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Introduction
Problem Statement
The application of Al-Bai Bithaman Ajil (BBA) Home Financing in Conventional
Banks and Islamic Banks is used considerably in Malaysia. However, it is argued that the
concept of Al-Bai Bithaman Ajil that is practiced in Malaysia is not a real BBA under the
BBA principles, it is rather considered Bay' Inah (sell and buy back) in character which is
contrary to a valid Islamic contract. Additionally, the Islamic banking transaction in
Malaysia has to be applied and implemented within the existing common law system of
courts and the regime of all other existing laws (includes substantive and procedural
laws).
Therefore, this study aims to highlight the issues surrounding Al-Bai Bithaman
Ajil Home Financing. This study shall identify whether the practice of Al-Bai Bithaman
Ajil Home Financing in Conventional Banks and Islamic Banks in Malaysia comply with
the real Islamic concept of BBA under Islamic Law. This is because the practice of BBA
contract in Malaysia has the characteristics of bay’ al-inah contract which is not a valid
Islamic contract. Furthermore, the decisions of Civil Courts in Malaysia relating to BBA
cases shall also be analysed and discussed critically.

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Objective of Study
The overall aim of this research is to analyse and evaluate the application and
practice of BBA Home Financing by the Banks in Malaysia. The objectives of this
research includes the understanding the concept of BBA in relation to home financing
and its application is Malaysia, determining whether BBA Home Financing in Malaysia
is practiced in compliance with Islamic Law and whether it is a sale contract or a loan
contract, also the study will analyse the legal aspect of BBA contract, and finally the
study will try to find alternatives for Home financing that are in compliance with
shari’ah.

I s l a m i c Fi n a n c i a l S y s t e m a n d E n v i ro n m e n t ( F I N
6640) | 9

Is Al-Bai Bithaman Ajil Home Financing in Malaysia is considered a real sale contract or loan contract? 3. Imam al-Ghazali also describes Maqasid al-Shari`ah in a view that benefits (masalih) that should be consistent and in line with the objective of the Shari`ah. ambiguity. 1997). (Osmani & Abdullah. since the basic purpose of Islamic I s l a m i c Fi n a n c i a l S y s t e m a n d E n v i ro n m e n t ( F I N 6640) | 9 . according to Alam et al (2012). cars or other appliances. the Islamic banks limit to transactions that are free from interest. are expressed not only in the details of Islamic transactions but in the extensiveness of its role in realizing the Maqasid al-Shari`ah (Abozaid & Dusuki. According to Abdul Karim Al-Zaidan. 2007). However.[Document title] 4 Research Questions 1. The values which are dominant within the sphere of the Shari`ah. cheating etc. Likewise. the establishment of the Islamic home financing is triggered by the nature of conventional home mortgages. 4. Does the Malaysian legal system help resolve BBA contract disputes under shari’ah law? To study and analyse the decisions of Civil Courts as regards to Al-Bai Bithaman Ajil Home Financing cases. usury. 2010). Are there other alternatives for Home Financing which is in compliance with Syariah? 5 Literature Review Home mortgage is defined as a loan given by financial institutions and secured by a mortgage on real property and provide a schedule of payments of interest as well as repayments of the principal to a bank (Tse. Dzuljastri & Fauziah (2011) also made a similar statement that the Shari`ah law prohibits any trading that involves the interest element or usury. Maqasid al-Shari`ah refers to an act of achieving and protecting the benefits and good (masalih) for the sake of human beings. Whilst conventional banks deal with interest in financing homes. Does the practice of Al-Bai Bithaman Ajil Home Financing in malaysia comply with Islamic Law? 2.

. convenience (hajiyyat) and refinement (tahsiniyyat). Canada.. the Islamic finance system is required to oblige several key principles that have been underlined in Shari`ah commercial law and to promote justice in its application. the financier will buy the house from the customer at a price equal to the financing amount and sells it back to the customer. there are five key components that require to be protected and one of them is the property or wealth (maal) protection. United Kingdom and Australia. Among the more dominant home financing products in Islamic are the al-Bay’ Bithaman Ajil (BBA) and the Musharakah Mutanaqisah Partnership (MMP) contracts. According to Razak et al. it is important to ensure the implementation of the system is in line with the ultimate objective of Shari`ah (Maqasid al-Shari`ah) which is to protect the property and the just distribution among the society.[Document title] legislation is to protect the interest of people against harm (mafsadah). At the initial stage of the BBA. variable or mixed rate which is set by the financier (Aris et al. BBA is similar to debt financing. 2005). In relation with Islamic finance. at a price plus profit margin (Meera and Abdul Razak. BBA is a facility provided by the financier (the Islamic bank) to a customer to buy a house. Hence. (2008). the benefits (masalih) of Maqasid al-Shari`ah can be categorized into three which are necessities (dharuriyyat). 20 years. United States. In 1983. which results in high cost and poses a burden to I s l a m i c Fi n a n c i a l S y s t e m a n d E n v i ro n m e n t ( F I N 6640) | 9 . In the first category of Maqasid al-Shari`ah which is necessities (dharuriyyah). at an either fixed. The BBA is the more popular concept in countries like Malaysia. According to the Muslim scholars. in order to achieve the highest objective of Shari`ah in protecting the wealth and property. The Islamic bank capitalizes its profit up front in the sale of the property to the customer who in turn is required to pay a fixed sum until the tenure ends. over a tenor of say. for home financing. Bank Islam Malaysia Berhad (BIMB) implemented the BBA in Malaysia. 2012). Islamic banks have adopted several products to keep them free from the elements prohibited by the Shari`ah. Indonesia and Brunei whereas the MMP is widely practiced in the Middle East. 2012). Thus. (Aris et al.

First. its permissibility in the Shari`ah. the customer enters into a partnership (musharakah) under the concept of Shirkat al-milk (joint ownership) agreement with the bank. BBA uses the concept of Bay’ al-Inah which is said to be one of the most controversial products of Islamic banking and finance (Abozaid & Dusuki. “Ikhtiar” (value-addition or effort) and “al-Kharaj bil Daman” (any benefit must be accompanied with liability). thereby rendering the BBA profit to be implicated with riba (Meera & Razak. even though their form may be different (Abozaid & Dusuki. 2007). they serve exactly the same contractors’ purposes. Abozaid & Dusuki (2007) also mentions that in Bay` al-`Inah applications. Bay` al-`Inah here is resorted to as a legal device (hilah) to circumvent riba-based financing. in reality the Islamic bank merely acts as a financier who provides money without taking any risk and without being involved in the investment process. MM is not widely used in Malaysia but is regarded as one of the modes of financing in Pakistan Islamic banks. the Islamic bank is to act as a trader selling or buying. if any. (International Fiqh I s l a m i c Fi n a n c i a l S y s t e m a n d E n v i ro n m e n t ( F I N 6640) | 9 . as the word ‘bay`’ suggests. Meezan Bank of Pakistan has been implementing this mode of finance for house financing. Here. its conditions and other Shari`ah principles related to this contract. and share exactly the same economic substance and consequences. However. Usmani (2002) has described the characteristics of MM in Pakistan and made a detailed discussion on the operational method of house financing in Meezan Bank. 2007). This contract combines two basic Islamic concepts. but as far as the substance is concerned Bay` al-`Inah-based financing and the conventional riba-based financing are the same. Musharakah Mutanaqisah (MM) on the other hand is based on the concept of diminishing partnership. The International Fiqh Academy of OIC in its 15th session has made a discussion on MM where the Shari`ah scholars have discussed the fundamental characteristics of this contract.[Document title] one’s family obligation. the bank leases its share in the house ownership to the customer under the concept of ijarah (leasing). Secondly. 2005). it is evident that the concept of Bay` al-`Inah ignores the Shari`ah principle of “al-Ghorm bil Ghonm” (no reward without risk).

However. 2004). (2012) stated that MM is still not favourable among the practitioners. This leads the financiers and the customers in difficulties.[Document title] Academy of OIC. The steadily increasing pattern since its establishment shows that Islamic products have been accepted among the people especially the Muslims. Smolo (2007). They compared between BBA home financing and MM home financing and concluded that MM is more Shari`ah compliant. Usmani (2005) has defined the MM contract and described its mode of applications in home financing. Meera & Abdul Razak (2005) argued that MM is a better alternative to BBA home financing. there are a lot of Islamic products that have been introduced since the emergence of Islamic banking. the profit rate in BBA is fixed as it is a fixed selling price which cannot be changed. It also shows the level of awareness among the Muslims on how important it is to avoid riba’ as it is one of the prohibitions in Islam. the majority of house financing in Malaysia is still using BBA and MM only acts as an alternative product. trade and business services while maintaining Shari`ah principles. As such the banks cannot make money as MM is purely based on rental payment. in his dissertation made comparison between the BBA and the MM. Up until today. Aris et al. even the Muslim scholars have tried I s l a m i c Fi n a n c i a l S y s t e m a n d E n v i ro n m e n t ( F I N 6640) | 9 . Al-Kawamelah (2008) made a detailed explanation of MM and its Shari`ah ruling. However. Islamic banking and finance have become the important element in the financial institutions since they have been introduced in the 1980s. It is said to be less attractive to bankers because the MM does not charge interest of advance profits. They argued that the current practice of BBA does not change the interest based system as it follows the similar computation formulas to the interest based system where the profit rate is quite similar to the interest rate in the market. In the context of Malaysia. 6 Proposed Model 1 Situational analysis 2 Marketing objective Nowadays. Furthermore.

in order to create a healthy environment between the customers and the Islamic banks. Furthermore. it can slowly make the Islamic banking institutions change their home financing contracts which currently uses Bai` Bitham al-Ajil or Bai` al-`inah contract to the new contract Musharakah Mutanaqisah. it aims to gain interest and support from the Muslims as well as non-Muslims within the region to use the Musharakah Mutanaqisah home financing contract. One of the marketing objectives of the Musharakah Mutanaqisah is to gain 35% of market share by 2016. since this contract is still considered quite young in the market. if the product can be accepted in the market after going through the marketing activities. Thus. Thirdly.[Document title] their best in producing Islamic products in-line with the Shari`ah. the Musharakah Mutanaqisah is the suitable contract to be used in the home financing. Hence. These objectives have been derived from the SMART approach in the marketing tools as follows:  Specific – The primary need of the Muslim customers is to avoid riba` in their transactions. however arguments are still being sparked among Muslim jurists on the permissibility of the product in Islam. Based on our research. Yet. in the context of home financing in Malaysia. For example. the concept of Bay al-`inah has been extensively used in most of the Islamic banks which give the same impact as mentioned above. it creates confusion among the customers on the permissibility of the products. extensive marketing is needed to create awareness about its existence. having a home is considered as part of Daruriyyat in the Maqasid Shari`ah. I s l a m i c Fi n a n c i a l S y s t e m a n d E n v i ro n m e n t ( F I N 6640) | 9 . Besides that. it also aims to create the product competitiveness in the market.

Strong Shari`ah and accounting educational background of the marketing staff can also be an added value to the Islamic banking Institution in delivering precise information to the customers. Strong knowledge of the marketing team is also vital in order to make the important elements in the contract be properly implemented.  Realistic – These objectives are realistic as the marketing resources are in place to conduct the segmenting and targeting exercise and access to information required.[Document title]  Measurable – Based on the World Islamic Banking Competitiveness Report 2013 – 2014.  Time Specific – The increase in market share is to be achieved within 24 months. with regular progress updates which will be reported every month to track level of success of this product in the market and the impact of this product to the customer financial as well as Islamic banking profitability. After implementing this product in the market.  Achievable – These objectives can be achievable by having strong technical support and commitment of all personnel involved in implementation of the marketing strategies as well as operation. 3 4 5 Target markets Product concept Integrated marketing communications I s l a m i c Fi n a n c i a l S y s t e m a n d E n v i ro n m e n t ( F I N 6640) | 9 . we are assuming that the market share will be increased by 15% as it can attract more investor from the Middle East country. the Malaysian Islamic Banking industry has dominated 20% market share with the it even growing faster than conventional banking.

[Document title] 6 Place and distribution An important element in the marketing mix is place and distribution. In addition. Hence. 3. 4. 5. which are as follows: 1. Friendliness of bank personnel 2. Based on this finding also. Fast and efficient services Speed of transactions Friendliness of bank personnel Confidentiality of bank Knowledge about the needs of customer However. 2. on the other hand non-Muslim customers ranked the following as the main factors in order for them to select their banks to deal with: 1. the current I s l a m i c Fi n a n c i a l S y s t e m a n d E n v i ro n m e n t ( F I N 6640) | 9 . According to the Dr. there are is a contrast on the criterions on choosing a bank where the Muslim customer prefers bank staff that understands and acknowledges the customer needs whereas the nonMuslim customer prefers to select a bank based on its reputation and image. there are five factors that Muslims need to consider in selecting the bank for them to deal with. The strategic location of the information resources will enable the customer to have easy access to the product as well as information related to the product. Confidentiality of bank Based on the research above. Fast and efficient services 3. According to Haronet. Speed of transactions 5. Wan Nursofiza (May. 2005). it is important to assign the human resources in the proper places so that it can satisfy the needs of the customers. Reputation and image of the bank 4. it will make the marketing goals to be achieved without much difficulty. recognizing the distribution strategy is also the key of successful in Islamic banks. Al (1994).

Since our product is still new and needs very strong support from the customers. we will also place a knowledgeable person in marketing or customer service in order to ensure the information can be delivered clearly to 7 8 9 10 the relevant parties. 7 Cash flow budgeting Analysis and Findings Conclusion References Appendices I s l a m i c Fi n a n c i a l S y s t e m a n d E n v i ro n m e n t ( F I N 6640) | 9 . Besides that.[Document title] practice of the Islamic banks is by introducing mini-branch as well as kiosks which provides the basic information of the banking facilities to the customers. we would use the approach of doing a nationwide road show in order to reach the target market.