Thursday, December 11, 2008

BBA vs Musyarakah Mutanaqisah

The following article by Habhajan Singh is related to his previous article which I posted in this blog. There seems to be some differences in method of implementation but I wonder whether the financial commitments of purchaser and financier are any different.

Monday, December 8, 2008
RHB Islamic phases out ‘disputed’ BBA financing
RHB Islamic Bank Bhd has completely phased out Al-Bai Bithaman Ajil (BBA) in favour of the musharakah mutanaqisah concept for its home financing products. This probably makes it one of the first local Islamic subsidiaries of local banks to move away completely from BBA which has been under increasing scrutiny over the years.
The move by RHB Islamic, one of the 17 Islamic banks including Al Rajhi Banking & Investment Corporation (Malaysia) Bhd and Maybank Islamic Bhd licensed by Bank Negara Malaysia (BNM), signals a shift in the local Islamic home financing front away from BBA.
"RHB Islamic has taken a stance of phasing out products and services based on BBA or bai al-inah with effect Oct 1. This is based on (its) Shariah committee's advice to adopt globally accepted Shariah principles," RHB Islamic Head of Shariah Division Ahmad Suhaimi Yahya told The Malaysian Reserve.
He added that the move is in tandem with the bank’s strategy to position itself as the banker of choice for local and international customers looking for Shariah-compliant financial products and services. This is in reference to the fact that BBA, with underlying concepts of bai dayn (debt trading) and bai inah (sale with imediate repurchase), are shunned in jurisdictions like the Middle East and Pakistan. BBA, which may involve the two concepts, is a deferred sale contract for a sale price that includes the profit, with a repayment period agreed beforehand.
For so many years, local Islamic banks have made BBA the linchpin when carving out Islamic financing, which now stands around RM143.4 billion.
The Islamic banking assets, according to latest statistics from the central bank, have expanded by 23% to RM234.9 billion compared to a year ago. The Islamic banking industry now accounts for 16.7% of total assets in the industry. It is understood that other banks are also in the midst of preparing to put on the shelf more home financing offerings that are not based on BBA contracts.
The recent major trigger for the move away from BBA was the July 18 written judgment by High Court judge Justice Datuk Abdul Wahab Patail in Arab-Malaysian Finance Bhd vs Taman Ihsan Jaya, first reported by The Malaysian Reserve on Sept 8.
The judgment, a collective ruling on 12 cases now pending an appeal, sent shockwaves in the local Islamic banking fraternity as they began deciphering its impact.
For starters, the judge had ruled that the application of the BBA contracts in those cases were contrary to the Islamic Banking Act 1983 (IBA). The judge ruled that since some BBA contracts were structurally faulty, defaulters need not pay more than the original financing amount that they received, depriving banks of the profit they would have otherwise booked from the transaction.
Bankers fear that this judgement could mean that current BBA financing clients would only need to pay the facility amount and would escape from paying the profit portion.
Following the High Court ruling, BNM sent a circular dated Sept 8 to heads of Islamic financial institutions to "strongly advise" them to review their heavy reliance on the BBA concept in their transactions.
The circular noted the industry's seeming over dependence on BBA, adding that BBA is a Shariah concept introduced more than 20 years ago to facililtate growth and development of Islamic finance.
At its end, RHB Islamic is offering Equity Home Financing-i to its customers based on diminishing musharakah or musharakah mutanaqisah as an alternative to the earlier BBA home financing.


Mark said...

Dr Ali,

I'm interested to read your comments on the matter, regardless if it's a layman's view.

alfa said...

Thanks for your interest Mark. From the mathematical point of view, a loan (or financing arrangement) would involve a certain sum of money normally called the principal. Then there is the interest rate charged or profit rate. The loan or financing arrangement will be amortized by a series of usually equal payments. Each payment will pay the interest (or profit)and part of the loan. This will go on until the loan is fully paid.

The two methods (BBA and Musyarakah Mutanaqisah) will also involve the above quantities and rates. The differences maybe in the 'aqad and the intentions. The analogy used by some Muslim scholars to this situation is that of the difference between chicken slaughtered in the name of Allah by a Muslim (which is halal) and chicken not slaughtered in the name of Allah (which is haram).

However Allah said in the quran that there are those who say that trade and usury are similar but Allah has permitted trade and has forbidden usury - Al-Baqarah verse 275

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MF said...


can you share the issues with MM implementation in malaysia like fluctuate rental rate, the promise from client to buy the share of bank and the damage to the properties.who will pay for the cost to repair if it due to natural and buyer are holding shares on that house, so the cost should be divided according to share percentage ?