews with our bank, it does not give the students any advantage or good impression as the syllabus remains outdated. Many do not know about the Policy Documents issued by Bank Negara Malaysia or the contracts covered by the policy documents. This really should be covered in a learning module as the latest requirements are captured in these documents. It is a good reference read, but it seems only practitioners and Shariah scholars are aware of these documents.
This is true as my last few interns also impressed the same. Tawarruq structures sounds alien to some of them, as their teachers prefer to teach BBA and Bai Inah to unlock its controversies as points for discussion. Let us be clear that most banks NO LONGER offer Bai Inah or BBA, and those which does, offer it as a continuation for a legacy arrangement or due to certain unavailable scenarios, such as fresh new documentations are not obtained for Tawarruq arrangement (such as Wakalah to buy commodities). It is no longer offered as a product to the public and this is evidenced from the Banks website where the structures can no longer be found. And most of the time if used, this is a temporary fix allowed until the deal reaches expiry or the Tawarruq appointments are obtained.
And with Tawarruq arrangements now being ably supported by good infrastructure such as Bursa Suq As Sila trading platform and other commodity brokers worldwide, there is no issue of Darurah (emergency) to justify the continued usage of Bai Al Inah or BBA.
SO, WHERE HAVE WE GONE TO SINCE 2011?
In short, we have moved to the following contracts:
- Bai Bithaman Ajil (BBA) – Usually BBA is used for purchasing of properties (Home financing or Commercial properties financing), or sometimes for trade financing products. These usage is now done under the Tawarruq arrangement (using Commodity Murabahah) where the proceeds from the sale of Commodities is used to settle the purchases of houses or commercial properties. Alternatively, Musyarakah Mutanaqisah arrangement (Diminishing Partnership) is also used by many banks where houses or properties are purchased by the Bank and leased out to the customer, who then pays rental and gradually purchases the shares of the house and properties over time. So now, BBA has been replaced with Islamic arrangements of Tawarruq or Musyarakah Mutanaqisah. Other Islamic contracts has also been known to support some elements of BBA, such as Istisna’a (property construction), Murabahah (good sale at profit) or Ijarah / Ijarah Mausufah fi Dhimmah (forward lease).
- Bai Al Inah – Usually Bai Inah is deployed for Personal Financing or Working Capital Financing and even Islamic Credit Cards. Again, Tawarruq arrangements has generally replaced these usage with the end result of providing cash. On a smaller note, the contract of Ujrah (Services) is also deployed to support some requirements of personal financing (where purchase of goods and services are required) and Islamic Credit Cards. So now, Bai Al Inah has now been replaced by Tawarruq arrangements or Ujrah contract to meet the cash and working capital requirements.
The final controversial contract that Malaysia currently deploy is the Bay Ad Dayn (Discounted Sale of Debt), which serves a specific purpose in trade financing products. Eventually a common ground must be found to make this contract more globally accepted, or replaced with a better solution.
UPDATE YOUR STUDY NOTES, PLEASE
The main challenge nowadays is to innovate further by improving what we have. Criticisms are good, especially on the old structures. But we practitioners do hope the learning academia afford us a bit more confidence and trust, especially these criticisms and consequent issues are not “unknown” to us, since we lived and breathed in its controversies many years ago. The comments made in recent times are something we had encountered and resolved 10 years ago. We enhance and evolve, and it will be good to see new students coming into the market armed with the latest updates of what is happening and let’s move forward.
It is now 2019. Do not get stuck in the muddy past. These contracts have gone into the history books. We have so much to do in the future arena.
Islamic Bankers Resource Centre 
Thank you for this post!
I was searching about Bai Bithaman Ajil. Didn’t know which one was already demised.
Now I’m wondering on the differences between them.
I’m no finance student, just a person curious in learning bits of Islamic finance here and there.
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Hi,
Generally both contracts of Bai Bithaman Ajil and Bai Inah suffers from the same issue ie Interconditionality in their legal clauses. Both contracts have 2 standalone contracts i.e. one sale contract and one buy-back contract. Both contracts should stand alone and the aqad is sequential, which makes it valid based on trading rules. But because banks want to minimise risks, the interconditionality clauses are added to ENSURE that once the first sale contract is concluded, the second buy-back contract is to be executed (mandatory). It goes on to say that if the second buy-back contract is not executed, then the first sale contract is invalid and restitution (going back to the original state) must be effected.
From Shariah point of view, it is problematic, because the first Aqad ie sale contract, is a valid contract and completed under Aqad which meets all its trading tenets. To impose that another external event (i.e. the non-completion of the buy-back contract) invalidates the valid sale contract already concluded and perfected, implies that the whole arrangement is superficial and do not carry real value. It should not be the case, because the Aqad is already valid. Thus the interconditional clauses is not favoured by Shariah and needs to be removed.
Therefore:
1) The Sale of Asset contract is valid on completion of Aqad
2) The Buy-Back of Asset contract is valid on completion of Aqad
3) If the Buy-Back of Asset contract is not completed, the Sale of Asset remains valid as the Aqad is already completed.
4) The requirement to force the Buy-Back of Asset contract to be completed via an interconditionality clause is problematic in substance. The notion of “one contract is only valid upon completion of another contract” do not sit well with Shariah.
Of course, for Banks, removal of such clauses from the documents represents a risk as the assets used belongs to the bank in the first place. The idea that the customer cannot be compelled to re-sell the assets back to the bank (or banks not allowed to buy-back) is a risk banks are not willing to take. As such impasse, most banks have removed both contracts from their shelves.
There are still some products using BBA and Bai-Inah still, but that is only because it is required by design and mainly between financial institutions (not between banks and retail consumers) where the interconditionality clauses are not required. For the public, Tawarruq or Musyarakah Mutanaqisah or Ujrah structures are now used.
Hope that helps. Thanks.
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Dear Mr. Amir,
I hope this message finds you well. While researching Islamic financing, I came across your website and would like to seek your expert advice regarding my Islamic home financing, which I entered into in 2021 for an apartment still under construction.
Recently, I received an email from Alliance Islamic Bank informing me that my financing will be changed from BBA to Murabahah via Tawarruq. The bank has asked me to sign three documents, including a supplemental letter of offer.
The bank explained the reason for this change as follows: “The revision is to align our products with other Islamic banks that have moved away from BBA and to enable future improvements to the product features to meet the needs of our customers.”
Could you kindly advise if there are any risks or downsides to signing these documents? Additionally, am I within my rights to refuse to sign, as I do not understand why new documents are required when the original letter of offer was agreed upon and signed in 2021.
I greatly appreciate your guidance on this matter.
Thank you very much.
Best regards,
Goldie
//Some excerpts from the recent email/letter:
By entering into the new Murabahah via Tawarruq Facility with the Bank, all principal and profit payments made by you for the Facility shall be treated as advance payments under the Murabahah via Tawarruq Facility (“Advance Payment”). The Advance Payment would be part of the Bank’s Selling Price under the Murabahah via Tawarruq Facility. Upon execution of this Supplemental Letter of Offer, the Bank will set off the Advance Payment from the Bank’s Selling Price and the amount of the Advance Payment will be regarded as duly paid by you from the Bank’s Selling Price. The previous Asset Sale Agreement and Asset Purchase Agreement under the BBA Facility will be inapplicable and deemed void. Save and except to the above, all other existing terms and conditions as stipulated in the Letter of Offer (including but not limited to any obligations of the Bank in relation to the undrawn amount and/or conditions precedent to disbursement and/or availability of the Facility), Facilities Agreement, Charge, Deed of Assignment, Power of Attorney, and any other documents or security documents as advised by the Bank’s solicitor in respect of the property/financing described in the Letter of Offer and for the aforesaid Facility shall remain unchanged and continue to be valid unless amended and expressly confirmed by us in writing.
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Hi Goldie,
Apologies as I have lost my access to this account for quite some time and have only managed to enable the account today with a new website address.
Tawarruq is currently regarded as the most flexible structure in the market and quite useful for many things such as top up limits, redrawable facilities and other features. Quite useful and majority of banks are using it.
Perhaps the only downside is that under Tawarruq usually the financing is based on floating rate tied to a maximum ceiling rate. It is good for price protection in the future, but it works on a floating rate.
As compared to a BBA, I believe most banks back then uses a fixed rate (which is usually higher rate) but does not move with the OPR movement, so you have peace of mind. This is advantage of BBA if the OPR starts to move upwards, but also disadvantage if the OPR remains lower than the BBA fixed rate.
My opinion, ok with the conversion to Tawarruq under a floating rate as it will help you take advantage of the lower OPR rate at the moment. It is a matter of preference. BBA = peace of mind with fixed rate. Tawarruq = more savings with floating rate.
If in doubt, do have a conversation with the bank staff who can explain the benefits better. I am sure you will be able to ease your mind after that.
Sorry for the late reply.
Amir
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