Bai inah is a traditional Islamic financial instrument that is used in Indonesia and some other countries in Southeast Asia. It is a form of borrowing and lending that is based on principles of sharia, or Islamic law, which prohibits the charging of interest on loans.
Bai inah works by one party selling an asset to another party, who then immediately sells the asset back to the first party at a higher price. The difference between the two prices is the "profit" that the first party receives, which is essentially the equivalent of interest in a conventional loan. However, because this profit is not explicitly referred to as interest and is not charged as a fixed rate, it is considered compliant with sharia principles.
Bai inah is often used as an alternative to conventional borrowing and lending, particularly in the context of small businesses or individuals who may not have access to traditional financial institutions. It can also be used for larger transactions, such as the financing of real estate or other assets.
One of the main advantages of bai inah is that it allows individuals and businesses to access financing without violating sharia principles. This can be especially important in Muslim-majority countries, where the prohibition on charging interest is a key aspect of religious doctrine.
However, bai inah also has some potential drawbacks. It can be difficult to determine the appropriate profit rate for the transaction, and the complexity of the instrument may make it difficult for some individuals to fully understand and use it effectively. In addition, there is some debate within the Islamic finance community about the permissibility of bai inah, with some scholars arguing that it is too similar to conventional interest-based lending and therefore not fully compliant with sharia principles.
Overall, bai inah is a useful financial tool that allows individuals and businesses to access financing in a way that is compliant with Islamic law. While it may not be suitable for every situation, it can be a valuable option for those seeking to adhere to sharia principles in their financial transactions.
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And with Tawarruq arrangements now being ably supported by good infrastructure such as Bursa Suq As Sila trading platform and other commodity brokers worldwide, there is no issue of Darurah emergency to justify the continued usage of Bai Al Inah or BBA. The key is to sell an Asset which has no value or interest to the Buyer. The customer may even keep the Asset in his ownership, while paying off the debt to the Bank. In Summary: 1 The Sale of Asset contract is valid on completion of Aqad 2 The Buy-Back of Asset contract is valid on completion of Aqad 3 If the Buy-Back of Asset contract 2 is not completed, the Sale of Asset 1 remains valid as the Aqad is already completed. This must not be the case, because the Aqad is already validly executed and is now running. But before we go further, BNM again reiterate that there is nothing wrong with the Bai-Inah as a concept, and the contract is valid in practice. Profits generated from the Interbank Mudarabah are shared in accordance with the agreed profit-sharing ratio.
Then comes the deadline that the compliance to the Investment Account concept paper is to be met by 30 June 2014. Again, Tawarruq arrangements has generally replaced these usage with the end result of providing cash. But the issue arises where the buyer is not willing; what is his options then? Many Banks have chosen the route of trying to comply with the removal of interconditionality, while other Banks view that the Tawarruq option was the right direction. Money Market Bank Islam offers a wide choice of deposit and investment products that are in compliance with Shariah rule and principles. Let us be clear that most banks Bai Inah or BBA, and those which does, offer it as a continuation for a legacy arrangement or due to certain unavailable scenarios, such as fresh new documentations are not obtained for Tawarruq arrangement such as Wakalah to buy commodities. Any excess profit will be retained by the Bank as a performance incentive. Profit is paid on the maturity date based on the receiving bank prevailing gross rates and the sharing ratio of the investing bank.
By making a request for the IIA Mudarabah, the customer understands the loss bearing or loss transfer feature of the Mudarabah contract and acknowledge that the Bank has legal recourse against the investor to enforce its rights. The final controversial contract that Malaysia currently deploy is the Bay Ad Dayn Discounted Sale of Debt , which serves a specific purpose in trade financing products. Any loss must be borne by the investor. What is Ijarah contract? This separates the contract from a conventional loan contract, when interest in added onto the loan amount and theoretically, is without definable ceiling. Opposite to that, tawarruq home financing is where the bank need to sell commodities to the customer to create the debt, which the customer will pay over a period of time ie installments. The underlying transactions of the BBA is said to be based on the concept Murabaha cost plus whereby the sales price is added up with the profit.
Therefore the customer has choices on what to do with the Asset. Profit is paid on the maturity date based on the actual return of the accepting bank. All products offered by Bank Islam are subject to the Islamic Financial Services Act 2013 and any applicable laws derived therefrom. Both parties will then negotiate and agree on the amount, tenor of investment and profit sharing ratio. Both contracts are executed consequentially and valid as all the tenets of the contracts are met perfectly. Important Notice: The contents of the above table, namely the details of Profit Sharing Ratio, Minimum Amount and Minimum Tenure are subject to change at the sole discretion of the Bank and customers should obtain confirmation from the Treasury Sales Team prior to making any decisions based on the above. Click to read more about recent development on Click to read about the alternative of Bai Inah i.
Many do not know about the This is true as my last few interns also impressed the same. The Assets used for the transactions sometimes bordering to comical, as Banks are using their own Assets for the transactions. One of the most controversial contracts that resides in Malaysia is the Bai Inah contract. Criticisms are good, especially on the old structures. Time to burn that midnight oil. This effectively separates the Bai-Inah contract into 2 separate Murabaha contract i. The uproar in the industry was therefore expected.
Why is it always under the Islamic finance microscope for scrutiny? Now we welcome the new Exposure Drafts and the boss has given me 2 days to read the relevant ones. Rate of return for Interbank Wakalah is based on the actual return of the accepting bank Wakil on the maturity date. Therefore, it is in the best interest of the Buyer to on-sell the Asset to obtain the cash required, and make the instalment payments. This effectively links the 1st and 2nd contract together; without one, the other is invalid. What do I think? Eventually a common ground must be found to make this contract more globally accepted, or replaced with a better solution.
WHY ARE YOU STILL ASKING ME ABOUT BBA AND BAI AL INAH? For example, a Murabaha may have an interconditionality clause that the Bank must FIRST purchase an Asset from a Supplier BEFORE selling it to the Customer. Both contracts must be able to stand alone and the aqad is executed sequentially, which makes it valid based on trading rules. This simply means that should if one party sells its asset to another party, at a selling price, the original owner of the asset should not impose on the other party to on-sell it back to the original owner. What are the types of Ijarah? And most of the time if used, this is a temporary fix allowed until the deal reaches expiry or the Tawarruq appointments are obtained. Many do not know about the This is true as my last few interns also impressed the same. If the Bank does not receive your confirmation within seven 7 days of our confirmation date, the Bank shall regard the confirmed transaction as correct and in order.
These usage is now done under the Tawarruq arrangement using Commodity Murabahah where the proceeds from the sale of Commodities is used to settle the purchases of houses or commercial properties. The customer, as in any real trade, must be given the option to either sell the asset back to the Bank, or sell it on the open market, where the customer takes the pricing risks for such sale. WHY ARE YOU STILL ASKING ME ABOUT BBA AND BAI AL INAH? This effectively separates the Bai-Inah contract into 2 separate Murabaha contract i. The comments made in recent times are something we had encountered and resolved 10 years ago. Alternatively, Musyarakah Mutanaqisah arrangement Diminishing Partnership is also used by many banks where houses or properties are purchased by the Bank and leased out to the customer, who then pays rental and gradually purchases the shares of the house and properties over time. Technically, this financing facility is based on the activities of buying and selling. This is a valid and perfected standalone contract.
Interconditionality means that for the customer to obtain cash, the customer MUST sell back the asset to the Bank, and failure to do so will result in the whole transaction being void, even if the first sale contract has been completed and concluded. The major reasons for this critique is that Bai Inah, while having an underlying transaction in its structure, argues critics, smells suspiciously like a loan with interest. But before going further, what is Bai Inah? Again, Tawarruq arrangements has generally replaced these usage with the end result of providing cash. Also, Bai-Inah is a key component in a re-financing scenario; a customer has fully owned a property but now requires cash or capital, sells the property to the Bank for cash, whom then re-sells the property to the customer at a profit to be settled via instalments. Glossary of UK, US and international legal terms. What is BBA in Islamic finance? Let us be clear that most banks Bai Inah or BBA, and those which does, offer it as a continuation for a legacy arrangement or due to certain unavailable scenarios, such as fresh new documentations are not obtained for Tawarruq arrangement such as Wakalah to buy commodities.
By my last count, 7 new Exposure Drafts was published by BNM yesterday and now it is time to digest them. Both structures are to create a financial obligation between 2 parties. Is Bay al-inah valid under RIBA? For BNM, based on discussions with Sharia scholars, has requested that this interconditionality be removed from Bai Inah documents and to a larger extent, the Malaysian version of the Bai Bithaman Ajil. Or, difficulties are placed in identifying precisely which Asset is being transacted if there are request to take delivery. These contracts have gone into the history books. How Bai al Inah works? The contention is that the Bank must not compel the customer to only trade with the Bank, but also provide an option to sell this asset into the open market. For many years, Malaysia have been taking heat on its use from international forums.
