It is 2019. BBA and Bai Al Inah are Old News.

WHY ARE YOU STILL ASKING ME ABOUT BBA AND BAI AL INAH?

It remains a mystery when people ask me why Malaysia continues to offer Bai Bithaman Ajil (BBA) and Bai Al Inah products, as according to them, these structures are based on elements of Hilah (trickery). It is a mystery because starting from 2012/2013 period, the instructions on Interconditionality issued by BNM to Islamic Financial Institutions requires that the provisions of “mandatory buy-back” must not appear in financing contracts such as Bai Inah and BBA. Because of this, Malaysian Islamic Banks have slowly weaned itself from such products and have since moved to other Islamic contracts.

Read the circular issued by Bank Negara Malaysia in 2012 on the practice of Bai Inah and their expectations by clicking this link (BNM Circular).

WE ARE STILL READING OLD BOOKS AND ARTICLES

In general, I still find that some learning institutions are incorrectly teaching students that the contracts are still alive and well in the Malaysian market. The text books used are still ones that predates 2011 and really, this is a disservice to students. When they come for interviews with our bank, it does not give the students any advantage or good impression as the syllabus remains outdated. Many do not know about the Policy Documents issued by Bank Negara Malaysia or the contracts covered by the policy documents. This really should be covered in a learning module as the latest requirements are captured in these documents. It is a good reference read, but it seems only practitioners and Shariah scholars are aware of these documents.

This is true as my last few interns also impressed the same. Tawarruq structures sounds alien to some of them, as their teachers prefer to teach BBA and Bai Inah  to unlock its controversies as points for discussion. Let us be clear that most banks NO LONGER offer 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). It is no longer offered as a product to the public and this is evidenced from the Banks website where the structures can no longer be found. And most of the time if used, this is a temporary fix allowed until the deal reaches expiry or the Tawarruq appointments are obtained.

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.

SO, WHERE HAVE WE GONE TO SINCE 2011?

In short, we have moved to the following contracts:

  1. Bai Bithaman Ajil (BBA) – Usually BBA is used for purchasing of properties (Home financing or Commercial properties financing), or sometimes for trade financing products. 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. 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. So now, BBA has been replaced with Islamic arrangements of Tawarruq or Musyarakah Mutanaqisah. Other Islamic contracts has also been known to support some elements of BBA, such as Istisna’a (property construction), Murabahah (good sale at profit) or Ijarah / Ijarah Mausufah fi Dhimmah (forward lease).
  2. Bai Al Inah – Usually Bai Inah is deployed for Personal Financing or Working Capital Financing and even Islamic Credit Cards. Again, Tawarruq arrangements has generally replaced these usage with the end result of providing cash. On a smaller note, the contract of Ujrah (Services) is also deployed to support some requirements of personal financing (where purchase of goods and services are required) and Islamic Credit Cards. So now, Bai Al Inah has now been replaced by Tawarruq arrangements or Ujrah contract to meet the cash and working capital requirements.

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. Eventually a common ground must be found to make this contract more globally accepted, or replaced with a better solution.

UPDATE YOUR STUDY NOTES, PLEASE

The main challenge nowadays is to innovate further by improving what we have. Criticisms are good, especially on the old structures. But we practitioners do hope the learning academia afford us a bit more confidence and trust, especially these criticisms and consequent issues are not “unknown” to us, since we lived and breathed in its controversies many years ago. The comments made in recent times are something we had encountered and resolved 10 years ago. We enhance and evolve, and it will be good to see new students coming into the market armed with the latest updates of what is happening and let’s move forward.

It is now 2019. Do not get stuck in the muddy past. These contracts have gone into the history books. We have so much to do in the future arena.

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.