INTRODUCTION

In accordance with Islamic law (sharia), Islamic financial products are based on specific types of contracts. These Sharia-compliant contracts support productive economic activities without betraying key Islamic principles as some conventional financial products do. Sharia-compliant contracts cannot create debt, cannot involve the payment of interest, and must provide for a sharing of risk and responsibility between the involved parties. To be valid, an Islamic contract must feature subject matter that is lawful, has value for a Muslim, and is specific enough to avoid uncertainties. The service or asset described in the contract generally must exist when the contract is being created, must be owned by the seller (hence prohibiting short sales of stock, for example), and must be deliverable.

1.0 BAI BITHAMAN AJIL (BBA)

1.1 DEFINITION AND CONCEPT Bai Bithaman Ajil (BBA) is deferred payment installment sale where under this contract of sale, a Islamic bank may finance its customers who intend to acquire an asset and to defer payment of the asset to a specific period by paying installment based on the agreed financing period. BBA in essence is a sales contract, differing from a cash sale (Bai AlNuqud) only by virtue of the payment system. Payments are deferred to some future date whereas in the cash sale they are to be made immediately. BBA must still fulfill the principles and conditions of a sale contract, which has four aspects, namely the agents of contract, the objective of the contract, the object of contact and the offer and acceptance. While the BBA is widely used in Malaysia, Indonesia, Brunei and few other countries, it has been subjected too much controversy among the Fuqaha worldwide with regard to its permissibility, where most of the Middle East scholars have rejected it. The price elements in the BBA and spot sale are spelled out in the objective of the contract. In spot sale, the offer price will include sometime element, since payment will be made in some future time. In the conventional system, home financing is, of course, usually interest-based and is forbidden in Islam. The BBA home financing, however, does not alter much much of the above equation. Instead of charging the customer interest, financiers charge a profit derived through a buy and sell contract which is permitted in Islam but regretfully, the profit rate is dependent on the market interest rate due to arbitrage activities. Therefore, while the BBA is practiced as Syariah compliant in some countries, it is nonetheless, converging to the conventional mode where the computation formulas are similar to the conventional and where the profit rate tracks the market interest rate.

1.2 MODUS OPERANDI Basically, BBA financing is employed by the bank to provide medium to long term financing to clients who intend to acquire houses/shop houses, land, motor vehicles, consumer goods, shares, overdraft facilities, education financing package, personal financing, and other suitable acceptable goods. The modus operandi of al-Bai Bithaman Ajil by following steps: Step 1- The bank may finance the customers who wish to acquire a given asset but to defer the payment for the asset for a specific period or to pay by installments unde the principle of BBA. Step 2- The bank first determines the requirements of the customer in relation to his period and manner of repayment. Step 3- The bank purchases the asset concerned. Step 4- The bank subsequently sells the relevant asset to the customer at an agreed price which comprises the actual cost of the asset to the bank, and the bank margin or profit and allows the customer to settle the pament by installment within the period and in the manner so agreed. Step 5- The contract of Al-Bai Bithaman Ajil has been utilized by the bank to provide the customers medium and long term financing to acquire such items which may include landed properties, houses, motor vehicles, furniture, stock and shares. It is simple contact whereby the bank purchases the items on a cash basis and sells such items on a deferred payment basis to customers requiring financing.

1.3 CALCULATION For example, assume that a customer wishes to buy a houses priced at RM200,000. The customer puts a down-payment of 10 percent, example of RM20,000 and finances the remaining 80 percent, example of RM180,000 using BBA method. Also assume that the Annual Profit Rate (APR) charged by the bank is 10 percent per annum and the duration of financing is for 20 years. The Islamic bank would first buy the house for RM180,000 and then sell the house to the customer at a profit, with deferred payments over the 20-year period. The monthly payment for the above financing is RM1,737.04 payable for 240 months which adds up to RM416,889.35 in total. The difference between this figure this figure and the original financing of RM180,000 which equals RM236,889.35 is capitalized upfront in the BBA mode, unlike under the conventional mortgage, where the interest due is not recognized until the elapse of time. One important difference of the BBA compared with the conventional mortgage is that of the balance of financing remaining before the expiry of the duration of financing. In this example, the BBA balance after 10 years (i.e. after 120 payments) is the total of the remaining 120 payments, i.e. RM208,448.80 whereas under conventional mortgage, this amount would represent the total interest paid for the loan over the 20 year period. The Islamic bank, however, may give some rebate for the early repayment, but the amount of rebate is determined at the discretion of the bank. Since the selling price is a price, indeed, Shariah prohibits the rebate to be stated as part of the contract. Note that even after 10 years of repayment, the balance under the BBA mode can even exceed the original financing of RM180,000. Nevertheless, considering all the socio-economic effects of fiat money, we regretfully assert that Islamic banking within the fractional reserve system can, indeed, be very damaging to economy.

1.4 ISSUES In legal documentation of conventional loan agreement, it is stated that the bank has the right to recall the facility, repossess the property and terminate the property. In BBA financing, the situation is different. This is due to the fact that the ownership of the house has been transferred to the client by virtue of the PSA. Hence, the bank has no right whatsoever to repossess the house. What the bank is entitled to is the payent price of the property. Therefore, the conventional clause on right to recall is not appropriate for the BBA facility, However, this clause can be included in the BBA financing facility with the certain modification. The right to recall the BBA financing facility means that the bank has all the right to terminate the facility and claim for the unpaid amount, but not the right to repossess the property. If the property is used as collateral, the bank can sell the property and claim on the unpaid amount and release the balance to the client. Another issue that arises from the long-term BBA financing is the mismatching of the BBA funds against its short-term deposit tenor. Whilst conventional financing has the ability to address this mismatch in the cost of funds through the variable interest rate, BBA financing cannot do this since customers are charged a fixed profit rate for the entire period of financing. There are two main purposes of financing intended in the practice of BBA in Malaysia, are to finance the acquisition of an asset and to provide liquidity. It is within the purview of the second purpose that refinancing has also utilized the BBA mode of financing as far as the Malaysian practice is concerned.

2.0 MURABAHAH
2.1 DEFINITION AND CONCEPT Murabahah is a particular kind of sale where the seller expressly mentions the cost of the sold commodity he has incurred, and sells it to another person by adding some profit thereon. Thus, Murabahah is not a loan given on interest; it is a sale of a commodity for cash/deferred price. The Bai' Murabahah involves purchase of a commodity by a bank on behalf of a client and its resale to the latter on cost-plus-profit basis. Under this arrangement the bank discloses its cost and profit margin to the client. In other words rather than advancing money to a borrower, which is how the system would work in a conventional banking agreement, the bank will buy the goods from a third party and sell those goods on to the customer for a pre-agreed price. 2.2 EVIDENCE. Al Murabahah is a legitimate contract in Islam. Majority of fuqaha comprising the sahabah (companion of the prophet), the tabien (followers of the sahabah), and imam of the mazhab considered al-Murabahah as a permissible contrat based on rukhsah principle. Al-Quran Hadith It was reported that when Prophet S.A.W was preparing for hijrah to Madinah, Abu Bakar bought 2 camels for the journey. The Prophet (s.a.w) said to Abu Bakar: Sell to me (at cost without profit) one of them. Abu Bakar said: It is yours for nothing. The Prophet (s.a.w) said: I would not take it without price. 2.3 PILLARS 1. Seller 2. Buyer 3. Merchandise or goods 4. Price 5. Sighah: Offer (Ijab) and Acceptance (Qabul)

2.4 CONDITIONS 1. Buyer should be aware of the cost of the goods. Murabahah is a particular kind of sale where the seller expressly mentions the cost of the sold commodity he has incurred, and sells it to another person by adding some profit. For example; the bank purchased machinery for RM100 000 and sold it to the customer on Murabahah with 10 percent mark-up. The exact cost is known and Murabahah sale is valid.

2. Buyer should be aware of the profit margin used for mark-up. The profit in Murabahah can be determined by mutual consent, either in a lump sum or through an agreed ratio of profit to be charged over the cost.

3. All the expenses incurred by the seller in acquiring the commodity like freight, custom duty, etc. shall be included in the cost price and the mark up can be applied on the aggregate cost. However, recurring expenses of the business like salaries of the staff, the rent of the premises, etc. cannot be included in the cost of an individual transaction.

4. Murabahah is valid only where the exact cost of a commodity can be ascertained. If the exact cost cannot be ascertained, the commodity cannot be sold on a Murabahah basis. For example; the bank has purchased a notebook and printer in a single transaction for a lump sum price of RM5000. The bank can sell the notebook and printer together on Murabahah but cannot sell separately because the individual cost of the notebook is no known. If the bank wants to sell the notebook separately, then it should be sold at a lump sum price without reference to the cost or the mark up.

5. The five options of sale as formalized in classical fiqh are; a) Buyers option to rescind: time limited, seller has similar option, but ceases before execution of contract. b) Option of Inspection: the right to see and verify the object of the sale c) Option of defect: right to return if defective d) Option of quality: right to specified quality e) Option of price: right to fair price within market range.

2.5 ISSUES IN MURABAHAH CONTRACT. 1. Rebate in the event of default. Sometimes the debtors want to pay early to get discounts. However in Islam, majority of Muslim Scholars including the major schools of thought consider this to be un-Islamic. However if the Islamic bank or financial institution gives somebody a rebate on its own, it is not objectionable especially if the client is needy.

2. Disclosure of cost. The Murabahah can only be effected when the seller can ascertain the exact cost he has incurred in acquiring the commodity he wants to sell. If the exact cost cannot be ascertained then Murabahah cannot take place. In this case the sale will take place as Musawamah i.e. sale without reference to cost.

3. Penalty of Default Another issue with Murabahah is that if the client default options in commercialism of the Price at thedue date, the price cannot be changed nor can penalty present be supercharged. To deal with dishonest guest who default in payment deliberately, they should be made liable to pay compensation to the Islamic Bank for the loss experience on account of default.

However these should be made subject to the following conditions: a) The defaulter may be given a grace period of at-least one-month. b) If it is proven beyond doubt that the client is defaulting without valid excuse then compensation can be demanded.

4. Rollover Murabahah dealing cannot be trilled over for a further time period as the old contract ends. It should be understood that Murabahah is not a loan rather the understanding of a good, which is postponed to a specific deat. Now what the seller can asked is only the in agreement price and therefore there is no question of effectuate another sale on the same commodity between the same parties.

2.6 CALCULATION IN MURABAHAH. APRIL 2011 Q6(c) Encik Farhi has requested BIMB to issue Letter of Credit (LC) under the contract of Murabahah. The details are as follows:

Total import cost (purchase price) Tenor of financing Profit rate offered

: RM750,000 : 90 Days. : 6% per annum.

Based on the above information, calculate the following: i. Selling price of the LC =RM750,000 X [ 1 + (0.06 x 90/365)] =RM761095.88 ii. The amount of total profit earned by BIMB. =RM761095.88 RM750000 =RM11095.88.

3.0 BAI SALAM

3.1 DEFINITION AND CONCEPT. Salam contract is crucial during the time of prophet hood and at the time where agriculture sector become outstanding and supreme. The wisdom of making salam permissible lies in the fact that salam facilitates a type of financing that people need it. By using this contract, the buyer may benefit from its permissibility as well, by acquiring the commodity at a price below the market price. Salam means giving (ita), advance ( taslif ) and leaving. Technically, salam means sale contract over prescribed commodity sold as a deferred liability on one party, in exchange for a price that is received during the contract session. It is normally used as underlying principle for agriculture financing, whereby small farmers need money to grow their crops and to feed their family up to the time of harvest. Under this contract, the farmer will undertake to supply crops of a specific quality and quantity to the bank at a future date in exchange of an advance price fully paid at the time of contract. The bank will then sell the crops and the difference between the selling price and purchase price, is the banks profit.

3.2 PILLARS Rabb as-salam / Musallim - The buyer in this contract Muslam Ilaihi - The seller in this contract Ras al-Mal - The Price Al- Musallim Fih The Product Sighah Ijab (Offer) and Qabul (Acceptance)

3.3 EVIDENCE Al - Quran

Ibnu Abbas commented that : I bears the witness that al-Salaf (Al-Salam) stipulated for a stated term had been made legal by Allah in His holy book and His permission is in it . He then recites the above verse. Hadith

Narrated by Ibn Abbas : The Messenger of Allah (s.a.w) came to Medina and the society used to pay in advance the price of fruits to be delivered within one or two years ( the sub narrator is in doubt whether it was one to two years or two to three years ) The Prophet S.A. said, Whoever pays money in advance for dates ( to be delivered later ) should pay it for known specified weight and measure (of the dates). IJMA

Every single jurist that we came across had given their consensus with regards to the permissibility of Bai Al-Salam particularly because the product in sale is one of counter-values in a contract ( similar to the permissibility of postponing the monetary payment which is one of the counter-value as well ) There is also the need of the people in it. The owners of the agricultural products and businesses also needed some financing to support themselves or to fund their crops until the day of harvesting. Hence, it is made permissible to fulfil these needs.

3.4 OBJECTIVES OF BAY AL-SALAM

Provide the financing for small and medium enterprises The economic reality underlying the contract of Salam, the ordering of goods to be delivered later for a price paid in advance, was the financing of the business of a small trader by his customers.

Benefits the trader or producer Provide Islamically accepted financing alternative and avoids any involvement in riba. Benefits the purchaser Provides goods and products at a discounted price in return for the willingness of the purchaser to help the financing of the business venture.

3.5 CONDITIONS OF AL-SALAM Conditions related to the price (ras al-mal) The price must be clearly determined and paid in full by the buyer at the time of undertaking the sale to avoid later dispute. The seller must take possession of the price in full before departing one another. If the price is ribawi item, it is not allowed to be exchanged for another ribawi item to avoid riba. For example wheat with barley.

Conditions related to the purchased commodity ( mussalam fih ) Salam can be effected on commodity whose quality and quantity can be clearly specified. The commodity must be vastly available in the market at the time of contract until the time of delivery, to ensure the capability of the trader to deliver the product. The quantity, weight and measure of the commodity must be agreed.

Conditions related to the date and place of delivery The exact date and place of delivery must be specified in the contract.

APPLICATION

This concept usually used by Islamic banks because it does not facilitate many advantages as compared to other concepts.

The price of purchased commodities in al-salam should be paid in advance while the subject matter will be delivered at a later date.

In general it clearly differs from numerous Islamic bank products, which provides better position for the customer who are in need, in which they would obtain the desired commodity with a deferred payment term.

Islamic banking product which are based on this concept are Hybrid salam Financing, Salam Financing Working Capital and Parallel Salam Financing.