Financing Contracts : Consumers

Bai Bithaman Ajil (BBA) or Bai Muajjal (Deferred Payment Sale)

  • The Bank agrees to purchase the property at a lower price and pay the developer / vendor immediately (1st contract). The customer then agrees to purchase the property from the bank at a higher price (principal + profit) and make payment to the bank on a deferred basis (instalments).
  • Not widely acceptable in Middle East. Reason : The customer has no right, in the first place, to sell the property to the bank as the customer do not fully own the property as the customer only made a down-payment on the full price of the property, and in cases where it only involves 2 parties, it does not look like a genuine economic transaction (usually having 3 parties i.e. developer – bank – customer). The earlier structure of using a Novation Agreement i.e. agreement that the developer will transfer all ownership and rights to the Bank to allow the Bank to sell the Asset to the customer is more closer towards an acceptable structure, but most of the property developers are reluctant to sign this agreement. Since the document transferring the ownership is not signed, it is argued that the Bank do not have full ownership to sell the property in this transaction.

Common Usage : Home Financing, Term Financing (Completed properties, New Financing / Refinancing)

 Musyarakah Mutanaqisah (Diminishing Partnership)

  • The customer and the bank jointly purchase a property, based on their equity contribution (customer’s downpayment and bank financing). The customer then rents the property and the rental is used to purchase the bank’s equity over a period of time. Once the bank’s equity is fully purchased, the property is transferred to the customer’s name. Relationship between bank and customer = partners. 
  • Only available to Islamic Subsidiary as banks under BAFIA are not allowed to buy & sell property / asset.

Common Usage : Home Financing, Term Financing (Completed properties, New Financing / Refinancing)

 Murabahah (Cost-plus sale)

  • The bank purchases an asset at a cost from the supplier / developer, and sells the asset at a selling price (inclusive of profit). The cost is made known to the customer, who agrees to pay the bank sale price in deferred payments; monthly, quarterly, yearly or lump-sum payments. A more acceptable form of financing compared to BBA where the bank will purchase the asset from a 3rd party (supplier / developer) instead of the customer.
  • Vehicle Financing only available to Islamic subsidiary as banks under BAFIA not allowed to buy & sell property / asset.

Common Usage : Home Financing, Term Financing (Completed properties, New Financing / Refinancing), Vehicle Financing.

  Tawarruq Murabahah (Cost-plus sale for Cash)

  • Involves three parties : bank – customer – commodity buyer/seller. For the purpose of creating a credit limit for the customer, the bank will act on behalf of the customer to purchase a commodity from another party at cost price, payment is made by the Bank on behalf of the customer. The customer purchases the commodity at a sale price (cost + profit), to be paid in agreed instalments / lump sum. The commodity is now owned by the customer.
  • The commodity is then sold to a commodity trader for cash consideration (by the bank acting on behalf of the customer) at a price equivalent to the cost price. Upon the sale of the commodity (spot), the cash is immediately given to the customer for his personal use. Acceptable form of personal by Middle East scholars due to the 3 party arrangements

Common Usage : Credit Cards, Personal Financing, Overdraft


Bai Inah (Sale for Cash Consideration)

  • Involves 2 parties : bank – customer. The customer approach bank for financing and bank sells the bank’s asset to the customer at a determined sales price (cost plus profit). Customer agrees to pay back in instalments, taking ownership of the bank asset. The customer re-sell the asset to the bank at a determined price (cost price / discounted price) and the bank pays (releases) the amount immediately for the customer to use. The asset ownership is returned to the bank.
  • Not widely accepted by the Middle East as it considered the transaction only happens on paper with no actual assets being transferred. Considered as a form of debt creation without an underlying asset, thus similar to conventional lending.

Common Usage : Islamic Credit Cards, Personal Financing

 Ijarah / Ijarah Thumma Al Bai / Ijarah Muntahiah bi Tamlik / Ijarah Wa Iqtina (Rental (lease) / Rental with intention to own / Rental with eventual transfer of ownership / Rental with promise to Gift)

  • The customer approached the bank for the intention of using an asset. The asset is purchased by the bank and rented to the customer according to agreed terms. Bank retains asset ownership during rental period. Upon completion of rental period, the customer can return the asset to the bank, or exercise the intention to own the asset, or the asset is automatically transferred to the customer.
  • If the Ijarah contract is attached with eventual transfer of ownership, this transaction must be recorded separately in another contract that takes effect after the Ijarah contract is completed as an Ijarah contract should be purely a leasing (rental) arrangement.
  • Vehicle Financing is only available to Islamic Subsidiary as banks under BAFIA not allowed to buy & sell property / asset.

Common Usage : Personal Financing, Vehicle Financing, Asset Financing (Completed)

 Ijarah Mausufah fi Zimmah (Forward Lease or Rental)

  • The bank is not allowed to rent to customer an asset which is still under construction, as the customer receives the asset in an incomplete form and unable to derive any benefits. During construction, payment is collected as an advance rental. Upon completion, the advance rental is immediately offset as capital payment, and thereafter, normal rental is payable.

Common Usage : Home Financing, Asset Financing (Property Under Construction)

 Musyarakah (Partnership or Joint-Venture)

  • The bank and the customer jointly enter financing a project with individual equity participation. As partners, the bank can choose to participate in the use/running of the asset/project or remain an observer on the board. At the end of the project, the project is disposed / liquidated / re-valued and the customer ends the partnership by returning the bank’s equity plus the profit derived from the project, based on the agreed sharing ratio.
  • Payment usually made in lump-sum at the end of the period as a purchase of the Bank’s share in the project. The customer then takes ownership of the project / asset at end of the period once Bank’s share is disposed.

Common Usage : Asset Financing, Property Financing, Project Financing (Property under construction)

 Istisna / Bai Salam (Order Sale / Trust Sale for future delivery)

  • The customer wants to purchase a property / asset under construction and approaches the bank. The bank purchases the property / asset from the developer / supplier, ensures the construction is done according to customer specifications and sells (deliver) the property / asset to the customer upon completion. Upon delivery of the property / asset, the customer is to ensure that the property / asset delivered meets their specific requirements.
  • As this concept is highly contentious in nature due to the absence of property / asset during the signing of the agreement, all conditions stipulated in the agreement must be strictly complied and adhered to. The customer has the right to refuse delivery of the property / asset if the construction is not according to specifications. The customer can be charged construction period profit during construction and instalments upon completion.
  • Usually attached to a Murabahah contract to cater for the period after completion of the property / asset construction.

Common Usage : Home Financing, Term Financing (Property under construction)

 Musawamah (Simple Sale)

  • Similar in operation as a Murabahah (cost-plus) sale, but different in terms of pricing determination. In Musawamah, the cost price of the asset / property purchased is not made known by the Bank to the customer, where only the sales price is determined. Usually involving transactions where the cost of the asset / property cannot be determined / inaccurate value of asset / goods or the goods are derived from a pool of products. A common example of this is the purchasing of dinner, where the cost of each food item is indeterminable.

Common Usage : Personal Financing

 Mudharabah (Profit Sharing)

  • Similar to the Musyarakah financing, where profits are shared between the bank and the customer upon the disposal / liquidation / re-evaluation of the asset or property, based on a pre-agreed profit sharing ratio. However, unlike Musyarakah where the Bank is involved in the running (or at least, monitoring) of the usage of the asset / property as partners, in a Mudharabah contract, the relationship remains as a Capital Provider (Raab ul Maal)  for the Bank and Entrepreneur (Mudharib) for the customer. As the Bank will be providing 100% of the capital, the customer can agree to receive an agreed amount as a fee for the running and successful disposal of the project.
  • In the event of loss, the bank may lose all its capital as the capital provider, representing monetary risks to the agreement. The customer would only lose time and effort on the asset / project as the customer is not financially invested. Not popular for Banks as a financing contract due to the significant degree of trust needed for the structure.

Common Usage : Term Financing / Project Financing

 Istijrar (Time to Time Purchase of Goods)

  • In contracts where goods are purchased in staggered and variable quantities, a Master Agreement is created to facilitate the staggered purchases. The customer, on principal, agrees to accept the sale price of goods when they are purchased in the future, and the subsequent charges and payment to the Bank. This is only valid if all pre-agreed conditions are met.

Common Usage : Foreign Currency Accounts, Islamic Credit cards

 Qardh / Qardhul Hassan (Loan / Interest Free or Benevolent Loan)

  • The customer is granted a loan where no interest is charged and payable within a short period of time. However, a fixed service charge (Ujrah) is usually incorporated for such a loan for the convenience of the facility. The customer must be agreeable to such fees.

Common Usage : Islamic Debit Cards


2 thoughts on “Financing Contracts : Consumers

  1. salam

    just to share my opinion on the khilaf of permissibility of certain product.

    BBA or bai muajjal is not prohibited in arab countries but the comment is on the implementation side. Any out-going movement of asset from one party and goes back to the same party is defined as I’nah. If Malaysian version of BBA can be designed into tri-partite way, our BBA version will be acceptable. Meaning, if the bank can buy the property from the developer or seller and sell to client at mark-up price, it would be allowed. The same goes to our Ijarah for corpoarte deal when the corporate sell its asset and lease back and eventually owned the asset. This would be treated as Inah also. To some extent, the so called Tawarruq also would be considered as Inah ( but certain scholar), if the selling agent is the same party with the buying party – in this case the bank, as you described above.

    Thanks. Wassalam


  2. Bro Amir,

    I have to agree with Bro Abu Kiko above on Malaysia BBA concept. If Malaysian banks is willing to revert back to the earlier transaction which used Novation Agreement there is a possibility that BBA will be accepted in Middle East. This is because the transaction involved 3 parties i.e. Developer, which would sell the property to the Bank, which in return would sell it to the Customer.

    As for Ijarah, there should not be any mention in the contract that the bank will transfer the ownership to customer at the end of the lease period as it will create gharar as to whether the transaction is a ase or deferred sales transaction. Transfer of ownership under Ijarah is the discreation of the bank and this obligation should be covered in seperate dcoument.

    Amir I will contact you at your private email to enable us to discuss this matter further.

    bye for now


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