LONDON: The ruling of the Malaysian Appeal Court that the Islamic mortgage offered by Malaysian Islamic banks based on the Al-Bai Bithaman Ajil (BBA) contract is a valid contract under the Shariah is a victory, not only for Bank Islam Malaysia Berhad (BIMB), the bank involved in the court proceedings, but also for diversity of opinion in Fiqh Al-Muamalat (Islamic law relating to financial transactions). Indeed, the court case involved BIMB’s “Baiti Home Financing-i” and “Baiti Cakna Home Financing-i” products.
BBA has been a popular financing transaction, primary for home and consumer financing, for more than a quarter of a century in the Malaysian Islamic finance market and accounts for about 60-80 percent of the financing of Malaysian Islamic banks. More recently, due to the globalization of Islamic finance with the arrival of foreign bankers working in the Malaysian Islamic banking market, some concerns were raised about the BBA and its application in the local market.
This concern could be partly because of a misunderstanding of the Malaysian practice and partly because of an element of chauvinism that the GCC (Gulf Cooperation Council) and South Asian practice (predominantly under the Hanbali and Hanafi Schools of Islamic Law) is effectively better than the Malaysian practice (predominantly under the Shafie School of Law). Hence, the misnomer that the Malaysian Islamic finance market is “more liberal”. In fact, there has been the isolated case of one local bank ceasing to offer BBA mortgages, a move which has since been rescinded.
BBA is a contract which refers to the sale of goods (assets) on a deferred payment basis. The bank will first purchase the asset/s on a cash basis and subsequently sells the assets to the client at an agreed price (the bank’s purchase price plus the bank’s profit). The client is allowed to settle the bank’s selling price by installments within a pre-agreed period, or in a lump sum.
According to BIMB, its Baiti Home Financing-i “is a financing based on the BBA contract, a method of sale with a deferred payment plan (monthly installment). It can reduce your risks against interest, fluctuations and other risks you can do without.” The BBA home financing contract in reality is a two-party transaction where a customer typically pays a deposit for a property and transfers his rights to the asset to the bank. The bank then charges him a sum that includes the cost price (the principal). Indeed, a lower court in Malaysia had earlier ruled that the above arrangement resembles a conventional loan akin to a fixed-rate mortgage, arguing that the bank should first buy the property from the developer before selling it to the customer for a profit. Some overseas Shariah advisories have similarly argued that the BBA as practiced in Malaysia is an interest-based loan cloaked in Islamic dress.
Potential confusion comes in whether the transfer of rights of the asset to the bank constitutes a purchase of the asset by the bank. Some may argue that such concerns are mere semantics because the net economic effect of the transaction is the same. Interestingly, the Court of Appeal also reiterated that a BBA contract is a sale transaction and therefore must not be compared to a loan transaction. This is an important distinction. The decision of the Shariah division of the Appeal Court that the BBA contract is valid, will further boost Islamic mortgage financing in Southeast Asia, which is by far the most developed of such markets in the world. Elsewhere, Islamic mortgages are structured under the Murabaha (cost-plus financing), which is very similar to the BBA in some respects; under the Ijara (leasing) contract; and under the diminishing Musharaka (diminishing equity partnership).
Not surprisingly, BIMB was confident that its “customers and the public at large can now take comfort from the certainty that BBA contracts are valid and binding. The said decision reaffirmed Bank Islam’s practices in relation to BBA contracts are Shariah-compliant and valid.”
Although there is a clamour for standardization or uniformity of Shariah interpretations, this is unrealistic given the various Madhabs (schools of Islamic law). In any case even in conventional finance there is no uniformity of rules and laws, and they can differ even within one country as in the US where the state laws on banking differ from one other.
Diversity of Shariah opinion is a strength not a weakness. In this respect the judgment of the Shariah judges in the appeal court was unanimous. Those who disagree should learn to agree to disagree. Only that way will the Islamic finance sector thrive. Petty squabbles over what is more Shariah-compliant will only give succour to the cynics and the detractors of Islamic finance.