The Concept of Bai` Bithaman Ajil (BBA)

Bai` Bithaman Ajil (BBA)

Introduction A contract that refers to the sale and purchase transaction for the financing of assets on a deferred and an installment basis with a pre‐ agreed payment period. The sale price will include a profit margin. The asset comprises of Land & Building, Machinery, and Equipment. Under conventional banking perspective, banks do not engage in the business of selling goods but grant loans repayable by monthly installment (or depending on the facility type, repayment can also be on demand basis) where interest (in Islam, interest chargeable by Banks is also considered as usury or riba) is charged until the principal portion (or the original loan amount) is fully repaid. As mentioned many times in this blog, usury (or interest) is strictly prohibited in Islam. This claim is clearly evidenced by Al Quran verse Al Baqarah (2:275)

The keywords of surah Al-Baqarah 275 is that "Trade is like usury but Allah had permitted trade and forbidden usury". Thus, instead of offering the joint venture financing product of Musyarakah (known as Shariah base product which is contrary to Shariah compliant product) during the inception of the first Islamic Bank i.e. Bank Islam Malaysia Bhd (BIMB) in Malaysia in 1983, the Islamic financing product of Murabahah was introduced to meet the above Quranic verse interpretation. Before we define what is "Murabahah" it should be noted that BBA is a Murabahah product but the product name of BBA was given by BBMB to differentiate between a short term (below 12 months) and long-term (above 12 months) tenor financing products. What is Murabahah? Murabahah or murabaha (Arabic ‫ةحبارم‬, more accurately transliterated as murābahah) involves a sale where the seller indicate his original cost of purchasing the good/s (in banking perspective - the original financing amount offered by the Bank) and the markup amount (agreed profit rate (%) x financing tenor) as the selling price. In most cases,

the buyer would have pay certain amount as deposit (normally 5 - 10% of purchase price) while the balance is payable on installment basis over the agreed deferred payment period (financing tenor) using the bank financing facility. How it works

Here is how it works: 1. You pick an asset you would like to buy. 2. You then ask the bank for BBA and promise to buy the asset from the bank through a resale at a mark-up price. 3. Bank buys the asset from the owner on cash basis. 4. Ownership of the goods passes to the bank. 5. Bank sells the goods, passes ownership to you at the mark-up price. 6. You pay the bank the mark-up price in installments over a period of time.