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BWSS 2073 [ ]
TABLE OF CONTENT
Acknowledgement Pages
1.0 Introduction 2
2.0 Definition of Al Bai Bithaman Ajil 3
3.0 The Legality of Al Bai Bithaman Ajil 3
4.0 The Concept and Application of Al Bai Bithaman Ajil 4
5.0 Islamic Credit Card 5-6
6.0 Features of Islamic Credit Card 7
7.0 Takaful Cover for Islamic Credit Cardholders 8
8.0 Cash Back Rebate on Credit Card Annual Fee 9
9.0 Islamic Credit Card in Al Bai Bithaman Ajil 9
10.0 Sources of Al Bai Bithaman Ajil 10
11.0 Recommendation 11
12.0 Conclusion 12
References 13
Appendices
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The Application of BBA in Credit Card
1.0 Introduction
Generally, to qualify the credit card as being Islamic, it must be observe to one
basic requirement, the card must be completely free from any riba or gharar. Riba is
usually translated as “interest” which means an extra amount charged in
transactions dealing with silver, gold, or money while gharar means uncertainty.
This means that Islamic credit cards can’t be charged with any compounding
interest from clients outstanding balance and management fees. Also the profit
margin is fixed for the whole tenure of contract, which is basically span up to 3
years.
Al Bai Bithaman Ajil or known as BBA is a consumer financing facility based on
sale plus profit mark-up, which widely used by Islamic Banking System in
Malaysia. Al Bai Bithaman Ajil is the most popular type of financing in Malaysia.
Most Islamic banks in Malaysia is employing this financing concept for their
customers for all kind of consumers financing such as houses, land, motor vehicle,
consumer goods, shares, education financing package and personal financing. Not
all financing provided by the bank is running smoothly in repayment process, some
customers may have some difficult to fulfill their obligation towards Islamic banks.
In my assignment, I will explain about the definition Al Bai Bithaman Ajil, the
legality and the concept and application of BBA in credit card.
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2.0 Definition of Al Bai Bithaman Ajil
Al Bai Bithaman Ajil is a sale and repurchase agreements in the concept of
Islamic banking used in the financing of hire purchase or purchase insurance. This
concept, the bank provides financing to customers for a property or service to buy
the assets from the customer or from the vendor with the cash price. After that, they
sell back the assets to the customer with the purchase price plus a profit. Customers
can pay back for the bank the installment and total the cost depends on three types.
The first types is the total purchase cost involved, second types is a payment risk
and the last types is the term of agreement. The Al Bai Bithaman Ajil is considered
as a method of financing to replace the loan based on the financing as practiced by
the conventional banking system.
3.0 The Legality of Al Bai Bithaman Ajil (BBA)
In general, there is no issues arises from the practice of deferring the payment of
the sale price. The legality through the sale contract is considered sufficient by
jurists to allow BBA. It is reported in one of the Hadith by a companion, Jabir, that
the Prophet, bought a camel from him outside the city of Madinah where by the
payment was settled later on in Madinah. Another Hadith was narrated that the
Prophet purchased a quantity of grain from a Jew on the basis of deferred payment
and he pledged his armor by way of security.
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4.0 The Concept and Application of Al Bai Bithaman Ajil (BBA)
In the concept of BBA, that is refers to the sale of goods or service on deferred
payment basis at a mark-up credit price, which include the profit margin agreed to
by bank and the customer. The packaging involves a combination of sales, profit
margin and deferment, conducted between two parties. The sale (bai’) between the
customers and the bank, a cost plus sale including a stated profit margin
(murabahah), deferred payment (al-ajal’) and involves one party selling asset at a
higher deferred price and buys it immediately for a lower cash price (bai’ al ‘inah).
Then, the process of BBA involves a sale and purchase agreement between the
buyer and the original seller in situation of financing, which includes a payment of
deposit to the seller. The profit earned by the bank is legitimate from the Shariah
point of a view since the transaction is based on a sale contract rather than a loan
contract. Any predetermined profit arising from the loan is prohibited in Islam as it
amounts to riba.
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5.0 Islamic Credit Card
Credit card refers to a card that facilities the cardholder to purchase goods and
services as well as to withdraw cash based on the agreed terms and conditions
specified in the contracts between the cardholder and card issuer. The cardholder is
allowed to pay the purchase transaction based on credit card as an alternative
method of payment apart from payment by cash or by cheques. In order to ensure
that Islamic credit card is used according to Shariah requirements, various
guidelines on the usage of Islamic credit card need to be established.
At this time, the Islamic Credit Card is one of the latest banking products offered
by Islamic institutions. For example, using the principles of Al Bai Bithaman Ajil
(deferred payment sale), the bank issues an interest free and penalty free credit card.
With using this credit card, as goods are purchased and the bank will render the
transaction on your behalf and simultaneously sell it back to the customer. This
credit is payable over a deferred period through installments within a certain time
frame.
In some Muslim countries the wealthy true Muslims can well afford a credit card
yet they prefer to go through the inconvenience of carrying bulky wads of cash with
them while shopping or travelling abroad. They know carrying large amounts of
money makes them vulnerable to thefts but they would rather face robbers than
“riba : the element of interest involved in banking transaction. To a traditional
Muslim “riba” or usury is “haram”, or a sin forbidden by the Holy Qur’an.
Interestingly, the drive to introduce an Islamic credit card in Bangladesh is an
international effort spearheaded by two organizations that hail from Malaysia. They
are the Arab Malaysian Bank Berhad, the only financial institution in the Asian
region with a Islamic credit card. The Arab Malaysian Bank Berhad introduced its
Islamic credit p- the Al-Taslif Visa Card in 1996. It is based on the Islamic principle 5
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of Al Bai Bithaman Ajil that allows for payment through installments within a
certain period.
Instead of interest, Al-Taslif charges an annual profit margin fee of 12% - 1%
monthly on the banks pricing rate for balance of payments. An Islamic credit card
can be subscribed to by a non-Muslims as well and banks with this facility are
trying to make it valid globally.
An Islamic credit card will probably get the largest number of subscribers in the
United States (US) and Britain. The considerable size of the Muslim community in
both the countries has already made conventional banks like the HSBC and UBS
introduce Islamic products ranging from house buying schemes to investment funds.
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6.0 Features on Islamic Credit Card
This product is open to Muslims as well as non Muslims.
This product a small fee may be charged annually for the credit card.
Then, you can enjoy the value added benefits of conventional credit cards. For
example, bonus points, gifts, shopping discounts, travelers cheques and others.
You may need to have some kind of collateral of some form that has been
agreed to earlier with your financial institution may be required.
Your credit limit will be based on your collateral value and it may be possible
to obtain general Takaful coverage.
Some banks may provide other services such as zakah payment with this credit
card. It may be possible to apply for a supplementary card.
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7.0 Takaful Cover for Islamic Credit Cardholders
There were proposals by Islamic financial institutions to provide takaful coverage
associated with personal accident as one of the privilages of which ujrah will be
imposed to Islamic credit cardholders. In this regard, the SAC was referred to on the
issue as to whether the proposed provision of takaful coverage with the imposition
of ujrah is permissible.
The imposition of ujrah for personal accident takaful coverage is not permissible
due to following considerations :
The Islamic credit cardholders are not direct participants in the takaful scheme.
However, the payment of ujrah is instead imposed on the cardholders as a
consideration for the takaful cover arranged by Islamic financial institutions
with a third party.
Since the ujrah is paid by the customers to the Islamic financial institutions for
benefit coverage against risk, hence such arrangement is prohibited by the
Shariah considering that the cash is exchanged with cash at different values.
Therefore, the application of hibah concept is considered as an appropriate
alternative compared to ujrah in order to avoid syubhah associated with the
prohibition of exchanging cash with cash at different values. In addition, there
is no Shariah restriction on the application of hibah.
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8.0 Cash Back Rebate on Credit Card Annual Fee
The Islamic financial institution that offered ujrah-based credit card is not
permitted to offer cash back rebate to the Islamic credit cardholder. In regular, this
facility may be offered as a hibah to the cardholders without any imposition of
ujrah.
9.0 Islamic Credit Cards in Al Bai Bithaman Ajil
An Islamic credit card holder does not pay interest on outstanding debt. The
cardholder pays an upfront fee which represents a part of the total payment and
through this mechanism it is possible to rollover the outstanding debt balance to the
next payment cycle. Some Islamic banks return a part of the upfront fee to an
Islamic card holder if the credit is repaid in time. The Islamic credit card is based on
the principle of Al Bai Bithaman Ajil (BBA) deferred payment sale. In other words,
the bank issues an interest-free and penalty free credit card. As goods are purchased
using this credit card, the bank makes the transaction on behalf of the customer and
simultaneously sells it back to the customer. This credit is payable over a deferred
period through installments within a certain time frame.
However, the Al Bai Bithaman Ajil (BBA) principle is sometimes critized as a
two-party transaction that tries to circumvent riba. This is because the financing of
the credit amount is normally done based on the bank selling a part of its assets
based on “cost + margin”. Instead of paying cash to the credit card holder, she or he
given “an overdraft” facility which can be utilized when paying using the card.
Several banks are doing away with this concept and are using Tawarruq
(Commodity Murabaha) and Ijara instead. In Tawarruq, the relationship between the
issuer as a bank and borrower as a credit card holder is developed based on actual
sale and purchase of a tangible asset through a third party.9
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10.0 Sources of Al Bai Bithaman Ajil
Al Bai Bithaman Ajil refers to the law based on the following texts : Word of
Almighty Allah which means, “ And Allah has permitted trading and forbidden
usury “. (Surah Al-Baqarah, 2:275). This verse explains that trading activity is
lawful and unlawful if the activity contains elements of Riba.
Therefore, Al Bai Bithaman Ajil is a mechanism in the sale and purchase of
preserving Islamic principles and conditions of sale in Islamic Muamalat. “ And ye
shall bring a witness whenever ye, and let not those who write and who become
mutual witness suffer harm. “ (Surah Al-Baqarah, 2:282). The verse also explains
the permissibility of sale. Sale and purchase in the form of debt shall require a
written sale and purchase transactions. The purpose of the transaction was created to
avoid misunderstanding, fraud and fights in the future and does not pose a problem
for both sides.
“ There is no sin for you to find gift (profit from your trading) of the Lord your
God. “ (Surah Al-Baqarah, 2:198). In the verse justify taking profit in the sale and
purchase of halal manner. Sale and purchase agreement must be executed feeling
pleased with each other and according to Islamic principles. Therefore, the
mechanism of trading uses Al Bai Bithaman Ajil involves taking profits through the
sale and purchase of business assets with deferred payment is required.
Hadith Prophet, from Aisha ra that means : “ The Messenger of Allah has
bought food from a Jew to defer payment of a specified period and secures the
shirt as a guarantee. “ (Al-Bukhari).
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11.0 Recommendation
Islamic Banking Act 1983 does not elaborate in what is the element that is not
approved by the religion of Islam. There are some elements that are not approved by
the religion of Islam under muamalah transactions. If the act does not state specific
elements of what is not approved by the religion of Islam, any court in dealing with
the case of Islamic financing default payment will hard to find any reference to
which elements that is not approved by the religion of Islam to provide judgement.
Therefore it is recommended that Islamic Banking Act 1983 to be amended with
an explanation of what are the elements that is not approved by the religion of
Islam, since the characteristics of Islamic bank is not merely an intermediary
between a surplus units to a deficit unit such as a conventional bank. Islamic bank
has a unique characteristic of business relations to its customers, Islamic bank could
become a partner of a business based on the profit and loss sharing agreement and
Islamic bank could become a seller based on the sale (bai’) contract.
In this respect, bank central should not impose the regulation of Islamic bank as
the same with its conventional counter part. New regulation need to be endorsed in
relation to Islamic Banking system in order to avoid misinterpretation in case there
is any dispute in the future in regards to Islamic financing facilities such as Al Bai
Bithaman Ajil (BBA). There are some other alternative of Islamic home financing
methods such as musharakah mutanaqqisah, ijarah muntahiyyah bit tamleek, or
Istina that bank can offer to its customers in order to avoid the repercussions of the
current judgment against the Al Bai Bithaman Ajil (BBA).
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12.0 Conclusion
In conclusion, Islamic Banking Act 1983, are procedure and not substantive in
nature. Therefore, the court was in searching of its findings has found some
difficulty to define what is the element of not approved by the religion of Islam, it
could be riba, gharar and masyir as elements not approved by the religion of Islam.
In this case the court has presented the interpretation of Al-Quran in regard to the
Prohibition of Riba in Surah Al-Baqarah verse 275-280 and Surah An-Nisa verse
60-61 and the quotation from the Torah and the Holly Bible.
More ever, the court finds that the sale of Islamic banks financing facility using
the mode of Al Bai Bithaman Ajil is not a bona fide sale because the court
interpretation of the nature of contact Al Bai Bithaman Ajil as “hilah” or a way to
circumvent riba under the name of sale where it is actually a loan.
The court order is to have the securities of defendants to be placed in a public
auction and the proceeds of the sale are to be paid to the plaintiffs including the
penalty of delayed in time of payment or ta’wid.
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References :
Nibra Hosen (2012, June 18). Al Bai Bithaman Ajil (BBA) : Application in Islamic
Banking System and it’s Implication upon Default Payment. Retrieved from
nibrahosen.multiply.com
Prof. Dr. Mohd Ma’sum Billah (2007, April 1). What is an Islamic Credit Card.
Retrieved from islamicbanking.info
Glossary of Islamic Banking in Credit Card. Retrieved from mydailytrade.net
Gulf Times Daily (2002, September 16). Islamic Credit Cards. Retrieved from
www.islamweb.net
Saiful Azhar Rosly (2006). Critical Issues on Islamic Banking and Financial
Markets, (page 88). Al Bai Bithaman Ajil Financing.
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