The Death of Bai-Inah

It looks like it’s going to be a very busy year in Malaysia.

It was with surprise that the Islamic Banking practitioners are called to Bank Negara Malaysia (BNM) for the briefing pertaining the use of the contract of Bai Inah. The date was 16th November 2012 and it was a packed room at Sasana Kijang. Something was in the air, and little did we know that it is a meeting the Bai-Inah will be officially “killed” in that meeting.

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. However, the main concern that BNM has were mainly on the way the contract is executed, that it no longer reflects the orginal intention envisioned for the contract. One of the key issues that BNM highlighted is on the issue of “Interconditionality”. 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. One party should not compel the other party to re-sell the asset back to the same party. This smacks of shades of “arranged trade” i.e. the use of hilah to validate an Islamic sale, and this compulsion is explicitly captured in legal documents to protect the interests of the original owner. 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.

Bai Inah Pre 2013 (Old Practice)

This doesn’t invalidate the Bai-Inah transaction in the first place, as it is a “willing buyer willing seller” scenario. But the issue arises where the buyer is not willing; what is his options then?

BNM highlighted that the Bai-Inah structure must therefore remove the “interconditionality” where the customer is compelled to sell back the asset to the Bank. 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.Bai Inah New

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. This effectively separates the Bai-Inah contract into 2 separate Murabaha contract i.e.

  1. the first contract is when the Sale of Asset by the Bank to the customer at a Selling Price (and Asset ownership is transferred to customer), and
  2. the second contract is for the customer to on-sell the Asset now owned by him to a third party or if he chooses, back to the Bank. The customer may even keep the Asset in his ownership, while paying off the debt to the Bank. One contract will therefore not be dependant on the other i.e. the interconditionalty of the sale is now removed.

The uproar in the industry was therefore expected. Many Islamic Banks have built up a substantial portfolio for their personal financing, credit cards and corporate working capital based on the contract of Bai-Inah. The options given by BNM was to either comply with the removal of the interconditionality in the Bai-Inah contract, or move to another contract where interconditionality is less than a problem, such as a Tawarruq or Commodity Murabaha structure. 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.

Personally, I feel trying to comply with the Bai-Inah requirements without “interconditionality” is at best a temporary measure. The way forward is to look at the Sharia structure of Tawarruq (Commodity Murabaha) and finding ways of making it efficient as soon as possible. This will be the key driver in the Islamic Banking industry in the coming year. And the death of Bai-Inah will be good news for our Middle-Eastern colleagues; one less controversial contract to talk about.

Like I said. It’s going to be a busy, busy year for us, as BNM gave the Banks until 30th January 2013 to either buck up or ship out. Time to burn that midnight oil.

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