Bay' Bithaman Ajil (BBA) contract used to be the most popular financing contract in all Islamic banks in Malaysia for home financing products. However, it is often argued by the academicians that the BBA practiced is not a true BBA under the BBA principles, but rather it is a Bay' al-Inah (sell and buyback) in character which is contrary to a valid Islamic contract. Here we will discuss more of the issues that arose on the application of Bay' Bithaman Ajil Home Financing.
The Legitimacy of Bay' Bithaman Ajil (BBA) Contract
Bank Negara Malaysia (BNM) defines BBA as a deferred payment sale whereby the financier purchases the property requested by the client and then sells the goods to the client at an agreed-upon price that includes a mark-up (profit) for the Islamic bank. The selling price is fixed and agreed upon by both parties, and it 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 transferred to the customer upon full payment.
Bay' Bithaman Ajil (BBA) is a valid contract as agreed by the scholars. Based on the hadith narrated by 'Aisha, from Sahih Bukhari which translates,
"The Prophet purchased food grains from a Jew on credit and mortgaged his iron armour to him."
Here, the Prophet SAW shows an example of a sale transaction where the goods were obtained and the payment was deferred to a later date. The Prophet SAW deferred the payment by giving his iron armour as a pledge. This hadith shows that deferred payment is permissible and thus this hadith has been relied upon by scholars for their support on BBA contracts.
However, there are some issues regarding the application of BBA contracts as home financing products. Here we discuss some of the issues that have arisen.
The Shariah Issues in Bay' Bithaman Ajil (BBA) Contract
The Element of Bay' al-Inah
The debate over BBA is not new, it has been ongoing since it was first introduced in the banking industry. Despite the fact that Islamic scholars have agreed on the necessity of deferred trading, it cannot be denied that the majority of Islamic scholars do not consider BBA to be an Islamic banking product due to the presence of the Bay' al-Inah element.
The BBA contract is viewed as merely act as a legal device (Hilah) used to circumvent the prohibition on taking an interest. Jurists, in particular, have condemned the use of a contract of sale to facilitate what is in fact a loan for money. It is equivalent to Bay' al-Inah in Islamic Law, which triggers the first of Islamic Law compliance issues in Malaysian sale-based financing structures, in their opinion.
Resembled a Conventional Loan
Bay' Bithaman Ajil (BBA) was also said to resemble the conventional loan transaction because it involved the practice of sell and buyback. Therefore, it is said that the BBA trading activity carried out by Islamic financial institutions and banking did not reflect the real BBA. The use of documents such as the Property Purchase Agreement (PPA) and the Property Sale Agreement (PSA) was claimed to be merely complementary to give effect to the BBA transactions.
When the customer came to sell assets under the PPA, he was not the actual owner of the asset or goods for sale since the said customer only paid a portion of the price of the overall total asset. For example, the PSA requires a 10% deposit to be paid to developers. The sole purpose of selling and buying back under the PSA and the PPA was to obtain cash to pay the seller. A bank could only act as a financier in this case, not as a seller.
Issue of Gharar or Uncertainty
Other than that, the use of BBA contracts was also claimed to contain gharar or uncertainty elements, for example, in the case of purchasing of property under construction rather than purchasing a finished property. The issue of gharar arises because the property to which the facility is covering is to be constructed or yet to exist.
A contract involving a non-existent subject matter is prohibited, according to a hadith whereby the Prophet Muhammad (SAW) 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.
Thus, this makes the validity of BBA facility questionable as the implementation of BBA contract for the financing of houses under construction is not valid due to the unclear status of the houses, collaterals, ownerships, purchasers, banks, and developers that may lead to gharar.
Conclusion
The BBA contract has sparked debates in the Muslim world, both in terms of acceptance and rejection, particularly among academicians and industry players. Due to the Shariah issues related to BBA contract, the popularity of BBA contract in financing products has decreased. Tawarruq contracts are now used by the majority of Islamic financial institutions and banks in place of BBA contracts.