Introduction to Islamic Banking

Concept:

Islamic Banking Business is defined under

Islamic Banking Act 1983 :
banking business whose aims & operations
do not involve any elements which are not
approved by islam.

The practice in islamic banking is that

both the borrower and the bank should be
informed of their obligation. ( there need
to be akad/undertaking between them)
The monthly instalment is fixed and the
bank does not have discretionary power
to increase the monthly installment.
Lender = banker & Borrower = customer due to sell & buy basis.
Bai Bithaman ajil (BBA)

also known as Deferred Payment Sale.

Mechanism: Sale and Purchase
transaction where the financier buys the
customers property at cost & sell it back
to the customer with a profit margin
agreed upon with the customer.
Financier will then sell back the property
to the customer - which the payment is

paid by customer thru instalments over a

period of time, hence ( deferred payment).
2.
* Normally by the time buyer approach the
bank to obtain loan, buyer had already pay a
10% percent deposit to vendor & sign the
SPA, - if such customer looking for financing
under BBA, financier would require that:

3.

4.

Firstly, financier buys all the customer

rights to the SPA signed earlier, at the
financier costs price ( the sum of loan
applied).
Financier than sell the same property
back to the customer at selling price +
profit margin.
Customer will pay for the selling price to
financier by monthly instalments over
specified period agreed upon.
For the security of the loan, customer will
charge the property ( if ada title) or assign
( no title) to the banker.
The document for securing BBA
financing facility comprises:
1. Property Purchase Agreement:
financier purchase the property from
customer at the financing sum & become
the owner. ( some use Novation
agreement where financier step into

5.

borrowers shoes & vis a vis with

developer.
Property Sale Agreement : financier
sell back the property back to the
customer selling price + profit price.
Charge Document ( w title) ( F16A +
charge anex) / Deed of Assignment ( w/
o title)
Memorandum of Deposit : a deposit of
money to be placed with the financier as
a security for due observance by the
customer to pay monthly installment.
Letter of Hibah ( if applicable)

Hibah

Hibah is used to facilitate third party

financing.
In a situation where there is 2 owners but
the loan is under one owner- the concept
of buy and sell under islamic banking will
not work out.
Two stage of Hibah
1st; a letter of hibaH is signed by the
co- owner (A) to give his share to B resulting to B owning the whole property.
When B own the full property, then only
Sale and Purchase of full property can
happen between the banker & customer.
This letter must be signed prior to
signing of PPA

 2nd: signed by the customer & the coowner (A) get back his share after the
sale & purchase of property.
the signing can only be done after
signing PSA and PPA - but before
signing of security documents so that
the original two owners can charge or
assign the property to bank as as
security.
Advantages:
BBA

Conventional

establish a seller/
buyer r/s between
parties

creates a creditor/
debtor r/s between
bank & its customer.

x interest

has interest

the total cost of

property is determine
at the time of contract

The total cost are not

determine at the time
of contract depending on the
interest rate- varies on
situations.

No interest risk ratecapping ada

fixed investment allow
for better financial
planning.

interest risk - no
capping .

Stamp duty
the amount shown in the security
documents reflects the selling price of the
bank to the borrower, thus if the stamp
duty are calculated based on the selling
price , customer will be burdened with
excessive stamp duty on charge.
Therefore, Stamp Act 1949 was amended
- Act A723 of 1989:
S 14; duty chargeable for repayment of
money under islamic banking shall be
calculated on the principal loan amount
applied by the borrower. ( stamp duty
calculated based on purchase price not
selling price).
PPA are also exempted from stamp duty
under Stamp Duty ( Exemption) Order
1987 .
Therefore, only PSA need to be stamped Rm10 je.
The issues under BBA
1. sale of non-existent property:
BBA facility may be applied for property
under construction as well as
completed property.

2. Transfer of Ownership
Execution of PPA & PSA in the facility
should reflect the transfer of ownership.
Dato Hj Nik Mahmud b Daud v Bank
Islam - The execution of PPA & PSA
does not amount to any transfer of
ownership.
3. Premature termination of BBA contract
when there is early settlement of the
facility, islamic bank can grant a rebate to
waive their right to the unaccrue sum but
such discounts are discretionary.
if rebate not given - syariah financing
contract cost more than conventional
loan.
BIMB v Azhar Osman : i purchaser back
out from the loan, the bank can only claim
the amount due and not on total selling
price.