Are BBA Agreements Valid?

Mohd Arief Emran examines two recent decisions that discuss the pre-requisites of a valid BBA agreement




The recent judgments of Datuk Abdul Wahab bin Patail J in Arab-Malaysian Finance Berhad & Ors v Taman Ihsan Jaya Sdn Bhd & Ors (Suit No: D4-22A-067-2003) and Arab-Malaysian Merchant Bank Berhad v Silver Concept (Suit No: D4-22A-145A-2003) have addressed questions concerning the validity and viability of Bai-Bithaman Ajil or Bai Muajjal as a mode of Islamic Finance.


Bai-Bithaman Ajil or Bai Muajjal (BBA) is defined by the Securities Commission as “A contract that refers to the sale and purchase transaction for the financing of an asset on a deferred and on an instalment basis with a pre-agreed payment period. The sale price will include a profit margin”. This concept is widely adopted by Malaysian financial institutions in home or property financing contracts instead of other concepts such as Mudarabah, Musyarakah and Diminishing Musyarakah due to BBA’s simplicity and ease of use.


The validity of BBA as a mode of finance is doubted by some scholars, especially those from the Middle East, who believe that this is merely a “hilah” (trickery) to facilitate riba (usury) that is prohibited in Islam.


The judgments of the High Court in the two cases are wide ranging, but due to constraints of time and space, this case commentary will concentrate on the issue of the validity of BBA as an Islamic Finance concept and the possible effect of the judgments on BBA transactions henceforth.




In the AMFB Case, the High Court gave one judgment in respect of 12 separate suits, one of which was brought by Arab Malaysian Finance Bhd and the remainder by Bank Islam Malaysia Bhd, against various defendants, after inviting submissions on the issues from all concerned parties. This approach was adopted so as to “obtain a more consistent result as to the basic principles concerning Islamic financing facilities”.


All of the claims concerned BBA facilities granted to the defendants which had been terminated, duly demanded and remained unpaid. The details of each case were not discussed in the judgment.



Choice of Law – Islamic Jurisprudence applicable to Contracts

Firstly, the Court observed that it is a requirement of the Islamic Banking Act 1983 ("IBA") and the Banking and Financial Institutions Act 1989 ("BAFIA") that all financing facilities offered by Islamic financial institutions must not involve any elements not approved by the Religion of Islam.


The Court opined that as the Federal Constitution, the IBA and BAFIA did not specifically state which Mazhab (i.e. jurisprudential school of thought within the religion of Islam) applies to Islamic financing transactions, there must be no element involved which is not approved by the Religion of Islam under any of the recognised Mazhab. Thus an agreement will be considered as being contrary to the Religion of Islam if any of the Mazhab does not recognise the validity of the said agreement or Islamic Finance concept.



Validity of BBA

It must be emphasised that as a general principle, the Court did not state that BBA is a concept which is contrary to the Religion of Islam. On the contrary, it was specifically held that “there are thus no issues involving elements not approved by the Religion of Islam inherent in these concepts” i.e. BBA, Bai-Al-Inah, Murabahah, Al-Ijarah and the like.


However, the Learned Judge found that in all of the cases there was no bona fide sale of the properties between the banks and their customers. Therefore the profit portions of such BBAs contravened the IBA and/or BAFIA.



In the words of the learned Judge:

No more is the vendor of the property involved, except to receive the balance of his selling price to the respective defendants. The effort to purchase directly from the original vendor and then to sell to the bank’s customer has been abandoned. More so than ever before the transaction between the plaintiff bank and its defendant customer became transparently financing in nature and for profit when the Al-Bai’ Bithaman Ajil transaction comprising letter of offer, PPA, PSA and the charge or assignment are read together.


If the Al-Bai’ Bithaman Ajil of the past were said to maintain only a pretence of a sale transaction between the Bank and the customer, the Al-Bai Bithaman Ajil in the current cases abandoned all pretence….

To summarise, it is essential to maintain a bona fide sale in order that the profit should not be an element not approved by the Religion of Islam”.


The Court held that for the profit portion to be recognised in Islamic Finance there must be a bona fide purchase of the property by the bank either directly from the third party or by way of a novation of the original sale and purchase agreement. The bank cannot legitimise profit derived through a fictitious purchase agreement directly from the customer and then resell the said property back to the customer.


In circumstances where there is no bona fide sale the banks are not entitled to claim the profits against the customer.  The Court went on to hold that the customers must repay the original amount of the facilities disbursed by the banks pursuant to section 66 of the Contracts Act. The fact that section 66 was applied means that the learned Judge was satisfied that the contracts in question were void.



Selling Price

Finally, the Learned High Court Judge maintained that the fact that the calculation of the selling price may look like a conventional loan would not render the profit claimed illegal. However, the Court imposed an equitable interpretation of the selling price by disallowing the banks' claim for the full purchase price stated in the property sale agreements.


Instead, the banks were required to show the Court the formula which they used to derive the amount outstanding as at the date on which the property is to be auctioned off or judgment is obtained. In so doing, His Lordship followed his earlier reasoning in Affin Bank Berhad v Zulkifli Abdullah [2006] 1 CLJ 438 ("Affin Bank Case").




In the Siver Concept Case, the Defendant entered into a Sale and Purchase Agreement dated 15 June 1995 to purchase approximately 2,075 acres of land from Ng Eng Hiam Plantations Sdn Bhd (“Seller”)(“original sale”).


To part finance the acquisition of the land and other assets, the Defendant requested a consortium of banks lead by the Plaintiff for a ABBA Facility with a sale price of RM216,875,000 being the aggregate of the purchase price of RM125,000,000 and profit of RM91,875,000.


The Plaintiff, as agent to the consortium, the Seller and the Defendant entered into a Sale and Purchase Novation Agreement dated 29 March 1996 (“Novation Agreement”) whereby certain rights and obligations between the Seller and the Defendant under the original sale were novated from the Defendant to the Plaintiff.


The Plaintiff and the Defendant then entered into an Instalment Sale Agreement dated 29 March 1996 whereby the Defendant inter alia agreed to pay the Plaintiff the sum of RM3,281,250 on various dates stated in the Instalment Sale Agreement and a final instalment of RM128,281,250.


The Defendant defaulted in paying an instalment on its due date, resulting in the facility being terminated and recalled. Attempts to restructure the transaction failed and the Plaintiff filed the civil suit against the Defendant.


The Defendant alleged the ABBA Agreement was illegal, null and void, arguing that the ABBA Agreement is a scheme to defraud the public and the public authority by couching and disguising a loan transaction with a fixed interest charged as a sale transaction valid in Shariah.


The same Judge who decided the AMFB Case disagreed with the Defendant and found in favour of the Plaintiff.


The Court held that BBA agreements are Shariah compliant in accordance with the decision in the AMFB Case (although the two decisions were handed down together, it appears that one was written earlier) and went on to hold that the existence of the Novation Agreement proved the existence of a bona fide sale between the customer and the Bank, thus justifying the profit claimed in Shariah, and ensuring its enforceability in the civil courts.


The Court maintained the views stated in the Affin Bank Case but held that in this case the Bank was entitled to claim the sum of RM185,536,908.64 (which includes the whole of the agreed profit) as the time period for payment of the final instalment had already expired and there was therefore no question that any of the profit had not been re-earned by the Plaintiff.




It is suggested that the following flow from the findings made by the High Court Judge in the above-mentioned cases:


(1) It is imperative that a BBA agreement does not involve any element which is not approved under any of the recognised Mazhab. Otherwise, the agreement will be deemed to contravene the Religion of Islam.


(2) In order to claim the profit element in a BBA agreement, there must exist a bona fide purchase of the property. It appears from the two decisions that bona fides may be established either through a novation agreement or by way of direct purchase of the property by the bank from the seller. The property may then be resold to the customer for a profit with the price to be paid by way of instalments.


(3) In claiming the sale price from a customer in default cases, financial institutions are not entitled to claim the full selling price from the customer pursuant to the equitable doctrine laid down in the Affin Bank Case. Following the said decision, the Court will only consider the profit that is earned by a financial institution as at the date of the judgment excluding all future unearned profits.


The AMFB Case has cast doubt on the enforceability of BBA agreements which are underpinned by a sale of the subject property by the customer to its financier. The financial institutions concerned have appealed against the decision of the High Court. Without doubt, financial institutions in Malaysia anxiously await the outcome of these appeals.



MOHD ARIEF EMRAN BIN DATO' ARIFIN ( This e-mail address is being protected from spambots. You need JavaScript enabled to view it )



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