The secrets of “Al Bai Bithaman Ajil “ Revealed

Ever wondered how a "BBA" scheme works? Harold Tan explains.

 

 

Imagine that after years of searching you finally found your dream house. Immediately, you paid a deposit to the vendor and approached your bank searching for a suitable banking facility to finance the balance of the purchase price. You were introduced for the first time to the Islamic financing scheme of “Al-Bai Bithaman Ajil” (“BBA”).

 

This article seeks to answer the following questions. What is a BBA financing scheme? How does it differ from conventional loan? What are its advantages? Are there any hidden risks?

 

 

THE MECHANICS OF BBA

BBA which means ‘deferred payment sale’ is a widely adopted Syariah principle in the Malaysian banking industry for the provision of Islamic financing. BBA contracts are essentially sales contracts where payments are deferred and payable by way of instalments.

 

It has recently been accepted by the Association of Islamic Banks Malaysia that upon a customer paying the initial down payment of a property to the vendor, the customer becomes the beneficial owner, which entitles him to sell the property. The mechanics of the BBA scheme involves the bank entering into a Property Purchase Agreement with the customer to purchase the property from the customer at the purchase price, which is usually the amount of facility required by the customer.

 

The bank will thereafter pursuant to a Property Sale Agreement sell the property back to the customer at an agreed selling price, payable in a series of fixed and predetermined instalments over the tenure of the facility. The selling price is the sum of the purchase price and the bank’s desired profit margin of the facility. The profit margin is calculated based on a constant profit rate of the bank, the purchase price of the property and the tenure of the facility. Profit of this nature is justified under Islamic principles since it is derived from the purchase and sale transactions and does not involve any element of “riba” or interest prohibited in Islam.

 

Similar to conventional loan, the bank will also under the BBA scheme require the customer to provide collaterals to secure the instalments. The security to be provided is usually a charge against the title of the subject property, and if the individual document of title to the property has yet to be issued, by way of a deed of assignment made in favour of the bank.

 

 

BBA SCHEME AND CONVENTIONAL LOAN

The BBA scheme differs from conventional loan in several pertinent aspects:

 

(1) Unlike conventional loan which creates a creditor/debtor relationship between the bank and its customer, the BBA scheme establishes a seller/buyer relationship between the parties.

(2) Interest is charged under conventional loan but not under the BBA scheme.

(3) The total cost of the property, including the financing cost, can easily be determined at the time of contract under the BBA scheme since both the selling price and periodic instalments are fixed and agreed upon upfront. However, under conventional loan, given that the interest rate charged is usually tagged to the bank’s base lending rate, which can fluctuate from time to time, it is difficult if not impossible for the customer to ascertain the total cost of the property until the final loan repayment is made.

 

 

THE ATTRACTIVENESS OF THE BBA SCHEME

One of the most attractive features of the BBA scheme is the fact that the customer is not at all exposed to interest rate risk. This is possible in view that interest is not chargeable under the scheme. Since both the selling price and the periodic instalments are fixed, the total repayment required of the customer under the BBA scheme will not be affected by fluctuations in interest rates. Fixed instalments would also allow for better financial planning. Furthermore, the BBA scheme is Syariah compliant since it does not contain any element of ‘riba’.

 

 

RISKS IN THE EVENT OF DEFAULT

It is important for one to appreciate that the Property Sale Agreement under the BBA scheme would almost certainly contain a term to the effect that if the customer defaults in paying the instalments, the bank may recall the facility, in which event the entire selling price of the property shall forthwith become due and payable by the customer to the bank. The bank shall also pursuant to the charge document or deed of assignment, be entitled to dispose off the property upon the customer’s default to recover the amount owed under the BBA facility, i.e. the full selling price of the property which essentially includes the bank’s profit margin for the entire tenure of the facility.

 

 

ZULKIFLI ABDULLAH CASE

The issue of whether a bank is entitled to claim from the customer the entire selling price of the property in the event of default under the BBA scheme was dealt with by the High Court in the case of Affin Bank Berhad v Zulkifli Abdullah [2006] 1 CLJ 438.

 

In this case, the defendant obtained a BBA facility of RM394,172.06 from the plaintiff to finance the purchase of a house. The selling price of the property was RM958,909.21 to be paid in instalments over a period of 25 years. The BBA facility provided, inter alia, that the defendant shall upon default repay the entire selling price of the property to the plaintiff. The defendant defaulted 2 years and 8 months later after having paid the plaintiff RM33,454.19. Pursuant to the terms of the BBA facility, the plaintiff proceeded to claim from the defendant for the outstanding amount based on the selling price of RM958,909.21. The plaintiff further applied for an order for sale of the charged property.

 

Naturally, the defendant was distraught that the facility had ballooned by almost 3 folds from a loan of RM394,172.06 to a debt of RM958,909.21 in less than 3 years after it was given.

 

Although the court granted to the plaintiff an order for sale of the charged property, the court held that the plaintiff was not entitled to claim from the defendant the entire selling price of the property. The plaintiff was only entitled to claim from the defendant its profit for the expired tenure of the facility. The court’s reasoning was succinctly set out in the following passage in the judgment:

 

That being the case, it follows that if the customer is required to pay the profit for the full tenure, he is entitled to have the benefit of the full tenure. It follows that it would be inconsistent with his right to the full tenure if he could be denied the tenure and yet be required to pay the bank’s profit margin for the full tenure. Furthermore, the sum that is recovered from the facility in the event of default before the end of tenure is applied to other facilities and the bank continues to earn its profit rate on the same sum. To allow the bank to also recover a profit margin for the unexpired tenure of the facility, means the bank is able to earn a profit twice upon the same sum at the same time. That profit margin that continues to be charged on the unexpired part of the tenure cannot be actual profit. It is clearly unearned profit. It contradicts the principle of Al-Bai Bithaman Ajil as to the profit margin that the provider is entitled to. Obviously, if the profit has not been earned it is not profit, and cannot be claimed under the Al-Bai Bithaman Ajil facility.”

 

The Zulkifli Abdullah case is very significant as it is the predominant High Court case that categorically held that the bank is not entitled to claim against the customer for the unexpired term of the BBA facility. It was followed in a number of subsequent High Court cases including Malayan Banking Berhad v Marilyn Ho Siok Lin [2006] 3 CLJ 796 and Bank Muamalat Malaysia Berhad v Suhaimi bin Md Hashim & Anor [2007] 1 MLJ 275.

 

 

CONCLUSION

It is important for all stakeholders to appreciate the mechanics and nature of the Islamic financing scheme of BBA because BBA contracts, although requiring fine-tuning in certain aspects, will undoubtedly continue to play an important role in the expanding business of Islamic banking in Malaysia.

 

 

HAROLD TAN KOK LENG ( This e-mail address is being protected from spambots. You need JavaScript enabled to view it )

 
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