Presentation Bba and Murabahah

8/2/2019 Presentation Bba and Murabahah

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Bay' Bithaman Ajil and Murabahah are two contracts where payments are

deferred to an agreed time. Compare and contrast these two contracts

and give your view with regard to Affin bank Berhad v Zulkifli Abdullah

(2005) and the 2008 BBA landmark cases.

A presentation by: Ahmad Murad Irqsous 2008354627

Melda Malek 2009293952

Nor Alira Ramli 2009556949

Abang Ikhbal Abang Bolhil 2009519587

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Introduction Nowadays, most Muslim in Malaysia are very much concern onchoosing the right product or offer from bank when their applicationfor loan or facility is approved. The main concern is that it must be inline with Islamic Banking principle. Islamic financing facilities havebeen growing parallel to conventional banking loan facilities. The

charging of interest for a loan or riba is prohibited in Islam, thereforein Islamic financing, the purchaser will pay profit instead of interest tothe bank.

Discussion on 2 types of Islamic financing product offered by banksin Malaysia.

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Introduction - Murabahah Derived from the word 'ribh' profit or gain

A type of contract, a form of sale, where the seller expressly mentions the cost of thesold commodity he has incurred, and sells it to another person (the buyer) by addingsome profit or mark-up thereon.

One of the financing mechanisms in the muamalat system a simple businesstransaction.

Mechanism has to be conducted with complete sincerity by the seller/financier bystating the cost price of the purchase and the total profit incurred clearly and truthfully.Hence, a sale based on trust (amanah).

Only valid for commodities whose cost price is known.

Murabahah initially was not a mode of financing in its original form. It was a simplesale on cost-plus basis. However, after adding the concept of deferred payment, ithas been devised to be used as a mode of financing only in cases where the buyerintends to purchase a commodity.

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Definitions by classical jurists Ibn al-Humam's Al-murabahah is a contract of delivery of traded

goods by a seller to the buyer by offering the buyer the selling costprice plus the total profit.

Ibn Qudamah A form of business transaction whereby thecustomer is informed that the goods are sold at a price whichincludes the cost price and profit.

Imam Shafi'i When someone sell an item with a contract, forinstance for every 10 products the profit is 1, the buyer thus mustpay the cost price, that is 90 dirham, plus the profit of 1 dirham forevery 10, hence 9 dirham and therefore eventually the total financing

is 99 dirham. All support that Murabahah is a trust sale which comprises both cost

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Legitimacy of Murabahah Murabahah is a legally permissible contract by the testimony of the

majority of jurists and the Companions of the Prophet (pbuh).

Proof from Al-Quran:

And Allah has permitted trade [2:275]

O you who believe! Eat not up your property among yourselvesunjustly except it is a trade amongst you, by mutual consent [4:29]

- Murabahah is clearly concluded by mutual consent and it comesunder the general permission in this verse.

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Legitimacy - cont. Some scholars made murabahah analogous to a form of sale called

Tawliyyah (sale at purchase price without making profit)

The Prophet (pbuh) purchased a female camel from Abu Bakr r.a.For use as transportation to migrate to al-Madinah. Abu Bakr wanted

to give it to the Prophet (pbuh) free-of-charge but the Prophet(pbuh)refused and said, I will preferably take it at the acquisition price.

This Hadith indirectly implied that a commodity can be sold at theacquisition price and also the acquisition price with mark up.

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Conditions for Murabahah5 important elements:-A. Product and selling price

-Product must be clearly defined including its type, quantity and other descriptions.

- Selling price- its cost and profit must also be disclosed clearly and truthfully.

- Act of concealing cost price and/or margin of profit render transaction null and void.

B. Contracting parties

- Seller/ financier responsible for supplying the product ordered by the buyer.

- Buyer/ customer obligated to to pay for the product hepurchased according to agreed terms of the agreement.

- Both must be adults, rational, intelligent and can be held accountable.

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Conditions - cont.C. Offer and acceptance- it shall contain the two important elements mentioned ie. Cost price and rate of profit.

- the original price must be fungible ie. The price at which the seller obtained the goodsmust be measured by weight, volume or number of homogeneous goods.

- If the original price is not fungible (eg. A house, clothes), then the question is whether theseller is the owner or not:-

If the seller is not the owner then murabahah is not permitted.

If seller is the owner then 2 situations :

i) if the profit margin is specified as a known amount of a different item (eg. Silve coins, aspecific dress etc), then the sale is permitted. In this case the first price is known andthe profit is known (eg. I sell you via murabahah in exchange for the dress in your

hand, and a profit of 10 dollars).

ii) if the profit is made part of the initial price (eg. The profit margin is 10%), then the sale isnot permitted, since the profit is made part of the object and not equally divisible.

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Conditions - cont.D. No riba trading shall be involved.- Products traded cannot be paid by barter system from ribawi items

prohibited by the Prophet (pbuh) ie. Gold for gold, silver for silver,wheat for wheat, flour for flour, dates for dates and salt for salt andbarley for barley unless weight, measurement and the calculationsare equal. Also forbidden eg. Selling 100kg of good flour at the priceof 120kg of sub quality flour constitutes riba.

E. The initial contract must be valid.

- The traded item or property must be lawfully owned by theseller according to Shariah requirements.

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Basic Features of Murabahah Financing It is not a loan given on interest it is a sale of a commodity for a deffered price which

includes an agreed profit added to the cost.

Murabahah cannot be used as a mode of financing except where the client needsfunds to purchase a commodity. eg. If the client wants funds to purchase cotton asraw material for his factory, the bank can sell him the cotton based on murabahah.

Murabahah cannot be affected if the funds are required for other purposes, likepaying the price of a commodity already purchased by the client or to pay utility billsor to pay staff salary.

Requires a real sale of commodities and not merely advancing a loan. Commodity inthe transaction must come into the possession of the financier, whether physical orconstructive the commodity must be in his risk, though for only a short period

In cases where it is not practicable for the financier to make a direct purchase, thefinancier is allowed to appoint the customer as his agent to purchase the commodityon his behalf.

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Practical Steps for Murabahah Financing1) The client and the financier sign a master agreement whereby the financier promisesto sell and the client promises to buy the commodity on an agreed ratio of profitadded to the cost.

2) When a specific commodity is required by the client, the financier appoints the clientas his agent for purchasing the commodity on its behalf, and an agreement of agencyis signed by both parties.

3) The client purchases the commodity on behalf of the financier and takes possessionas an agent.

4) The client informs the financier that he has purchased the commodity on its behalf,and at the same time, makes an offer to purchase from the financier.

5) The financier accepts the offer and the sale is concluded whereby the ownership as

well as the risk of the commodity is transferred to the client.- All these 5 stages are necessary to affect a valid murabahah.

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Types of Murabahah2 Types of Murabahah:-i) Ordinary Murabahah Sale

- involves 2 parties seller and buyer. The seller is an ordinary trader who buysa commodity without depending on a prior promise of purchase, then he

displays it for murabahah sale for a price and a profit to be agreed upon. (Notpopular!)

ii) Murabahah based on Order and Promise

- widely applicable because used as one of financing tools by Islamic banksworldwide.

- Murabahah to the purchase orderer (MPO) for a pre-agreed selling price, whichincludes a pre-agreed profit mark-up over its cost price, this having beenspecified in the customer's promise to purchase.

- The payment is payable within a fixed future date in lump sum of by fixedinstalments

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The Prohibited Elements in Murabahah To assume that murabahah is a universal instrument which can be used for

all types of financing offered by conventional interest-based banks.

Clients sign the murabahah documents merely to obtain funds though theydo not intend to use these funds to purchase the commodities specified inprescribed forms.

Sale of commodity to the client is effected before the commodity is acquiredby the seller. This usually happens when all the documents of murabahahare signed at one time without taking into account the various stages ofmurabahah.

Entering into a murabahah contract on commodities already purchased by

their clients from a third party. This practice is unacceptable in Shariah.Once the commodity is purchased by the client himself, it cannot bepurchased again from the same supplier.

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Bai' Bihtaman Ajil (BBA)- Intro. The most popular type of financing.

The Majallah (mainly Hanafi-bases codification) refers to BBA asBay' 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 termMurabahah.

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

Definition:-

BB

Ais a sale contract in which the payment of the price is deferredand payable at a certain particular time in the future.

Therefore, BBA can be implicated for other sale contracts inc.Musawamah and Murabahah. (not applicable for salam contract) 14


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Legality of BB

A

Legality of BBA:-

In general, no issue arises from the practice of deferring the payment of saleprice.

It is reported in a Hadith by a Companion, Jabir, that the Prophet (pbuh)

bought a camel from him outside the city of Madinah whereby the paymentwas settled later on in Madinah.

In anotherHadith, it was narrated that the Prophet (pbuh) purchased aquantity of grain from a Jew on the basis of deferred payment and hepledged his armour by way of security.

The dispute arises from the practice of increasing the price due todeferrment.

According to majority jurists inc. Al-Kasani, Ibn 'Abidin, Ibn Rushd and Al-Nawawi increasing the price due to the deferment in the payment ispermissible because the increase is against the commodity and not againstthe money.

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BBA

Financing In Malaysia, BBA financing is employed by bank to provide mediumto long term financing to clients for acquiring eg. Property, land,motor vehicle, consumer goods, shares,overdraft facility, educationfinancing package etc

House financing is the most popular facility granted under theconcept ofBai 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 theproperty purchased to the bank for a cash sum paid to the customerand the property will then be immediately resold back by the bank tothe customer at higher price which include the banks profit on the

sale, payable by the customer to the bank by monthly installmentsover a fixed period of time.

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BBA

- documentation 3 main ingredients of BBA facility: Sale and Purchase Agreement

- Not part of the documentation of the facility but is required to obtain the facility.

Property Purchase Agreement(PPA)

- This is an agreement made between the client and the bank.

-most of the time the purchase price consists of the remaining balance of theprice of the property (eg 90%) and some other costs such as lawyer's fees,MRTA etc.

Property Sale Agreement(PSA)

-This agreement is signed between the client and the bank.

- PSA should be signed after the signing of the PPA so as to allow the bank tosell back the asset to the client.

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Some issues with BBA

Selling of the non-existent

For houses under construction, property transacted is not yet inexistence and may fall under non-completion.

Even if the opinion of Ibn Taymiyyah and Ibn al-Qayim that allows theselling of non-existent subject matter is to be followed, the ruling isbased on the near certainty of delivery.

To avoid conflicting issue such as this, banks are recommended touse other types of financing for property under construction eg. Istisna(future delivery)

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Issues with BBA

- cont.Transfer of ownership Issue of possession (al-qabd) since BBA is actually a sale contract, the

transfer of ownership and the taking of possession must truly happen evenfor a little while.

Dato' Haji Nik Mahmud bin Daud v Bank Islam (1996) CLJ p.582

- The issue arisen was whether the execution of PSA and PPA amounted to atransfer of ownership of the Malay reserved lands in question.

- Court held that it was never the intention of the parties to involve any transferof ownership and that the executions of the PPA and PSA were part of theprocess required by Islamic banking procedure.

Although justice and equity have been carried out in this case, the judgmentcaused serious conflict with the concept of BBA whereby, the contractshould, result in the transfer of ownership of the property, even only for asecond.

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CASE REVIEW (contd)

Affin Bank Berhad v Zulkifli Abdullah [2006] 1 CLJ 438

Facts of the case

Zulkifli bought a house from a vendor and applied for BBA financing from hisemployer, Affin bank. The bank paid the balance sum due to the Vendor (seller)amounting to RM346,000-00 which is the approved facility amount and Zulkifli

was required to repay to the bank the facility amount over a period of 18 yearsby a fixed monthly amount. The bank selling price to Zulkifli is RM466,847.28.The said facility was then restructured because he had defaulted in hisrepayment and also because he had left his employment with the bank. Therestructuring involved a revision of the banks purchase price, the banksselling price, the tenure of the facility and the monthly installmentspayable. Zulkifli agreed with all the terms of restructuring hence agreed to pay

the bank the revised selling price ofRM992,363-40. After few payments, Zulkiflithen defaulted again and the bank commenced an action to sell the property byway of public auction. The bank claimed that the balance due from Zulkifli wasRM958,909-12, being the difference between the revised selling price and theamount he had paid.

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The Learned Judge held that the bank is not entitled to claim for profit margin forthe full tenure of the vacility for over 25 years.

He did not agree with the banks calculation of the amount due and stated thatbanks selling price in BBA financing is not a sale price paid in a singlepayment but a series of equal monthly instalments. The profit margin isculculated with the profit rate applied to the full tenure.

What is immediately striking is the amount of the claim whereby the revised

facility had mushroomed into a claim for a debt ofRM958,909.12 which is morethan double.

If the customer is not given the full tenure to pay the selling price, then the bankis not entitled to claim for the banks profit margin of the full tenure. The profitmargin charged on the unexpired part of the tenure is unearned profit and notactual profit and therefore cannot be claimed under BBA.

The reason behind this judgement is obviously on the following :

as the facility was terminated way before the expiry of the tenure, the bankwas not entitle to the unearned portion of the full profit. The sum that thebank was allowed to recover was the sum ofRM582,626.80 which wasculculated base on profit per day which is 9% per annum from the revisedfacility amount of RM394,172.06 until the judgment date .

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CONCLUSION

Zulkifli then got away with having to pay substantially less than what he hadagreed to pay to the bank for the restructured facility and the bank did notappeal against the decision.

In light of this decision, it is important for a purchaser/customer who requiresfinancing to fully understand his or her obligations and liabilities under BBA

financing. This is because the customer has to pay what he has agreed uponand what both parties have contracted with each other i.e. to pay and torepay. The banks selling price which is calculated up to the full period of theloan need to be fully served.

It is the term in the facility that allowed the bank to claim the full selling priceand in this case, the judge seems to rewrite the contract and re calculate the

balance due by Zulkifli and the bank is not entitle for the actual or the totalselling price as agreed during the execution of the Property Sale Agreement.

Therefore it is vital to understand all terms and conditions stated in Facilityagreement and questions, discussion and clear explanation of the implicationof default payment and early settlement is a must. Both parties need to beclear on this issue or else the concept and principle of predetermined profit inBBA does not serve the purpose .

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ARAB-MALAYSIAN FINANCE BHD v.

TAMAN IHSAN JAYA SDN BHD & ORS;

KOPERASI SERI KOTA BUKITCHERAKA BHD

(THIRD PARTY) AND OTHER CASES(2008)

HIGH COURT MALAYA, KUALALUMPUR

ABDUL WAHAB PATAIL J

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Background The respective defendants had already purchased theproperty from a third party and paid part of the price. The defendants approach the plaintiff banks for facilities to

complete the purchase, were there are required to sell theproperty they had bought to the respective banks for thatbalance sum stipulated in the banks property purchase

agreement (PPA).

The bank then sold the property to the defendants via thebanks property sale agreement (PSA).

According to the PSA the defendants would pay an agreednumber of installments of specific sums to the banks, the

total of which made up the banks selling price. As security this Al Bai Bithaman Ajil facility, the respective

defendants were required to and had executed a chargecum assignment of the property to the bank. 24


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The defendants defaulted in the payment of the banksselling price, and the banks in consequence applied for anorder for sale of the charged property.

The defendants argued that the transaction herein,comprising the letter of offer, the PPA, the PSA and thecharge or assignment in question, became transparentlyfinancing in nature and smacked of transactions for profits.

Defendants beseeched the court to examine the same anddetermine whether it involved elements not approved bythe religion of Islam or had otherwise contravened theprovisions of the Islamic Banking Act 1983 or the Banking

and Financial Institutions Act 1989.

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Held, granting order for sale, ordering return of original facilityamounts to plaintiff banks.

Ratio

The plaintiffs submission in reliance upon Bank Islam Malaysia Berhad v.

Adnan Omar[1994] 3 CLJ 735, [1994] 4 BLJ 372 that since the parties haveagreed upon a selling price, there is aqad and the court must look nofurther does not appear to be right. The fact there is an aqad, and beforethat an ijab and qabul does not prevent an examination of the terms as tothe transaction in fact is. It is necessary to look beyond the labels used andlook at the substance. (paras 60 & 62)

Where the bank becomes the owner under a novation agreement, the saleto the customer is a bona fide sale, and the selling price is as interpreted inAffin Bank v. Zulkifli Abdullah [2006] 1 CLJ 438. Thus, where the bank is theowner of the property, by a direct purchase from the vendor or by a novationfrom its customer, and then sells the property to the customer, the plaintiffsinterpretation of the banks selling price is rejected and the court will applythe equitable interpretation. (para 68)

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Where the bank purchases directly from its customer and sells back to thecustomer with deferred payment at a higher price in total, the sale is not abona fide sale, but a financing transaction, and the profit portion of such Al-Bai Bithaman Ajil facility renders the facility contrary to the Islamic BankingAct 1983 or the Banking and Financial Institutions Act 1989. (para 69)

To understand more on this matter, we will look into para 56

But it must be said that, bearing in mind that deferred payment of the sellingprice is a credit or a loan, permissible only because no riba is charged, anyprofit claimed or charged by the seller from deferred payment byadding to the cost above a profit for himself for the time given to makefull payment, that profit arising from the giving of time to make payment

is interest, is riba and the very element prohibited in the Religion of Islam.

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The court distinguish benevolent loan

If interest is no more than an increase, expressed as a sum or rate, for thefacility of a loan, profit upon a sale is the increase upon the sale. The sum ofthe sellers cost and his profit is the selling price. The selling price isordinarily paid upon delivery. If the payment is to be made later, the seller ineffect is extending a credit, in other words, a loan, of that selling price. If there is no increase of the selling price as a consequence of granting time to

make payment, it is a benevolent loan (qard al-hasan). (Para 53) Since the banks action resulted more likely from a misapprehension rather

that of intent aforethought, the plaintiffs were entitled under s. 66 of theContracts Act 1950 to return of the original facility amount they hadextended. (para 70)

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View

Al Bai Bithaman Ajil concept exclude riba, its no more then a deferredsale. In most cases the three simultaneous transaction is adhered butin this case the BBA facility contain financing transaction and its

rendered riba contrary to IBA

1983 and BA

FIA

. In this case when the bank claim profit for himself from the time given

to make full payment, that profit arising from the giving time of payment is constitute of interest. We cant charge profit based on timegiven to make full payment.

In the issue of agreed selling price. If the bank can fulfill the BonaFide requirement of sale, then the bank may entitle to the sellingprice.

BBA concept is acceptable and reliable as long the customer is not indefault.

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Recent case

Bank Islam Malaysia Bhd Vs Ghazali Shamsuddin and 2 others 2009

On 31 March 2009 Court ofAppeal unanimously overturned Abdul WahabPatail much debated judgement in the Arab Malaysia case discussed above

and held that BBA is in line with shariah in Malaysia.

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Conclusion Murabahah and BBA are 2 separate components but can also be 2 parts ofone product.

BBA originally refers to the method of payment when the payment is deferredand paid by installments.

The mandatory requirement of Murabaha is that the original purchase priceas well as the profit added on, must be clearly revealed to the purchaser.This requirement is not necessary for BBA unless it is attached toMurabahah as a product.

As separate products, Murabahah is usually utilised for short term financingwhereas BBA is utilised for long term financing.

Murabahah can only be utilised for the purchase of a commodity and can notbe utilised for personal financing needs unlike BBA which in practice, can beused for other financing needs.

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Presentation Bba and Murabahah

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Transcript of Presentation Bba and Murabahah