ISB540 - BBA

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MAHYUDDIN KHALID [email protected]

ISLAMICISLAMIC BUSINESS TRANSACTIONBUSINESS TRANSACTION

CHAPTER NINECHAPTER NINE

BAY BIBAY BI--THAMAN AJILTHAMAN AJIL

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DEFINITIONDEFINITIONDEFINITIONDEFINITION

EVIDENCEEVIDENCEEVIDENCEEVIDENCE

OBJECTIVEOBJECTIVEOBJECTIVEOBJECTIVE

PRICINGPRICINGPRICINGPRICING

CONDITIONCONDITIONCONDITIONCONDITION

APPLICATIONAPPLICATIONAPPLICATIONAPPLICATION

INTRODUCTION DEFINITION EVIDENCE OBJECTIVE OF BBA PRICING FOR BBA CONDITION OF BBA APPLICATION OF BBA

CONTENTCONTENT

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The most popular type of financing The Majallah (mainly Hanafi-bases codification) refers to BBA as

Bay' al-Muajjal. This term is employed in Pakistan. In Bangladesh, it is known as Bay Muazzal. In the Middle East, a similar practice is used under the term

Murabahah. Bay Bi-thaman Ajil (BBA) or deferred payment sale also calledBay a;-Taqsit (Sale with Installment) or Bay al-Muajjal (DefferedPayment Sale).

However, in Malaysia both terms refer to two different products.

I NTRODUCT I ONI NTRODUCT I ON

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BBA is a defined as an instalment sale. BBA is a sale contract in which the payment of the price is

deferred and payable at a certain particular time in the future. It is a contract whereby the commodity is delivered immediately

and the price is paid by instalments.

The payment is delayed to a fixed and stipulated period of time.The selling price includes the cost price plus an agreed profitmargin which will increase depending on the length of periodover which the deferment is agreed upon.

DEF I N I TI ONDEF I N I TI ON

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BBA is essentially to sell something with a prompt delivery ofsold items to the purchaser while the payment is postponed untila specified date in the future or through installment (taqsit)

Therefore, BBA can be implicated for other sale contractsincluding Musawamah and Murabahah. (not applicable for salamcontract)

According to some writers BBA occurs when the payment ofMurabahah is deferred to a certain date agreed upon by theparties. It is also possible to say that while in Murabahah theoriginal cost is disclosed it may not be necessary under BBA. Inthe Malaysian context the selling price both in Murabahah and

BBA is based on the cost price. However, Murabahah is used forshort-term transactions while BBA is used for longer termtransactions.

NATURE OF BBANATURE OF BBA

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In general, no issue arises from the practice of deferring thepayment of sale price.

It is reported in a Hadith by a Companion, Jabir, that the Prophet(s.a.w) bought a camel from him outside the city of Madinahwhereby the payment was settled later on in Madinah.

In another Hadith, it was narrated that the Prophet (pbuh)purchased a quantity of grain from a Jew on the basis of deferredpayment and he pledged his armour by way of security.

The dispute arises from the practice of increasing the price dueto deferrment.

According to majority jurists inc. Al-Kasani, Ibn 'Abidin, Ibn

Rushd and Al-Nawawi increasing the price due to the defermentin the payment is permissible because the increase is against thecommodity and not against the money.

EV I DENCEEV I DENCE

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1. To provide financing for potential buyers who could not affordto pay cash in advance and enable them to perform dailyresponsibilities and obligations without any financial hardshipor difficulties

2 . To facilitate and support the smooth flow of transaction in thebusiness society by providing flexible modes of paymentespecially through credit payment.

OBJECT I VE OF BAY B I THAMAN AJ ILOBJECT I VE OF BAY B I THAMAN AJ IL

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One of the most effective strategy to attract potential clients is thetrader would offer flexibility on how the client could settle thepayment of their purchase.

Instead of paying cash, they could purchase it on credit basiswith the payment made in the future either through installmentor lump sum

Common practice for BBA to set higher pricing for productpurchased through deferred payment or installment compared tocash payment

Meant to compensate traders who are willing to wait little bitlonger before they could regain their money back. If they receive

payment in advance, they could use it for other purpose suchreinvest.

P R I CI NG FOR BAY B I THAMAN AJ ILP R I CI NG FOR BAY B I THAMAN AJ IL

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P R I CI NG FOR BAY B I THAMAN AJ ILP R I CI NG FOR BAY B I THAMAN AJ IL

SALAM PRICING NORMAL PRICING BBA PRICING

At a discount cheaperthan normal pricing

Market rate based onthe ability to pay cash

Higher than normal andSalam pricing

Strategy for flexible pricing has advantages for seller and buyer:Traders would be able to attract potential customer byoffering some credit assistance for buyers who are notcapable to pay in full and hence increase their sales.By offering higher price for credit purchase, it is indirectstrategy to encourage buyers to pay cash instead delaying. Itis not penalty to penalize those who cannot pay in full. Itjust considered as justified compensation for traders whoare willing to forego direct payment in return for slightlyhigher return.

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Few minority scholars against sale of product with deferredpayment at higher price than daily price on the basis that it isactually part of riba nasiah that being prohibited in Islam

Majma Fiqh Islami concluded that Bay Taqsit (instalment) ispermissible in syariah.

Majority scholars allowed different pricing for both normal sale

and BBA. This permissibility is based on several reason:1. Scholars such as Ibn Qayyim stated that it permissible sinceelement that prohibited (riba, uncertainty(gharar),gambling(maysir) and ignorance) does not exist in thetransaction

2 . There are no single evidence that prohibits this type of

pricing.3 . The counter-values (cash versus product) differ from eachother compared to ribawi transaction especially ribawi debtwhere the counter values are exactly the same (cash versuscash)

ISS UE S OF BBA S D I FFERENT P R I CI NGISS UE S OF BBA S D I FFERENT P R I CI NG

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BBA is permitted in Islam only for non-ribawi commoditiesFor ribawi commodities of different category and type sincethe exchange of items must be conducted according to theprinciple of spot transactions and within the same contractsession. Any delay in the exchange will transform thisdealing to prohibited transaction.

Majority of jurist stated that duration of contract must be clearlystated in a precise manner whether using Islamic calendar or anyforeign calendar provided it is realiable.

The payment of BBA could be made in several form:1. Instalment spread over a certain period2 . One lump sum in the future3 . Combination of both provided it clearly stated in the

contract and both parties agreed with term and condition inthe contract.

COND I TI ON S OF BAY B I- THAMAN AJ ILCOND I TI ON S OF BAY B I- THAMAN AJ IL

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In classical Islamic law, there is no differences between BBA andbay al-murabahah. They simply mean deferred payment sale ata mark-up.

In Islamic bank practice, they confined BBA to medium and long-term asset financing and murabahah to short term financing.

Murabahah is a trust transaction; it require more strict conditioncompared to other type of transaction like BBA.

D I FFERENCE S BETWEEN BBA AND BAY A L- MURABAHAHD I FFERENCE S BETWEEN BBA AND BAY A L- MURABAHAH

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In Malaysia, BBA financing is employed by bank to providemedium to long term financing to clients for acquiring eg.Property, land, motor vehicle, consumer goods, shares, overdraftfacility, education financing package etc

House financing is the most popular facility granted under theconcept of Bai Bithaman Ajil (BBA) either to purchase existingcompleted houses, build or construct new house on customersland even as a refinancing facility.

In BBA, the customer sells the property purchased to the bank fora cash sum paid to the customer and the property will then beimmediately resold back by the bank to the customer at higherprice which include the banks profit on the sale, payable by thecustomer to the bank by monthly installments over a fixed periodof time.

APP LI CAT I ONAPP LI CAT I ON

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Islamic bank also provides a facility of Overdraft Naqad by usingthis type of sale.

The operation of overdraft Naqad involves two aqad or contracts. First, the bank buys the asset from the customer in cash and the

latter sells it in cash as well.

Then, the bank deposited the money received from the customerin a designated current account (ASM/D). The bank controls the money in this account. Therefore, the

customer is actually uses his own money deposited by the bankin a current account.

APP LI CAT I ONAPP LI CAT I ON

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END OF CHA P TER END OF CHA P TER

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ISB540 - BBA

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