Modus operandi Bay 'Al-Tawaruq-Based Vehicle Financing at Bank Rakyat

While buying Islamic banking vehicles in Malaysia, such as Bank Rakyat, the Bank
has issued a range of Islamic Sharia services, including personal finance services offered
based on the Bay 'al-tawarruq model. The need for this definition is undeniable based on the
increasing demand for vehicle buying services from year to year. Bay 'al-tawarruq is a
method of financing of vehicles based on the principles of al Murabaha and al-wakālah. This
term has also been extended to most Islamic financial instruments. Bay 'al-tawarruq is an
alternative to usury-based loans that is used for car finance under the contracts of al-
murābah Ijarah and al-wakālah. In addition, Bay 'al-Tawarruq refers to the selling and
acquisition of goods or properties based on the contingent payment by Murabaha (i.e., the
cost price of the asset plus the profit margin) or Musawamah (i.e., the sale that does not
reveal the cost price of the asset and profit margin) from the seller to the purchaser, and
then the product or asset will be paid in cash to a third party (other than the origin)

It is also known as the Murabaha Commodity. Usually, this term is applicable to the
arrangement of fixed deposit instruments, insurance, wealth management and risk
responsibility, such as personal financing, home financing and credit card facilities. The
principle of Murabaha is one method of selling and acquisition that allows the seller to supply
the purchaser with details on the costs incurred in acquiring the principal purchase price and
additional gains in the form of the sale price. Although murābah commodities involving
commodities (assets) is the intervention of brokers such as tawarruq. In the implementation
of personal financing in Islamic banking in Malaysia, Bay 'altawarruq is not carried out on its
own; in effect, Islamic banking in Malaysia shapes this personal financing by combining it
with other contracts, namely al-wakālah and bay' almurābah

Bay 'al-murābah is to market the commodity at the price of money and to apply the
amount of benefit to the negotiated cost. In the practise of Bank Rakyat, as this theory is
applied, it means that Bank Rakyat operates as a broker, first purchasing goods from the
seller and then reselling them to the consumer at a higher price. When the principle of al-
wakālah is used in the selling and purchasing arrangement, it means that the Islamic bank
functions as an agent or agent in the purchase or distribution of such goods on behalf of its
clients and that the bank earns wages from the services it offers. The modus operandi of
vehicle finance based on the principle of al-tawaruq in the People's Bank as shown by the
diagram below.
1. Customers want to make personal finance on the Tawarruq/Murabaha products contracts.

2. Banks buy products from broker A in cash.

3. The bank sells the same product to the buyer for a delayed payment at a cost-plus price.

4. The bank, as an agent, sells the goods to broker B in cash.

5. Then the bank's cash is billed to the client.

6. The client owes the bank at the expense of adding funds to the instalments.

For example, a customer wants to make a personal loan of RM40,000 from Rakyat
Bank. At the initial point, the client will apply for the financing of the vehicle from Bank
Rakyat, and the bank will purchase an item or product worth RM40,000 from any firm or
broker that performs its business in compliance with Islamic Sharia law. Then, the bank will
deliver the goods to the customer in Murābahah (cost price and profit rate of 5.1 percent).
The sale price of this item shall be paid by the buyer to the bank which has been postponed
for 3 years. Using the new deal, the buyer will nominate the bank as an agent to sell the
items he has ordered. Usually, the bank would bill the RM20 customer for the service offered
as a sales agent. As a representative, the bank will sell the goods to any company operating
based on Islamic sharia that wants the goods, that is, to a company that sells the goods in
cash for RM40,000 in the first level. The proceeds from the selling of the bank would be
added to the customer's account. At the final stage of this deal, the buyer will pay the price
of the goods he purchased cheaply to Bank Rakyat in the first stage in a deferred manner.

In this agreement, it is provided that all the terms of the selling and purchase deal,
namely the seller, the customer, the product, and the price, follow the terms of sale and
purchase. Although the nature of this loan is known to the customer and the bank that the
purpose of this sale and acquisition is for the customer to acquire personal finance to fulfil
his financial needs. The Bank, on the other hand, issues debts to consumers through this
bay ‘altawarruq operation, allowing Bank Rakyat to take advantage of sales and
transactions. The supply of finance to these consumers is seen to be able to satisfy the
needs of customers who need funds to satisfy their wishes. According to Rafe Hanef, al-
tawarruq funding has been used to fund the demands of customers for tuition, medication,
cars, legal expenses, and other market needs.

2.3 About Tawarruq Vehicle Financing-i at Bank Rakyat (Bank Rakyat, n.d.)

No Subject Information
1. Syariah Concept Tawarruq

2. Characteristics of the • Maximum margin up to

product 100% of selling price or
invoice
• Payments due up to the 9
years
• Financing limit is open and
depends on customer’s
ability to pay monthly
• Funding is for all new
passenger and private
vehicles
3. Qualifications • Age not less than 18 years
old and not exceeding
retirement age.
• Open to government
workers and GLC with fixed
salary which has been
working at least six months.
• Minimum salary (RM 1500)
4 Methods of payment • Biro Perkhidmatan
Angkasa (BPA.)
• Salary Deduction by
Employer (PGM)
• Electronic and cash
payment (only for
 government and GLC
customers which have
minimum salary RM 3500)
5. Profit rate • Contact the nearest branch
• Profit rate are depending
on the car condition (used or
new), car origin (local or
foreign) and years of loan.
• Refer to table 1