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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.

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
shariah.

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Research Questions

1. Does the practice of Al-Bai Bithaman Ajil Home Financing in malaysia comply with Islamic
Law?
2. Is Al-Bai Bithaman Ajil Home Financing in Malaysia is considered a real sale contract or loan
contract?
3. Does the Malaysian legal system help resolve BBA contract disputes under shariah law?
To study and analyse the decisions of Civil Courts as regards to Al-Bai Bithaman Ajil Home
Financing cases.
4. Are there other alternatives for Home Financing which is in compliance with Syariah?

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, 1997). However, according to Alam et al
(2012), the establishment of the Islamic home financing is triggered by the nature of
conventional home mortgages. Whilst conventional banks deal with interest in financing
homes, cars or other appliances, the Islamic banks limit to transactions that are free from
interest, usury, ambiguity, cheating etc. (Osmani & Abdullah, 2010). Dzuljastri &
Fauziah (2011) also made a similar statement that the Shari`ah law prohibits any trading
that involves the interest element or usury.
The values which are dominant within the sphere of the Shari`ah, 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, 2007). According to Abdul Karim
Al-Zaidan, Maqasid al-Shari`ah refers to an act of achieving and protecting the benefits
and good (masalih) for the sake of human beings. Likewise, 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, since the basic purpose of Islamic
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legislation is to protect the interest of people against harm (mafsadah). According to the
Muslim scholars, the benefits (masalih) of Maqasid al-Shari`ah can be categorized into
three which are necessities (dharuriyyat), convenience (hajiyyat) and refinement
(tahsiniyyat). In the first category of Maqasid al-Shari`ah which is necessities
(dharuriyyah), there are five key components that require to be protected and one of them
is the property or wealth (maal) protection. In relation with Islamic finance, 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. Hence, in order to achieve the highest objective of
Shari`ah in protecting the wealth and property, 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.
Thus, for home financing, Islamic banks have adopted several products to keep
them free from the elements prohibited by the Shari`ah. Among the more dominant home
financing products in Islamic are the al-Bay Bithaman Ajil (BBA) and the Musharakah
Mutanaqisah Partnership (MMP) contracts. The BBA is the more popular concept in
countries like Malaysia, Indonesia and Brunei whereas the MMP is widely practiced in
the Middle East, United States, Canada, United Kingdom and Australia. (Aris et al.,
2012).
In 1983, Bank Islam Malaysia Berhad (BIMB) implemented the BBA in
Malaysia. BBA is a facility provided by the financier (the Islamic bank) to a customer to
buy a house, over a tenor of say, 20 years, at an either fixed, variable or mixed rate which
is set by the financier (Aris et al., 2012). At the initial stage of the BBA, the financier will
buy the house from the customer at a price equal to the financing amount and sells it back
to the customer, at a price plus profit margin (Meera and Abdul Razak, 2005). 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. According to Razak et al.
(2008), BBA is similar to debt financing, which results in high cost and poses a burden to
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ones family obligation. 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,
2007). Abozaid & Dusuki (2007) also mentions that in Bay` al-`Inah applications, the
Islamic bank is to act as a trader selling or buying, as the word bay` suggests. However,
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, if any. Here, it is evident
that the concept of Bay` al-`Inah ignores the Shari`ah principle of al-Ghorm bil Ghonm
(no reward without risk), 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, 2005). Bay` al-`Inah here is resorted to as a legal
device (hilah) to circumvent riba-based financing, but as far as the substance is concerned
Bay` al-`Inah-based financing and the conventional riba-based financing are the same,
they serve exactly the same contractors purposes, and share exactly the same economic
substance and consequences, even though their form may be different (Abozaid &
Dusuki, 2007).
Musharakah Mutanaqisah (MM) on the other hand is based on the concept of
diminishing partnership. This contract combines two basic Islamic concepts. First, the
customer enters into a partnership (musharakah) under the concept of Shirkat al-milk
(joint ownership) agreement with the bank. Secondly, the bank leases its share in the
house ownership to the customer under the concept of ijarah (leasing).
MM is not widely used in Malaysia but is regarded as one of the modes of
financing in Pakistan Islamic banks. Meezan Bank of Pakistan has been implementing
this mode of finance for house financing. 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. 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, its permissibility in the Shari`ah, its
conditions and other Shari`ah principles related to this contract. (International Fiqh
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Academy of OIC, 2004). Usmani (2005) has defined the MM contract and described its
mode of applications in home financing, trade and business services while maintaining
Shari`ah principles. Al-Kawamelah (2008) made a detailed explanation of MM and its
Shari`ah ruling.
Smolo (2007), in his dissertation made comparison between the BBA and the
MM. Meera & Abdul Razak (2005) argued that MM is a better alternative to BBA home
financing. They compared between BBA home financing and MM home financing and
concluded that MM is more Shari`ah compliant. 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. Furthermore, the profit rate in BBA is fixed as it is a fixed selling price
which cannot be changed. This leads the financiers and the customers in difficulties.
However, Aris et al. (2012) stated that MM is still not favourable among the practitioners.
It is said to be less attractive to bankers because the MM does not charge interest of
advance profits. As such the banks cannot make money as MM is purely based on rental
payment. However, the majority of house financing in Malaysia is still using BBA and
MM only acts as an alternative product.
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Proposed Model
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Situational analysis
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Marketing objective
Nowadays, Islamic banking and finance have become the
important element in the financial institutions since they have been
introduced in the 1980s. Up until today, there are a lot of Islamic
products that have been introduced since the emergence of Islamic
banking. The steadily increasing pattern since its establishment shows
that Islamic products have been accepted among the people especially
the Muslims. 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. In the context of Malaysia, even the Muslim scholars have tried
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their best in producing Islamic products in-line with the Shari`ah,
however arguments are still being sparked among Muslim jurists on the
permissibility of the product in Islam. Yet, it creates confusion among
the customers on the permissibility of the products. Based on our
research, in the context of home financing in Malaysia, the concept of
Bay al-`inah has been extensively used in most of the Islamic banks
which give the same impact as mentioned above. Thus, in order to
create a healthy environment between the customers and the Islamic
banks, the Musharakah Mutanaqisah is the suitable contract to be used
in the home financing. Hence, since this contract is still considered
quite young in the market, extensive marketing is needed to create
awareness about its existence.
One of the marketing objectives of the Musharakah Mutanaqisah
is to gain 35% of market share by 2016. Besides that, 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. Thirdly, it also aims to create the product competitiveness in
the market. For example, if the product can be accepted in the market
after going through the marketing activities, 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. 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. Furthermore, having a home is
considered as part of Daruriyyat in the Maqasid Shari`ah.

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Measurable Based on the World Islamic Banking


Competitiveness Report 2013 2014, the Malaysian Islamic
Banking industry has dominated 20% market share with the it
even growing faster than conventional banking. After
implementing this product in the market, we are assuming that
the market share will be increased by 15% as it can attract more
investor from the Middle East country.

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. Strong knowledge of the marketing team is also vital
in order to make the important elements in the contract be
properly implemented. 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.

Realistic These objectives are realistic as the marketing


resources are in place to conduct the segmenting and targeting
exercise and access to information required.

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.

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Target markets
Product concept
Integrated marketing communications

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Place and distribution

An important element in the marketing mix is place and distribution.


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. Hence, it will make the marketing goals to be
achieved without much difficulty. In addition, recognizing the
distribution strategy is also the key of successful in Islamic banks.
According to Haronet. Al (1994), there are five factors that Muslims
need to consider in selecting the bank for them to deal with, which are
as follows:
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2.
3.
4.
5.

Fast and efficient services


Speed of transactions
Friendliness of bank personnel
Confidentiality of bank
Knowledge about the needs of customer

However, 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.
Friendliness of bank personnel
2.
Fast and efficient services
3.
Reputation and image of the bank
4.
Speed of transactions
5.
Confidentiality of bank
Based on the research above, 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. Based on this finding also, it is important to assign the human
resources in the proper places so that it can satisfy the needs of the
customers. According to the Dr. Wan Nursofiza (May, 2005), the current
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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. Since our product is still new and needs very strong
support from the customers, we would use the approach of doing a
nationwide road show in order to reach the target market. Besides that,
we will also place a knowledgeable person in marketing or customer
service in order to ensure the information can be delivered clearly to

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the relevant parties.


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Cash flow budgeting
Analysis and Findings
Conclusion
References
Appendices

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