Bai Inah, as used in Malaysia in particular, to provide for a means for personal financing, has always been treated as the ugly stepsister of Islamic Banking. Many calls were made for the abolishment of Bai Inah were made as it is perceived as a close substitute of riba’-based conventional loan and that there is very little to separate the two.
Of the 4 Islamic jurists, only the Shafie school of thought has, to some degree, allowed the Bai-Inah contract to be used in times of darurah (emergency). This explains the reluctance of the middle-east scholars to accept the contract’s validity as the Bai-Inah transaction, although legally valid, is considered as a “legal trick” (Hilah) to facilitate a contract which has no real economic value due to the absence of asset transfer. The main argument was that the intention of the contract is not to trade (buy & sell) an asset, but to create a debt to which a margin is built in. This margin is seen as too close for comfort to the concept of interest on top of a loan.
Furthermore, criticism has also come in the way of how Bai-Inah is structured. The Assets used for the transactions sometimes bordering to comical, as Banks are using their own Assets for the transactions. Assets are wide ranging under the books of the Banks; table, chairs, pieces of land, ATM machines, computers, company shares, subdivided properties, and many others. The intention is not to transfer these Assets to the customer, and should a customer insists on the transfer of these Assets to them, there are ready legal clauses that will force the customer to sell these Assets back to the Bank and cancel the whole transaction. Or, difficulties are placed in identifying precisely which Asset is being transacted if there are request to take delivery. This is where the criticism of “arranged transactions” became the thorn in the Malaysian Islamic Banking industry; something we have not been able to address satisfactorily.
Practitioners in Malaysia, however, have selectively adopted the Bai-Inah contract for the use of personal financing and other working capital requirements mainly because of the following:
- The market is a dual banking market, where the Islamic and conventional banking business battle side-by-side in a competitive environment. The Banks sees the conventional counterpart has having the ability to provide easy and hassle-free products and the Islamic Banking industry is under pressure to produce a similar competitive product.
- Building on the above point, practitioners produce the personal financing contract based on the understanding that if an Islamic Banking product for personal financing is not introduced, or an alternative is not provided for muslims, the muslim consumers will be left with no choice but to seek out a conventional personal loan dealing in interest (riba), to meet their needs. Ultimately, this will further burden the ummah when they have no other options.
- The concept of darurah is practiced for the contract of Bai Inah while a viable replacement contract is introduced to suit the customer’s requirements. The replacement contract is to be developed sooner rather than later to facilitate the migration of personal financing to a more acceptable contract.
What is Bai-Inah?
Essentially, it is the opposite of what a Murabahah contract is, except that instead of the customer selling an asset to the Bank and the Bank re-selling the asset to the customer at cost-plus-profit, it is the Bank who is selling the asset to the customer and re-purchasing it at a discount, thus creating a debt. There is intrinsically no intention of the Bank to sell its assets to the customer, and conditions are put where the asset is to be immediately resold to the Bank upon completion of the property transfer to the customer. This is debatable as Hilah as it serves no economic value other than to create a debt.
Practitioners has made efforts to differentiate the product from the conventional counterparts. Among the efforts made to distinguish the Islamic features into the product are as follows:
- Provide a clear “sell and buy” flow of asset to emulate an underlying transaction. For this, the assets to be transacted must be in existence, identifiable and with intrinsic economic values.
- Provide clear documentation on the whole transaction as safeguard to the contract. The documents must show the sequential order of the “sell and buy” for the Bai-Inah contract.
- Provide clear use of the Islamic Banking 5 tenets of a valid contract, that it includes clear demarcation of Seller, Buyer, Asset, Offer/Sale and Value. The purchase price must be clearly agreed upon, and so must the selling price, terms of which cannot be changed by any party without consent during the contractual tenure. This separates the contract from a conventional loan contract, when interest in added onto the loan amount and theoretically, is without definable ceiling.
- Provide reasonable discouragement to default. The Central Bank of Malaysia now allows 1.0% p.a. as compensation charges for default, but is only applicable for current month arrears and is not compounded. That translates more to a deterrent measure rather than a penalty to consumers.
Unfortunately, the personal financing product has, over a short period of about 5 years, grown into this large monster which is profitable that many banks are finding it difficult to ignore. Instead of a more concerted effort to develop a product which is contractually more acceptable to the global Islamic audience, more and more Malaysian banks are turning to personal financing to capture the growing demand for the product as consumers try to minimise credit card debts by restructuring to a term-like product. Personal financing fills this need and this explains why even some banks have become a single-product bank offering personal financing as its main product.
The newer banks from middle-east have introduced an alternative to the product under the commodity murabahah contract. Hopefully, the industry will shift its focus from Bai-Inah to a Commodity Murabahah structure under Tawarruq arrangement. It has shown good promise and a lot of scholars are putting their weight behind Tawarruq at the moment. It is a matter of time until the market looks at this new structure and build the necessary infrastructure for it to succeed.
Until then, Bai-Inah still provides a quick solution to building the books of Malaysian Banks. It will take strong financial motivation to move away from a structure which has been working so very well in the banking space.