6.

3) ISSUE THAT RELATE TO BAY BITHAMAN AJIL (BBA)

6.3.1 THE ISSUE OF RIBA IN BAY BITHAMAN AJIL (BBA)

The issue of riba in banking products offered by the Islamic banks are inter-related

with the issue of hilah. The concept of hilah in Islam was critically analyzed in the recent

2011 article titled “Hilah in the Islamic Banking Instruments in Malaysia” (Aishath Muneeza,

Nik Nurul Atiqah Nik Yusof, Norariefah Mohd Iqbal, Juyda Noor Mohamad, Vol. 2, 2011).

The authors also described hilah with regards to the views of various Islamic scholars. Hilah

or also known as legal device is usually as an intermediate of reaching some targets.

According to the authors, for Imam Ahmad and Imam Malik, all types of hilah are prohibited.

Whereas, some people including Al-Shatibi considered hilah illegal in general when

they are adopted in an impermissible manner that leads to waiving a ruling or transforming it

into another, which could not have happened except for the hilah that was employed while

one is aware that the means adopted was not supposed to be utilized for this purpose (Al-

Shatibi, al-Muwafaqat fi Usul al-Shariah, Cairo: al-Maktabah al-Tijariyyah, Vol. 2, p. 378-

385). In this article, the authors also specified that BBA is regarded to be a hilah. This is

because, the agreement used in completing the facility which is Property Purchase Agreement

(PPA) and Property Sale Agreement (PSA) are used as a legal device to hide the interest of

riba. Hence, it is the view of the authors that the practice of repurchasing the asset or the

house by the purchaser or borrower with higher price in BBA is not in line with the Shariah

principles.
6.3.1.1 COURT CASES OF RIBA IN BAY BITHAMAN AJIL (BBA)

A) Malayan Banking Bhd v Ya’kup bin Oje & Anor

There were few of Court cases which involved BBA and the main concern was the

issue of riba element which is the basis of research for this paper. We may first refer to the

case of Malayan Banking Bhd v Ya’kup bin Oje & Anor whereby in this case, the learned

judge opined that “the fixing of profit or definite returns in terms of percentage as opposed

to sharing of profits in Shariah banking activities are more akin to riba than trade. It must be

emphasized that the basic and most important characteristic of Islamic financing is that it

does not deal with fixed interest rate or predetermined profits. It is based on a profit and loss

sharing contract. In crux, it is equity-based financing. In other words, Shariah banking

principles invite banks to be venture capitalists rather than lenders.” In this case, the main

issue that came before the court was that whether the bank was entitled to the full profits or

full sale price in the event that the BBA facility it terminated prematurely.

However, the Court had decided that the purchaser or customer should be entitled to rebate

against the whole loan amount accompanied with the interest which is due payable on him for

the monthly installment in the case of order for sale.

B) Arab-Malaysian Finance Bhd v Taman Ihsan Jaya Sdn Bhd & Ors

In a High Court case of Arab-Malaysian Finance Bhd v Taman Ihsan Jaya Sdn Bhd &

Ors, the well-known Malaysian judge, Abdul Wahab Patil J, held that BBA in house

financing is regarded as a loan transaction and not a sale and purchase transaction. This is

because, in BBA, the defaulting borrower has to pay the whole amount of the sale price

which is usually double the purchase price of the property in the sale purchase agreement
made between the borrower and the housing developer. The Court further mentioned that,

BBA not only contain riba element, but also considered as unjustifiable to the purchaser or

borrower. It was also stated that, the transaction which involved the act of the bank

purchasing the asset or property directly from its customer and later sold the same to the

customer with deferred payment at a higher price is not a honest sale but a mere financing

transaction. Such profit earned from the BBA facility is considered to be contrary to the

Islamic Banking Act 1983 or the Banking Financial Institutions Act 1989, as the case may be.

Through this case, we can see that the learned judge was of the same opinion with the

previous learned judge in the case of Malayan Banking Bhd v Ya’kup bin Oje & Anor

whereby an Islamic financing scheme must not contain any prohibited elements under the

religion of Islam especially as regard to riba or usury.

As the main concern which triggered the BBA facility to be ruled as upholding riba`

element, the learned judge also specified that the bank`s selling price should not be excessive

to the extent that it would burdened the purchaser which is similar with the interest charged

on a loan transaction by the conventional banks. This is because, if the amount is found to

excessive, such facility offered by the bank shall be regarded as contrary to the Islamic

banking principles. The fact that the parties had agreed to the excessive selling price is not

the main reason for the court not to examine the substance of the contract in order to examine

whether the terms are consistent with the religion of Islam (Mohamed, 2008).

C) Bank Islam Malaysia Bhd v Lim Kok Hoe & Anor

In a year after the case, another case which the principle of the case regarding BBA

facility until now is not challenged or reversed. The main discussion of the legality of BBA

as a sale transaction remained in this 2009 Court case. We may refer to the case of Bank
Islam Malaysia Bhd v Lim Kok Hoe & Anor. The Court had made a clear declaration

whereby BBA facility is not a loan transaction but a real sale transaction. According to the

judges, it is not appropriate to compare BBA facility with a conventional loan transaction.

Both BBA facility and conventional loan transaction are different instruments as BBA facility

involved sale agreement while conventional loan transaction involved money lending

transaction.

Another point derived by the trial judge in this case which turned the Islamic banking

and finance industry in Malaysia into a tailspin is that, such BBA facility is not acceptable by

the four main mazhabs and thus it is also not acceptable in the religion of Islam. It seemed

that the trial judge had misinterpreted the definition of Section 2 of the Islamic Banking Act

1983 pertaining to the definition of ‘islamic banking business’. This is because, BBA was

rejected by the majority of the mazhabs except the Shafie’s. Nevertheless, the learned judge

had ruled that, the trial judge was erred in law and the issue whether the facility is in

accordance with the Shariah principles is not for the Civil courts to rule. It needs

considerations by the eminent jurists who are properly qualified in the Islamic jurisprudence.

The judges in this case also mentioned about the role and presence of Shariah Advisory Body

in each of the Islamic banks for the institutions to be granted Islamic banking licence.
6.3.2 THE ISSUE OF GHARAR IN BAI BITHAMAN AJIL (ABANDON HOUSING

PROJECT)

Gharar means ‘detrimental act’ which can cause injuries and losses. Gharar

transaction means sale transaction activities that involve uncertain terms and subject matter of

the contract and unclear contractual terms. It also involves failure of the seller to deliver the

subject matter of the contract (Majma’ al-Lughah al-Arabiah al-Idarah al-‘ammah Lil

Mu’jamat Wa Ahya’ al-Turath, 2005; Hasanuzzaman & Saleh, 1991; al-Zuhayli, 1988).

Gharar transaction is prohibited in Islam as its existence can cause harm against the rights

and interests of the contracting parties. It can cause enmity, hatred, injustices and losses to the

contracting parties (Md. Dahlan & Aljunid, 2010). Gharar transaction is a void transaction

under Islamic Law (al-Zuhayli, 1988). According to article 363 of the Mejelle referring to

gharar transaction as “A thing, which admits of consequences of a sale, is a thing sold, which

exists, is capable of delivery, and is Mal Mutaqavvim. Therefore, the sale of things which are

not existing, and not capable of delivery, and not Mal Mutaqavvim, is void (Batil)”.

The position of Islamic law is clear on contracts involving a non-existent subject-

matter. Islamic law lays down a condition that the subject matter must actually exist at the

conclusion of the contract. Thus, if the subject matter does not exist, generally, the contract is

void even though it could probably exist thereafter, or even if it is established then that it

would exist in the future but the existence is still to the detriment of the contract party. A

contract which involves a non-existent subject matter is prohibited pursuant to a hadith

(tradition), whereby the Prophet Muhammad (PBUH) prohibited a person from selling an

animal foetus yet to be born while it is still in the mother’s womb, when the mother was not

part of the sale (al-Zaila’i, n.d.; Nawawi, 1999; al-Zuhayli, 1988). The Prophet (PBUH) also

prohibited the sale of things which one does not own.

 Nonetheless, Muslim jurists allow the contract of a non-existent subject matter, as one

of the exceptions to the above, relating to the sale of agricultural products before they become

ripe. However, this is subject to the knowledge that the products have already appeared even

before the signs of ripeness are shown. Further, this type of contract is allowed if the

purchaser immediately harvests them. The position is the same in respect of the sale of fruits

and agricultural products, which yield successively one after another during one harvest as in

the case of water melons and egg-plans. This contract falls under the category of the subject

matter exists in essence, then comes into existence thereafter’ (Nawawi, 1999).

As regards the subject matter which did not exist at the time of contract and it is

established that it could not also exist in the future, Muslim jurists reject this kind of contract

as this contract contains element of gharar (Nawawi, 1999). A transaction containing element

of gharar is prohibited based on the verses of the Quran and the hadith of the Prophet

(PBUH). Majority of the jurists are also unanimously of the opinion that the contract which

its subject matter generally could not be surrendered to the parties at the conclusion of the

contract or at the promised date, is a gharar contract and thus it is void, not binding and

having no legal effect.

Muslim jurists allow the sale of non-existence subject-matter known in arabic as Bay’

al-Ma’dum as an exception to the above situations, they allow sales of agricultural products

before the products are fully matured. Nonetheless, this position is dependent on the

knowledge that the products are in existence before the signs of ripeness appear. Further, this

type of contract is allowed if the purchaser could immediately harvest the products, once he

discovered signs of ripeness of the products.

There is no mention on gharar transaction in the Quran. Nonetheless there are many

verses that enjoin people to do justice and prohibit any fraudulent acts and oppression in trade
and business. The examples is “And do not eat up your property among yourselves for

vanities, nor use it as bait for the judges, with intent that ye may eat up wrongfully and

knowingly a little of (other) people's property” (al-Baqarah(2): 188).

There is no term in the BBA transaction in the case study that provides a liability and

responsibility of BIMB as the vendor to guarantee that the purchaser/consumer would obtain

the duly completed house. The BBA transaction does not provide adequate provision

purported to give protection to purchaser/consumer against any losses arising from

abandoned housing projects. It should be noteworthy that in abandoned housing projects, the

subject matter being the purported housing unit does not exist at the time the BBA transaction

are executed nor does it exist after the expiry of the construction period. This situation has

caused a gharar transaction being a transaction prohibited under Islamic law for want of the

pillar and condition of a valid contract (al-Zuhayli, 1988; Md. Dahlan & al-Junid, 2010).

Furthermore, in abandoned housing projects, the inability of the purchaser consumers

to obtain duly completed houses together with the Certificate of Fitness for Occupation (CF)

or Certificate of Completion and Compliance (CCC), failure of the ventor to register their

names into the issue documents of title to the said houses due to the abandonment and that

they have suffered complaint and losses are situations that fall under the heading of gharar al-

fahish (exorbitant gharar). Due to the abandonment of the housing projects and the fact that

the purchaser consumers are unable to obtain the vacant possession of the houses and occupy

the said houses as the vendors fail to obtain CF or CCC, the BBA transaction is a gharar al-

fahish transaction (exorbitant gharar).

It is noteworthy that pursuant to Article 271 of the Mejelle, the delivery of a house is

complete if the vendor gives the key of the house. In the case study, there is no CF, CCC and

house key that have been given by the vendor (BIMB/developer) to signal the completion of
the transaction. Thus, following the above building and construction law, there was no

delivery of the duly completed subject matter to the detriment of the purchaser consumer.

Thus, gharar al-fahish (exorbitant gharar) occurred in the situation as illustrated in the case

study.

6.3.2.1 COURT CASES OF GHARAR IN BAI BITHAMAN AJIL (BBA)

A) Pripih Permata Sdn Bhd v. Bank Muamalat Malaysia Bhd

In this case, the Plaintiff purchased three units of shop-houses/office (the property)

from a developer to run a medical clinic business. To finance the purchase of the property,

the plaintiff entered into a contract with the defendant bank using the principle of Bay’

Bithaman al-Ajil (BBA). The price stated in the PPA was RM 384,000.00. While the price

stated in the PSA was RM764,051.40. The Plaintiff was to pay RM4,244.73 as monthly

installment for 180 months.

The plaintiff made the payment as required under the agreement without failed. When

the said property was abandoned and the developer was wound up, the plaintiff informed this

to the defendant to stop making further payment. Nevertheless, the defendant requested the

plaintiff to proceed with the installment payment as usual and mentioned that legal action

would be taken if the plaintiff failed to comply with the defendant’s demand. The plaintiff

paid all the balance of the selling price which was still outstanding but they had not yet

obtained vacant possession of the said property. As the result, the plaintiff commenced a legal

action against the defendant on the contention that all documentations relating to the said

agreement were null and void due to the concept of Gharar al-Fahish (exorbitant gharar) and
the security interest contained element of riba’(usury). The plaintiff claimed damages on the

property price, compensation on rental payment and costs of refurbishing the clinic.

The High Court decided that the principle of Gharar al-Fahish (exorbitant gharar) is

clearly applicable in this case from the commencement until the conclusion of the contract.

The plaintiff had cautioned the defendant bank about the problematic housing development

project and thus requested the defendant bank to stop making any progressive payment to the

defaulting developer but this had not been heeded by the defendant bank. The court also held

that the BBA documentation is also void. Further, according to the court, at the first look, the

word ‘security interest’ can be interpreted as a ‘guarantee interest’. ‘Guarantee interest’ is

unlike ‘profit margin’. Thus, there is a conflict of meanings and that the ‘guarantee interest’

also known as ‘security interest’ that falls under the category of the prohibited riba’ (usury).

In implementing finance facility approved by Shariah, the defendant bank should stay away

from any element of riba’ (usury). The court also, on the balance of probability, allowed the

application and claims of the plaintiff. Finally, the court ordered that the amount of

RM577,168.42 being the total installments paid to the defendant bank be refunded to the

plaintiff and the defendant bank pays to the plaintiff RM387,600.00 as damages for the rental

of clinic and RM4,200 as damages for the cost of refurbishing the clinic, being the

expenditures incurred by the plaintiff purchaser consumer.

6.3.3 THE ISSUE ON LATE PAYMENT AND CASE OF DEFAULT IN BAI

BITHAMAN AJIL (BBA)

Islamic Banks face severe criticism when it comes to the discussion of late payment

penalty or charges. Usually Islamic Banks are allowed to impose Ta’wid as a punishment to

late penalty where they take it and put it into charity fund. However, Banks are also allowed

to consider this late penalty as an Income by BNM. Due to this, the late payment treatment is

same like conventional banks. While in case of default, customer is bound to pay full

settlement of the selling price whereas the amount charged is for the 30 year period and he

has defaulted in let‟s say 2 years. Thus, this activity makes the customer insolvent as he is

indebted to the Bank while getting nothing out of the property which he wishes to acquire

from the developer. Same case can be treated if the developer abandoned the contract and the

financing is left behind, No Islamic Bank takes the responsibility of such issue and they ask

for full payment of debt. (Jazeel Abdul Wahid, 2014)

When there is default payment, the ownership of the asset remained hold in the bank

side as the financier; there are no transfer of ownership by proportionately percentage

according to the amount that have been paid by the customer. Thirdly, the price of the assets,

particularly the balance of financing at any point of time often exceeds the original price of

the asset compare to other Islamic product like MMP (Musharakah Mutaqisah) which is the

combination between the Partnership and Ijarah. Critically, the global Fuqaha specifically

Shariah scholars in the Middle East diverged of the BBA with regard to the prohibition of

interest contract as stated in the guideline from the council of Islamic Ideology (Pakistan) that

“However, although this mode of financing is understood to be permissible under the Shariah,

it would not be advisable to used it widely or indiscriminately in view of the danger attached

to it of opening a backdoor for dealing on the basis of interest.”

 Furthermore, dissatisfaction from the Banker‟s point of view, the BBA fixed

financing mode triggers the problems of liquidity management due to the charge of funds

especially the deposit rate is determined based on floating rate at the same time, its income

decide predominantly based on fixed rate Murabaha and Ijara contracts whereby the rate is

unchanging. The divergence in the rate during the installment periods become serious

concern for the banks. Usually, the Islamic Bank would substitute its fixed rate Murabaha

case flow for floating rate cash flow to match its cost structure.

Presently, one of the improvement methods to BBA is by allowing the rate to be

based on variable rate. In addition, BBA has converged to the conventional mode where the

computational formula is similar to its counterpart where the profit rate tracks the market

interest rate (Meera 2005). Instead of imposing the interest to the customers, Islamic Banks

charge a profit rate which is reliant on the rate of market interest. And according to Azhar

(2011), in practice, Islamic and conventional Bank is alike as the purchasers buys the

property first and then look for financing. The transactions seem to be look like a loan rather

than a sale. This presumption was confirmed by the case of Dato’ Haji Nik Mahmud bin

Daud v Bank Islam Malaysia Berhad (1996) where the presiding judge thought that there

was no intention of the parties (customer and bank) to effect the transfer of the property, and

that it was merely a device to facilitate the BBA transaction.

One thing that should be distinguished is that the profit derived from the deferred

payment in loan basis is prohibited as this consider as Riba. However, this transaction in the

trading based is allowed by majority Muslim Jurist. Some supporting ideas of taking profit

upon the deferred payment in the sale and purchase contract are as follow ;1)Price will

possibly rise due to its deferred payment ;2)The deferment for some period of time has a

value in the price; 3)Five which is paid in cash is equal to six which is paid on deferred;

4)The period is part of the price; 5)This is the evidence that the period of time in sale and
purchase has its portion in the price and it is permissible for sale and purchase

contracts.(Nurrachmi, R., Mohamed, H., & Nazah, N. (2013))

6.3.3.1 DISPUTE ON BBA IN CASE OF DEFAULT PAYMENT

The problematic arise in BBA cases that lead to the dispute are due to the bank

making a claim for the full sale price as stipulated in the property sale agreement (PSA)

because the bank have a legal right as noted by High Court Judge Datuk Rohana Yusuf. The

bank‟s agreement that comes first to the court should be respect and implement the clear

written term of the contracts and should not interfere with the intention of parties by imputing

any other term. As long as the parties involved agreed to the price as stated in the PSA, the

defendant is under a legal obligation to pay the full sale price, irrespective of when a breach

occurs.

For most cases attracted much public attention is that the way how the bank

practitioner calculated the outstanding amount to be repaid by borrower who had defaulted on

their BBA contract. The amount has been designed by Banks up to the full periods of the

contracts even though the borrower may have defaulted only a few years or months during

the financing period. According to the judge, Abdul Wahab, the courts accepts the banks as

the owner or became the owner under a novation agreement, then the sale become bona fide

sale to the customer. The selling price as one of the debated subject matter was interpreted

from the agreement of BBA contracts. Consequently, the bank is the owner of the property by

a direct purchase from the vendor or by a novation from its customer. In brief, most of the

dispute cases that pass to the court were won by the Bank. Thus before the contract signed by

both parties, the customers have to see clearly and ensure the understanding to avoid any

dispute in the future.

6.3.4 CONCLUSION

As a way to achieve human justice and religious purpose, many Islamic instruments

are offered to the customer as a way to avoid activities which prohibited is in the Shariah. As

part of Islamic instrument, many issues rise in the practice of BBA. The issue rise due the

customer not convince when it comes to early redemption or in the event of default, there is

default payment, there is no transfer of ownership, and the price of the asset often exceeds the

original price of the asset compare to other Islamic product like MMP (Musharakah

Mutaqisah.

One of the improvement methods to BBA is by allowing the rate to be based on

variable rate. Instead of imposing the interest to the customers, Islamic Banks charge a profit

rate which is reliant on the rate of market interest.

The practice of BBA in Malaysia is similar to the concept of debt financing which is

often resulted in high cost. It causes the BBA contract seen as not in compliance with the

Shariah principle because the bank does not take the risk of ownership and liability on the

property which is a similar finding for the previous study. There is high level of

dissatisfaction among the customers as shown in their low intention to use BBA. They

recommended that Islamic banks or Islamic financing needs to come up with alternatives of

Islamic home financing product.

Furthermore, the BBA practices consists of a few elements of gharar which is

prohibited in Islam (QS: Al Baqarah : 188) and Islamic law is clear on contracts involving

non-existing subject matter (in this case house under construction) referring to many cases of

abandoned housing projects in Peninsular Malaysia. And also the practice of the BBA in

Malaysia is conversed to the teachings of Islam. BBA transaction should be modified and

revamped until it is fully able to protect the interests of the customer

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