Bay' Bithaman Ajil and Murabahah are two contracts where payments are
deferred to an agreed time. Compare and contrast these two contracts
and give your view with regard to Affin bank Berhad v Zulkifli Abdullah
(2005) and the 2008 BBA landmark cases.
A presentation by: Ahmad Murad Irqsous 2008354627
Melda Malek 2009293952
Nor Alira Ramli 2009556949
Abang Ikhbal Abang Bolhil 2009519587
• Nowadays, most Muslim in Malaysia are very much concern on
choosing the right product or offer from bank when their application
for loan or facility is approved. The main concern is that it must be in
line with Islamic Banking principle. Islamic financing facilities have
been growing parallel to conventional banking loan facilities. The
charging of interest for a loan or riba is prohibited in Islam, therefore
in Islamic financing, the purchaser will pay profit instead of interest to
• Discussion on 2 types of Islamic financing product offered by banks
Introduction - Murabahah
Derived from the word 'ribh' – profit or gain
A type of contract, a form of sale, where the seller expressly mentions the cost of the
sold commodity he has incurred, and sells it to another person (the buyer) by adding
some profit or mark-up thereon.
One of the financing mechanisms in the muamalat system – a simple business
Mechanism has to be conducted with complete sincerity by the seller/financier by
stating the cost price of the purchase and the total profit incurred clearly and truthfully.
Hence, a sale based on trust (amanah).
Only valid for commodities whose cost price is known.
Murabahah initially was not a mode of financing in its original form. It was a simple
sale on cost-plus basis. However, after adding the concept of deferred payment, it
has been devised to be used as a mode of financing only in cases where the buyer
intends to purchase a commodity.
Definitions by classical jurists
Ibn al-Humam's – Al-murabahah is a contract of delivery of traded
goods by a seller to the buyer by offering the buyer the selling cost
price plus the total profit.
Ibn Qudamah – A form of business transaction whereby the
customer is informed that the goods are sold at a price which
includes the cost price and profit.
Imam Shafi'i – When someone sell an item with a contract, for
instance for every 10 products the profit is 1, the buyer thus must
pay the cost price, that is 90 dirham, plus the profit of 1 dirham for
every 10, hence 9 dirham and therefore eventually the total financing
is 99 dirham.
All support that Murabahah is a trust sale which comprises both cost
price and margin of profit.
Legitimacy of Murabahah
Murabahah is a legally permissible contract by the testimony of the
majority of jurists and the Companions of the Prophet (pbuh).
Proof from Al-Quran:
“And Allah has permitted trade” [2:275]
“O you who believe! Eat not up your property among yourselves
unjustly except it is a trade amongst you, by mutual consent” [4:29]
- Murabahah is clearly concluded by mutual consent and it comes
under the general permission in this verse.
Legitimacy - cont.
Some scholars made murabahah analogous to a form of sale called
Tawliyyah (sale at purchase price without making profit)
The Prophet (pbuh) purchased a female camel from Abu Bakr r.a.
For use as transportation to migrate to al-Madinah. Abu Bakr wanted
to give it to the Prophet (pbuh) free-of-charge but the Prophet(pbuh)
refused and said, “I will preferably take it at the acquisition price.”
This Hadith indirectly implied that a commodity can be sold at the
acquisition price and also the acquisition price with mark up.
Conditions for Murabahah
5 important elements:-
A. Product and selling price
-Product must be clearly defined including its type, quantity and other descriptions.
- Selling price- its cost and profit must also be disclosed clearly and truthfully.
- Act of concealing cost price and/or margin of profit render transaction null and void.
B. Contracting parties
- Seller/ financier – responsible for supplying the product ordered by the buyer.
- Buyer/ customer – obligated to to pay for the product he
purchased according to agreed terms of the agreement.
- Both must be adults, rational, intelligent and can be held accountable.
Conditions - cont.
C. Offer and acceptance
- it shall contain the two important elements mentioned ie. Cost price and rate of profit.
- the original price must be fungible ie. The price at which the seller obtained the goods
must be measured by weight, volume or number of homogeneous goods.
- If the original price is not fungible (eg. A house, clothes), then the question is whether the
seller is the owner or not:-
If the seller is not the owner then murabahah is not permitted.
If seller is the owner then 2 situations :
i) if the profit margin is specified as a known amount of a different item (eg. Silve coins, a
specific dress etc), then the sale is permitted. In this case the first price is known and
the profit is known (eg. I sell you via murabahah in exchange for the dress in your
hand, and a profit of 10 dollars).
ii) if the profit is made part of the initial price (eg. The profit margin is 10%), then the sale is
not permitted, since the profit is made part of the object and not equally divisible.
Conditions - cont.
D. No riba trading shall be involved.
- Products traded cannot be paid by barter system from ribawi items
prohibited by the Prophet (pbuh) ie. Gold for gold, silver for silver,
wheat for wheat, flour for flour, dates for dates and salt for salt and
barley for barley unless weight, measurement and the calculations
are equal. Also forbidden eg. Selling 100kg of good flour at the price
of 120kg of sub quality flour – constitutes riba.
E. The initial contract must be valid.
- The traded item or property must be lawfully owned by the
seller according to Shariah requirements.
Basic Features of Murabahah Financing
It is not a loan given on interest – it is a sale of a commodity for a deffered price which
includes an agreed profit added to the cost.
Murabahah cannot be used as a mode of financing except where the client needs
funds to purchase a commodity. eg. If the client wants funds to purchase cotton as
raw material for his factory, the bank can sell him the cotton based on murabahah.
Murabahah cannot be affected if the funds are required for other purposes, like
paying the price of a commodity already purchased by the client or to pay utility bills
or to pay staff salary.
Requires a real sale of commodities and not merely advancing a loan. Commodity in
the transaction must come into the possession of the financier, whether physical or
constructive – the commodity must be in his risk, though for only a short period
In cases where it is not practicable for the financier to make a direct purchase, the
financier is allowed to appoint the customer as his agent to purchase the commodity
on his behalf.
Practical Steps for Murabahah Financing
1) The client and the financier sign a master agreement whereby the financier promises
to sell and the client promises to buy the commodity on an agreed ratio of profit
added to the cost.
2) When a specific commodity is required by the client, the financier appoints the client
as his agent for purchasing the commodity on its behalf, and an agreement of agency
is signed by both parties.
3) The client purchases the commodity on behalf of the financier and takes possession
as an agent.
4) The client informs the financier that he has purchased the commodity on its behalf,
and at the same time, makes an offer to purchase from the financier.
5) The financier accepts the offer and the sale is concluded whereby the ownership as
well as the risk of the commodity is transferred to the client.
- All these 5 stages are necessary to affect a valid murabahah.
Types of Murabahah
2 Types of Murabahah:-
i) Ordinary Murabahah Sale
- involves 2 parties – seller and buyer. The seller is an ordinary trader who buys
a commodity without depending on a prior promise of purchase, then he
displays it for murabahah sale for a price and a profit to be agreed upon. (Not
ii) Murabahah based on Order and Promise
- widely applicable because used as one of financing tools by Islamic banks
- Murabahah to the purchase orderer (MPO) for a pre-agreed selling price, which
includes a pre-agreed profit mark-up over its cost price, this having been
specified in the customer's promise to purchase.
- The payment is payable within a fixed future date in lump sum of by fixed
The Prohibited Elements in Murabahah
To assume that murabahah is a universal instrument which can be used for
all types of financing offered by conventional interest-based banks.
Clients sign the murabahah documents merely to obtain funds though they
do not intend to use these funds to purchase the commodities specified in
Sale of commodity to the client is effected before the commodity is acquired
by the seller. This usually happens when all the documents of murabahah
are signed at one time without taking into account the various stages of
Entering into a murabahah contract on commodities already purchased by
their clients from a third party. This practice is unacceptable in Shariah.
Once the commodity is purchased by the client himself, it cannot be
purchased again from the same supplier.
Bai' Bihtaman Ajil (BBA)- Intro.
• The most popular type of financing.
• The Majallah (mainly Hanafi-bases codification) refers to BBA as
Bay' al-Muajjal. This term is employed in Pakistan.
• In Bangladesh, it is known as Bay'Muazzal.
• In the Middle East, a similar practice is used under the term
• However, in Malaysia both terms refer to two different products.
• BBA is a sale contract in which the payment of the price is deferred
and payable at a certain particular time in the future.
• Therefore, BBA can be implicated for other sale contracts inc.
Musawamah and Murabahah. (not applicable for salam contract)
Legality of BBA
Legality of BBA:-
• In general, no issue arises from the practice of deferring the payment of sale
• It is reported in a Hadith by a Companion, Jabir, that the Prophet (pbuh)
bought a camel from him outside the city of Madinah whereby the payment
was settled later on in Madinah.
• In another Hadith, it was narrated that the Prophet (pbuh) purchased a
quantity of grain from a Jew on the basis of deferred payment and he
pledged his armour by way of security.
• The dispute arises from the practice of increasing the price due to
• According to majority jurists inc. Al-Kasani, Ibn 'Abidin, Ibn Rushd and Al-
Nawawi increasing the price due to the deferment in the payment is 15
permissible because the increase is against the commodity and not against
• In Malaysia, BBA financing is employed by bank to provide medium
to long term financing to clients for acquiring eg. Property, land,
motor vehicle, consumer goods, shares,overdraft facility, education
financing package etc
• House financing is the most popular facility granted under the
concept of Bai Bithaman Ajil (BBA) either to purchase existing
completed houses, build or construct new house on customer’s
land even as a refinancing facility. In BBA, the customer sells the
property purchased to the bank for a cash sum paid to the customer
and the property will then be immediately resold back by the bank to
the customer at higher price which include the bank‟s profit on the
sale, payable by the customer to the bank by monthly installments
over a fixed period of time.
• 3 main ingredients of BBA facility:
• Sale and Purchase Agreement
- Not part of the documentation of the facility but is required to obtain the facility.
• Property Purchase Agreement(PPA)
- This is an agreement made between the client and the bank.
-most of the time the purchase price consists of the remaining balance of the
price of the property (eg 90%) and some other costs such as lawyer's fees,
• Property Sale Agreement(PSA)
-This agreement is signed between the client and the bank.
- PSA should be signed after the signing of the PPA so as to allow the bank to 17
sell back the asset to the client.
Some issues with BBA
Selling of the non-existent
• For houses under construction, property transacted is not yet in
existence and may fall under non-completion.
• Even if the opinion of Ibn Taymiyyah and Ibn al-Qayim that allows the
selling of non-existent subject matter is to be followed, the ruling is
based on the near certainty of delivery.
• To avoid conflicting issue such as this, banks are recommended to
use other types of financing for property under construction eg. Istisna
Issues with BBA - cont.
Transfer of ownership
• Issue of possession (al-qabd) – since BBA is actually a sale contract, the
transfer of ownership and the taking of possession must truly happen even
for a little while.
• Dato' Haji Nik Mahmud bin Daud v Bank Islam (1996) CLJ p.582
- The issue arisen was whether the execution of PSA and PPA amounted to a
transfer of ownership of the Malay reserved lands in question.
- Court held that it was never the intention of the parties to involve any transfer
of ownership and that the executions of the PPA and PSA were part of the
process required by Islamic banking procedure.
• Although justice and equity have been carried out in this case, the judgment
caused serious conflict with the concept of BBA whereby, the contract
should, result in the transfer of ownership of the property, even only for a 19
CASE REVIEW (cont’d)
• Affin Bank Berhad v Zulkifli Abdullah  1 CLJ 438
• Facts of the case
• Zulkifli bought a house from a vendor and applied for BBA financing from his
employer, Affin bank. The bank paid the balance sum due to the Vendor (seller)
amounting to RM346,000-00 which is the approved facility amount and Zulkifli
was required to repay to the bank the facility amount over a period of 18 years
by a fixed monthly amount. The bank selling price to Zulkifli is RM466,847.28.
The said facility was then restructured because he had defaulted in his
repayment and also because he had left his employment with the bank. The
restructuring involved a revision of the bank’s purchase price, the bank’s
selling price, the tenure of the facility and the monthly installments
payable. Zulkifli agreed with all the terms of restructuring hence agreed to pay
the bank the revised selling price of RM992,363-40. After few payments, Zulkifli
then defaulted again and the bank commenced an action to sell the property by
way of public auction. The bank claimed that the balance due from Zulkifli was
RM958,909-12, being the difference between the revised selling price and 20 the
amount he had paid.
• The Learned Judge held that the bank is not entitled to claim for profit margin for
the full tenure of the vacility for over 25 years.
• He did not agree with the bank‟s calculation of the amount due and stated that
bank‟s selling price in BBA financing is not a sale price paid in a single
payment but a series of equal monthly instalments. The profit margin is
culculated with the profit rate applied to the full tenure.
• What is immediately striking is the amount of the claim whereby the revised
facility had mushroomed into a claim for a debt of RM958,909.12 which is more
• If the customer is not given the full tenure to pay the selling price, then the bank
is not entitled to claim for the bank‟s‟ profit margin of the full tenure. The profit
margin charged on the unexpired part of the tenure is unearned profit and not
actual profit and therefore cannot be claimed under BBA.
• The reason behind this judgement is obviously on the following :
as the facility was terminated way before the expiry of the tenure, the bank
was not entitle to the unearned portion of the full profit. The sum that the
bank was allowed to recover was the sum of RM582,626.80 which was
culculated base on profit per day which is 9% per annum from the revised
facility amount of RM394,172.06 until the judgment date .
• Zulkifli then got away with having to pay substantially less than what he had
agreed to pay to the bank for the restructured facility and the bank did not
appeal against the decision.
• In light of this decision, it is important for a purchaser/customer who requires
financing to fully understand his or her obligations and liabilities under BBA
financing. This is because the customer has to pay what he has agreed upon
and what both parties have contracted with each other i.e. to pay and to
repay. The bank‟s selling price which is calculated up to the full period of the
loan need to be fully served.
• It is the term in the facility that allowed the bank to claim the full selling price
and in this case, the judge seems to rewrite the contract and re calculate the
balance due by Zulkifli and the bank is not entitle for the actual or the total
selling price as agreed during the execution of the Property Sale Agreement.
• Therefore it is vital to understand all terms and conditions stated in Facility
agreement and questions, discussion and clear explanation of the implication 22
of default payment and early settlement is a must. Both parties need to be
clear on this issue or else the concept and principle of predetermined profit in
BBA does not serve the purpose .
ARAB-MALAYSIAN FINANCE BHD v.
TAMAN IHSAN JAYA SDN BHD & ORS;
KOPERASI SERI KOTA BUKIT
(THIRD PARTY) AND OTHER CASES
HIGH COURT MALAYA, KUALA
ABDUL WAHAB PATAIL J
The respective defendants had already purchased
property from a third party and paid part of the price.
• The defendants approach the plaintiff banks for facilities to
complete the purchase, were there are required to sell the
property they had bought to the respective banks for that
balance sum stipulated in the banks‟ property purchase
• The bank then sold the property to the defendants via the
banks‟ property sale agreement („PSA‟).
• According to the PSA the defendants would pay an agreed
number of installments of specific sums to the banks, the
total of which made up the banks‟ “selling price”.
• As security this Al Bai‟ Bithaman Ajil facility, the respective
defendants were required to and had executed a charge
cum assignment of the property to the bank. 24
• The defendants defaulted in the payment of the banks‟
selling price, and the banks in consequence applied for an
order for sale of the charged property.
• The defendants argued that the transaction herein,
comprising the letter of offer, the PPA, the PSA and the
charge or assignment in question, became transparently
financing in nature and smacked of transactions for profits.
• Defendants beseeched the court to examine the same and
determine whether it involved elements not approved by
the religion of Islam – or had otherwise contravened the
provisions of the Islamic Banking Act 1983 or the Banking
and Financial Institutions Act 1989.
• Held, granting order for sale, ordering return of original facility
amounts to plaintiff banks.
• The plaintiffs‟ submission in reliance upon Bank Islam Malaysia Berhad v.
Adnan Omar  3 CLJ 735,  4 BLJ 372 that since the parties have
agreed upon a selling price, there is “aqad” and the court must look no
further does not appear to be right. The fact there is an “aqad”, and before
that an “ijab” and “qabul” does not prevent an examination of the terms as to
the transaction in fact is. It is necessary to look beyond the labels used and
look at the substance. (paras 60 & 62)
• Where the bank becomes the owner under a novation agreement, the sale
to the customer is a bona fide sale, and the selling price is as interpreted in
Affin Bank v. Zulkifli Abdullah  1 CLJ 438. Thus, where the bank is the
owner of the property, by a direct purchase from the vendor or by a novation26
from its customer, and then sells the property to the customer, the plaintiffs‟
interpretation of the bank‟s selling price is rejected and the court will apply
the equitable interpretation. (para 68)
• Where the bank purchases directly from its customer and sells back to the
customer with deferred payment at a higher price in total, the sale is not a
bona fide sale, but a financing transaction, and the profit portion of such Al-
Bai‟ Bithaman Ajil facility renders the facility contrary to the Islamic Banking
Act 1983 or the Banking and Financial Institutions Act 1989. (para 69)
To understand more on this matter, we will look into para 56
• But it must be said that, bearing in mind that deferred payment of the selling
price is a credit or a loan, permissible only because no riba is charged, any
profit claimed or charged by the seller from deferred payment by
adding to the cost above a profit for himself for the time given to make
full payment, that profit arising from the giving of time to make payment
is interest, is riba and the very element prohibited in the Religion of Islam.
The court distinguish benevolent loan
• If interest is no more than an increase, expressed as a sum or rate, for the
facility of a loan, profit upon a sale is the increase upon the sale. The sum of
the seller‟s cost and his profit is the selling price. The selling price is
ordinarily paid upon delivery. If the payment is to be made later, the seller in
effect is extending a credit, in other words, a loan, of that selling price. If
there is no increase of the selling price as a consequence of granting time to
make payment, it is a benevolent loan (qard al-hasan). (Para 53)
• Since the bank‟s action resulted more likely from a misapprehension rather
that of intent aforethought, the plaintiffs were entitled under s. 66 of the
Contracts Act 1950 to return of the original facility amount they had
extended. (para 70)
• Al Bai Bithaman Ajil concept exclude riba, its no more then a deferred
sale. In most cases the three simultaneous transaction is adhered but
in this case the BBA facility contain financing transaction and its
rendered riba contrary to IBA 1983 and BAFIA.
• In this case when the bank claim profit for himself from the time given
to make full payment, that profit arising from the giving time of
payment is constitute of interest. We cant charge profit based on time
given to make full payment.
• In the issue of agreed selling price. If the bank can fulfill the Bona
Fide requirement of sale, then the bank may entitle to the selling
• BBA concept is acceptable and reliable as long the customer is not in29
Bank Islam Malaysia Bhd Vs Ghazali Shamsuddin and 2 others 2009
• On 31 March 2009 Court of Appeal unanimously overturned Abdul Wahab
Patail much debated judgement in the Arab Malaysia case discussed above
and held that BBA is in line with shariah in Malaysia.
• Murabahah and BBA are 2 separate components but can also be 2 parts of
• BBA originally refers to the method of payment when the payment is deferred
and paid by installments.
• The mandatory requirement of Murabaha is that the original purchase price
as well as the profit added on, must be clearly revealed to the purchaser.
This requirement is not necessary for BBA unless it is attached to
Murabahah as a product.
• As separate products, Murabahah is usually utilised for short term financing
whereas BBA is utilised for long term financing.
• Murabahah can only be utilised for the purchase of a commodity and can not
be utilised for personal financing needs unlike BBA which in practice, can be
used for other financing needs.