THE ISSUE AND DELIMMA OF THE BAI BITHAMAN AJIL CONTRACT AS MODE OF ISLAMIC FINANCE

1. ADVANCE FIQH MUAMALAT (IFE705)
THE ISSUE AND DELIMMA OF THE BAI BITHAMAN AJIL CONTRACT
AS MODE OF ISLAMIC FINANCE EMPHASIZING ON –
(I) CONCEPTUAL MODEL OF AL-BAI BITHAMAN AJIL;
(II) THE IRONY OF AL-BAI BITHAMAN AJIL ITS FACING
CONTRIBUTING TO THE ACCUSATION TO BE CONTRARY TO
SHARIAH PRINCIPLES;
(III) AT LEAST 5 PREVIOUS CASES WITH ITS ISSUES (OF THE
CASES) AND DECISION MADE BY THE COURT
PROVIDE YOUR OWN CRITICAL EVALUATION TO THE DECISIONS
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2. CONTENTS
1. INTRODUCTION
2. LEGAL EVIDENCE OF AL-BAI BITHAMAN AJIL FROM AL-QURAN AND
SUNNAH OF RASULULLAH SAW
3. THE OBJECTIVES OF AL-BAI BITHAMAN AJIL
4. TENET OF AL-BAI BITHAMAN AJIL
5. CONCEPTUAL MODEL OF AL-BAI BITHAMAN AJIL.
6. AL-BAI BITHAMAN AJIL AS A FINANCIAL FACILITY
PRACTICE BY ISLAMIC BANK IN MALAYSIA.
7. THE LEGAL ISSUES OF AL-BAI BITHAMAN AJIL
UNDER THE MALAYSIAN LEGAL SYSTEM
7.1 Bank Islam Malaysia Berhad v. Adnan Bin Omar
7.2 Dato' Nik Mahmud b Daud v. Bank Islam Malaysia Berhad
7.3 Affin Bank Bhd v Zulkifli b Abdullah [2006]
7.4 Arab Malaysian Finance Berhad V. Taman Ihsan Jaya Sdn Bhd
7.5 Bank Islam Malaysia Bhd v Azhar bin Osman and other cases
8. CONCLUSIONS – GROUP VIEWS ON AL-BAI BITHAMAN AJIL BASED ON THE
DECISIONS OF THE COURTS’ CASES 2

3. INTRODUCTION
 Al Bai Bithaman Ajil” (BBA)
(i) Literally means “to make something into a known portion or
pieces”.
(ii) Technically, means“to defer the payment into several portions for a
different time period, and every portion that is due is called al-qist”.
 BBA a sale of contract in which the payment of the purchase price is
payable at a certain particular time in the future.
 BBA is also known as -
(i)Bay’ al-Nasiah which means as “waiting”;
(ii)Bay’ al-Taqsit which means as “installment”;
(iii) Bay’ Muajjal which means “deferred payment sale”; or
(iv) Al-Bay’ Li Ajal: If the payment is deferred as one lump sum towards
the end of a particular period.
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4.  In the middle east countries, the term used is Bay’ al-Taqsit
 Bank Negara Malaysia defines :
“BBA as deferred payment sale whereby the property requested
by the client is bought by the financier, who subsequently sells
the goods to the client at an agreed price, including a mark-up
(profit) for the Islamic bank. The selling price is fixed and agreed
by both parties and will remain unchanged until the end of the
payment period. The ownership of the property purchased will be
under the claim of the financier and will be handed over to the
customer upon full payment.”.
INTRODUCTION
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5. AL-QURAN :
Al-Quran from surah Al-Baqarah, 2: 282.:
‫ا‬َ‫ب‬ِّ‫الر‬ َ‫م‬َّ‫ر‬َ‫ح‬َ‫و‬ َ‫ع‬ْ‫ي‬َ‫ب‬ْ‫ل‬‫ا‬ ُ‫ه‬‫ـ‬َّ‫ل‬‫ال‬ َّ‫ل‬َ‫ح‬َ‫أ‬َ‫و‬
‘And Allah has permitted trade and forbidden riba’.’
‫ي‬َ‫ج‬َ‫أ‬ ٰ‫ى‬َ‫ل‬‫إ‬ ٍ‫ن‬ْ‫ي‬َ‫د‬‫ب‬ ‫م‬ُ‫ت‬‫ن‬َ‫ي‬‫َا‬‫د‬َ‫ت‬ ‫ا‬َ‫ذ‬‫إ‬ ‫وا‬ُ‫ن‬َ‫م‬‫آ‬ َ‫ين‬‫ذ‬َّ‫ل‬‫ا‬ ‫ا‬َ‫ه‬ُّ‫ي‬َ‫أ‬ ‫ا‬ََُ‫ه‬‫و‬ُ‫ب‬ُ‫ت‬ْ‫ك‬‫ا‬َ‫ف‬ ‫ى‬ًّ‫م‬َ‫س‬ُّ‫م‬ ٍ‫ل‬َ
‘O you who believe! Whenever you give or take credit (tadayantum) for a stated term,
set it down in writing.’
SUNNAH :
(a) It is reported in a Hadith by a Companion, Jabir, that the Rasulullah SAW
bought a camel from him outside the city of Madinah whereby the payment was
settled later on in Madinah.
(b) In another Hadith, it was narrated by Aisha RA that the Rasulullah SAW bought
a meal from one Jew with deferred payment, and Rasulullah SAW mortgaged
his iron shirt which is made from iron.
LEGAL EVIDENCE OF AL-BAI BITHAMAN AJIL
FROM AL-QURAN AND SUNNAH OF RASULULLAH
SAW
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6. THE OBJECTIVES OF AL-BAI BITHAMAN AJIL
 The objectives of BBA -
(i) providing financing for the purchaser who could not afford make
the full payment of the purchase price of the purchased goods
upfront so as to reduce the hardship and burden for the purchaser
in providing the full payment of purchase price to purchase the
goods;
(ii) attracting potential purchaser by offering payment by way of credit
for the purchaser to purchase the goods for the immediate usage
and make payment on affordable installment over an agreed
period of payment which eventually lead to interest free sale
transaction; and
(iii) providing flexible modes of payment as under BBA, the deferred
purchase price would be settled by the purchaser through various
modes of agreed installment payment between the seller and the
purchaser and thus, leads to smooth business transaction
between the seller and the purchaser.
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7. TENET OF AL-BAI BITHAMAN AJIL
 Seller and purchaser, where both of them must be of sound mind,
attain age of puberty and intelligent;
 Subject matter, exist during the time of purchase, known by the seller
and the purchaser, lawful and permissible or halal under Shari’ah,
the seller is the owner of the subject matter and the subject matter
could be delivered to the purchaser which include the transfer of
ownership; (BBA is subjected to the condition for transaction for non-
ribawi items only. If involve ribawi items, the ribawi items have to be
of different categories and types).
 Price, must be known by the seller and purchaser where the
payment must be made in the currency agreed by both of them; and
 Aqad which are ijab and qabul, must be absolute, decisive and
definite language to be made in one session.
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8. CONCEPTUAL MODEL OF
AL-BAI BITHAMAN AJIL
 BBA is a sale of good with deferred payment at agreed selling price agreed by the
seller and the purchaser.
 Under BBA the goods is delivered by the seller to the purchaser on the spot. The
payment of the purchase price by the purchaser to the seller is on deferred payment
or postponed to an agreed future either–
(i) equally fixed installment;
(ii) incremental (mutazayidah) installment;
(iii) a full purchase price payment at an agreed future date for payment; or
(iv) diminishing installment (mutanaqisah).
 Any increament of the selling price of goods under BBA is a profit for the seller and it
was agreed between the seller and the purchaser. Thus, it does not involve any
attachment of interest or riba’ as in the conventional deferred installment payment
for example Riba’ Nasiah.
 The selling price offer by the seller to the purchaser is either in form of -
 (i) Bay’ Musawwamah (normal contract of sale); or
 (ii) Bay’ Mudharabah (cost plus contract)
 BBA is not applicable for Bay’ Salam 8

9. AL-BAI BITHAMAN AJIL AS A FINANCIAL FACILITY PRACTICE BY
ISLAMIC BANK IN MALAYSIA.
 Agreements for BBA financing facility -
(a) The Property Purchase Agreement (PPA), Islamic bank purchase the
property from the purchaser at the purchase price, which usually the
amount of financial facility required by the purchaser.
(b) The Property Sale Agreement (PSA), the customer undertake and
guarantee to re purchase of the financed property for the Islamic bank at
the agreed selling price between the Islamic bank and the purchaser.
(c) Some other important documents to be executed by the purchaser for the
Islamic would be the security documents for securing the installment
payment of the facility amount are as follows –
(i) Legal Charge, for the property with individual titles; or
(ii) Deed of Assignment and Power of Attorney executed by the
purchaser in favour of the Islamic bank, for the property under master
title and has yet to be issued with individual titles; and
(iii) any other Islamic financing documents as required by the
Islamic bank, for instance, takaful on the property or
the provision of guarantors by the purchaser. 9

10. AL-BAI BITHAMAN AJIL AS A FINANCIAL FACILITY
PRACTICE BY ISLAMIC BANK IN MALAYSIA.
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11. THE LEGAL ISSUES OF AL-BAI BITHAMAN AJIL UNDER
THE MALAYSIAN LEGAL SYSTEM
Bank Islam Malaysia Berhad v. Adnan Bin Omar [1994] 3 CLJ, 735
 Facts: BIMB granted a loan of RM265,000.00 secured by a charge over a
land for resale amount of RM583,000.00 (in charge document) payable in
180 instalments by Adnan
 Issue : What is the amount to be paid? RM583,000.00 or RM265,000.00
 Decision : Both parties had the same intention when executed PSA & the
charge document which amount to be secured was RM583,000.00
(including the profit margin BIMB).
 Principles :
(i) Its civil courts jurisdiction in relation to the recovery of the Islamic
bank’s right over the default payment and not Shari’ah courts.
(ii) Decision was based on the contractual relationship and agreement by
both parties.
(iii) Issues : Has the Court has exercised justice to Adnan as the amount
RM583,000.00 secured by the property under the facility was
anticipated or forecasted to reach such amount on 2 March 1999 and
not during the date of the breach of such
repayment of the purchase price has occurred in April 1985? 11

12. THE LEGAL ISSUES OF AL-BAI BITHAMAN AJIL UNDER
THE MALAYSIAN LEGAL SYSTEM
Dato' Nik Mahmud b Daud v Bank Islam Malaysia Berhad [1998] 3 CLJ
605
 Facts: Dato’ Nik obtained financing from BIMB by executing PPA, PSA and
charged a Malay reserve land as seurity.
 Issue : whether there was an actual transfer of right or interest from Dato’
Nik to BIMB as BIMB is not a Malay.
 Decision : No evidence of the land was being transferred to BIMB. The so-
called sale transaction in BBA facility is in fact a credit device instrument
and not a bona fide sale transaction.
 Principles : (i) BBA practice by Islamic bank in Malaysia involves element of
gharar. The very basic tenet of BBA contract is a sale transaction which
transfer of ownership of the property. BIMB is never a registered owner of
the property its sell under PSA.
(ii) Issue : The sale of property under contructions where the ownership of
the property is not being transferred by the developer to the purchaser.
How is the purchaser sell the property to Islamic bank under PPA?
Which party be responsible to complete the property if it was
abandoned?
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13. THE LEGAL ISSUES OF AL-BAI BITHAMAN AJIL UNDER
THE MALAYSIAN LEGAL SYSTEM
Affin Bank Bhd v Zulkifli b Abdullah [2006] 1 CLJ 438
o Facts: Zulkifli bought a double storey link house through BBA from his employer at
that time for the sum of RM 346,000. Then, Zulkifli resigned and at his request, the
BBA was restructured. Under the revised BBA the bank’s selling price of the house
was RM992,363.40 payable over a period of 25 years
o Issue : (i)What is the amount Zulkifli has to pay the bank in the event of default
(ii) In the event of a default before the end of tenure, could the bank claim as
part of the sale price or bank selling price the profit margin for the
unexpired tenure of the facility
o Decision : Granting the order for sale and reducing the amount of repayment
 Principles : (i) If the customer is not given the full tenure to pay the selling price,
then the bank is not entitled to claim for the bank's profit margin for the full tenure, as
to allow the bank to do so would mean that the bank is able to a earn a profit twice
upon the same sum at the same time.
(ii) The profit margin charged on the unexpired part of the tenure is unearned profit
and not actual profit, and therefore cannot be claimed under BBA.
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14. THE LEGAL ISSUES OF AL-BAI BITHAMAN AJIL UNDER
THE MALAYSIAN LEGAL SYSTEM
 Arab Malaysian Finance Berhad V. Taman Ihsan Jaya Sdn Bhd & Ors;
Koperasi Seri Bukit Cheraka Berhad (Third Party) [2009] 1 CLJ 419
o Facts: Tmn. Ihsan S/B obtain BBA facility from AMFB. Tmn. Ihsan S/B
defaulted in the payment of the bank selling price and AMFB applied for
an order for the sale of property.
 Issue : Tmn. Ihsan S/B argued the letter of offer, PPA, PSA and the
charge or assignment is financing in nature and not in accordance to
Shari’ah and involved riba’.
 Decision : Court ordered sale by public auction of the charged
properties.
 Principles : (i)The claim price by the bank of the property must close
to the market price and cannot be more than that.
(ii) The BBA practice is not in line with the Islamic Banking Act 1983 or
the Banking and Financial Institutions Act 1989. The Sale
Agreement was therefore void. The bank cannot claim the selling
price but only the balance of the selling price. 14

15. THE LEGAL ISSUES OF AL-BAI BITHAMAN AJIL UNDER
THE MALAYSIAN LEGAL SYSTEM
 Arab Malaysian Finance Berhad V. Taman Ihsan Jaya Sdn Bhd & Ors;
Koperasi Seri Bukit Cheraka Berhad (Third Party) [2009] 1 CLJ 419
o Legal implication:
 Due to the potential significant impact on the Islamic finance industry
because of the case of Arab Malaysian Finance Bhd v TamanIhsan Jaya
Sdn Bhd & Ors, the Malaysian government took a further step in enhancing
the legal framework by passing the Central Bank of Malaysia Act 2009 (Act
701) (“CBA”). Unlike the earlier Act, the CBA inserts a new provision in Part
VII which covers matters pertaining to Islamic finance. Part VII, Chapter 1 of
the CBA aims at resolving issues pertinent to Shari’ah matters (Zulkifli
Hasan, 2011).
 Sections 51to 58 of the CBA further clarify and enhance the Shari’ah
governance framework for Islamic Financials Intitutions in Malaysia (see
Hasan, 2010: 105-108). The CBA provides a clear and precise legal
framework for Islamic finance, particularly regarding the legal status of
Shari’ah resolution and the Shari’ah Advisory Council (SAC) as the highest
authority on Islamic banking and finance.
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16. THE LEGAL ISSUES OF AL-BAI BITHAMAN AJIL UNDER
THE MALAYSIAN LEGAL SYSTEM
Bank Islam Malaysia Bhd (BIMB) v Azhar bin Osman and other cases [2010] 9
MLJ 192
o Facts: Two sets of appeal went to Court Of Appeal. It was decided that
BBA contact was valid and enforceable. The cases were sent back to
High Court to decide on the quantum of claim and amount due. BIMB
was unsatisfied with the decision and appealed to Court of Appeal
 Issue : Whether there is an obligation for the defendant to pay full sale
price stated in the Property Sale Agreement irrespective of a premature
termination
 Decision : Claim to recover full sale price was granted
o Principles : (i)BBA are sale contracts and the court must give full effect
to the same
(ii) Ibra’ is applicable in early settlement cases and not in default
cases
(iii) The bank is allowed to claim balance sale price
(iv) Court should not interfere with the contract if there is no vitiating
factors to do so
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17. CONCLUSION
 BBA has attracted different and various interpretation of the courts in its
decision which is finally demonstrate the level of understanding of people at
large especially the judges on the subject of BBA as a mode of financing
facility by Islamic bank.
 Possibility due to lack of knowledge of the judges and legal counsel
representing the clients on BBA but this various judgments by the Courts is
assisting the development of BBA in the Malaysian legal system.
 It is suggested that if BBA is to continue its role as a mode of financing
facility, the modus operandi and the standard operating procedures for the
application and management of BBA should be reviewed by the Islamic
banks or the authority so as to ensure that it is in conformity with the true
essence of Shari’ah principles and the Malaysian legal system as well.
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18. THANK YOU FOR KIND ATTENTION
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