CHAPTER 7

APPLICATION OF FUND: FINANCING

FACILITIES AND UNDERLYING SHARIAH
CONCEPTS
SITI NOOR AIN BINTI AZIZ
ACIS, UiTM KAMPUS SEGAMAT
CTU351

1
 Contents
} Applications
} Home/Property Financing (BBA, MM,)
} Motor Vehicle Financing (Ijarah, AITAB)
} Personal Financing (Bai’ Inah, Tawarruq)
} Credit Cards (Wadiah, Bai’ Inah, Qard Hasan)
} Modus operandi
} Computation
} Exercises & Activity
} Conclusion
} References

2
Outcomes
} At the end of this topic, students should be able
to:

Explain the concept of Shariah

Financing facilities and its features

Compute the price for BBA Home

Financing, Ijarah Financing

Evaluate the modus operandi of

financing facilities under Islamic Banking

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 Application of funds (uses of fund)

4
 CONT..

ISLAMIC RETAIL FINANCING CORPORATE FINANCING

1. HOME FINANCING
§ Bay’ Bithaman Ajil (BBA) Home 1. SALE-BASED
Financing § Murabahah to the Purchase
§ Musharakah Mutanaqisah Home
Financing Ordered
§ Parallel Istisna’ Home Financing
§ Tawarruq Home Financing 2. LEASE-BASED
§ Ijarah Muntahiyah Bittamlik
2. AUTOMOBILE FINANCING
§ Al-Ijarah Thumma Al-Bay’ (AITAB)
3. WORKING CAPITAL
3. PERSONAL FINANCING FINANCING
§ ‘Inah Personal Financing
§ Tawarruq Personal Financing
§ Rahn Personal Financing

5
1. ISLAMIC RETAIL FINANCING
} Can be defined as financing activities where
the main emphasis is on service for individuals
rather than businesses and corporate entities

Common
Categories

Home Personal
Automobile
financing financing
financing

6
 HOME FINANCING -
BAI BITHAMAN AJIL (BBA)

7
Bai Bithaman Ajil (BBA)
} BBA means sale of goods with deferred payments, i.e.
bai (sale), bithaman (price), Ajil (deferment).
} Is a sale with “deferred payment” and is not a spot
sale.
} Is a mode of Islamic financing used for property,
vehicle, as well a financing of other consumer goods.
} This financing facility is based on the activities of
buying and selling.
} The price at which the bank sells the asset to the
customer will include the actual cost of the asset and
will also incorporate the bank’s profit margin.
Selling price = actual cost + bank’s profit margin

} The profit earned by the bank is legitimate from

Syariah point of view since the transaction is based
on the sale contract rather than a loan contract.

8
Cont…
} The monthly installments are determined by
selling price, repayment period and the
percentage margin of financing.

} One unique feature of the BBA facility is the

selling price itself, which is fixed throughout the
duration of the tenure. Any change in price will
make the contract null and void.

We need
money to
buy a house,
vehicle etc…

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Essential Elements/condition of BBA
Contract

Essential
Elements/condition
of BBA Contract

RIBA
Essential Elements/condition of BBA Contract
Tenet Mandatory characteristic/ conditions Prohibited characteristic/ conditions

Buyer/Seller 1. Must posses sound mind (aqil) 1. Forced to enter into a contract
2. Must be at least 18 years old. (attains the age of 2. He must not be prohibited from
puberty-baligh) dealing and also:
3. Must be intelligent - not a bankrupt
- not prodigal
Asset/ Merchandise 1. Exist at the time of transaction.
2. Bank must be the owner of the merchandise.
3.must be of pure substance (lawful)
4. Must be of some use or some value.
5. Must be able to be delivered by seller to the buyer.
6. Known to both the seller and buyer. (i.e. full details of
the goods is known to both parties)

Price 1. Must be known to both seller and the buyer.

2. Must be with the quantum and type of currency
specified.
Contract(aqad) 1. Absolute, definite and decisive language.
–offer and acceptance - In the past or present tense.
- Not in the future or imperative tense.
- Not limited to a certain period.
2. The acceptance must agree with the offer.
3. The offer and acceptance must be made at the one
and same meeting or session.

11
Contracts in BBA
◉ The terms and conditions of
bai such as the purchase
and selling prices, the rights
and duties of a seller and
buyer, consideration must be
included.
◉ Any uncertainties and
ambiguities about the
principles of a sale contract
can be tantamount to a
contract being rendered null
and void.
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A valid BBA sale consists of three contracts
◉
as explained below:
1. Property Purchase Agreement (PPA)
PPA is the agreement between the customer
and the bank wherein the bank purchase
the property from the customer and
immediately sells the same property to the
customer on deferred terms under the
Syariah principle of BBA.
2. Property Sale Agreement (PSA)
This agreement reflects the act of reselling the
same to the customer upon deferred
payment which includes the bank’s profit
margin. The agreement also states:
“Beneficial ownership of and rights of the
property shall pass to the customer upon the
execution of this agreement.”
3. Charge Document (Form 16A and Annexure)
or Deed of Assignment
This is an agreement made between the bank
and the customer whereby the latter agrees
to assign all his right and interest over the
property to the former as security for the
financing granted.
Bay’ Bithaman Ajil (BBA) Home Financing

Ø Itcan be defined as a sale contract in which

the payment of the price is deferred an
payable at a particular time in the future.

Ø Refersto the method of payment in the

transaction via a deferred payment basis

Ø Profit rate for the BBA is fixed.

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Modus Operandi for BBA Home Financing
(5) IB pays bal 90% of property
purchase price

(1) Identify the asset

(2) Signing to purchase asset under PPA, + paid 10% downpayment

(3) Approach IB requesting for financg 90%

bal,then IB n purchaser execute PPA & PSA

(4) Selling the asset under PPPA +. profit

(6) Pays the selling price by installment

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Explanation:
1. The customer identified the house he wishes to buy. Then,
customer will sign S&P agreement and pays the deposit to
house developer (HD) since he had agreed.
2. By paying the deposit, the customer is deemed to habe a
beneficial o/ship of d property. Hence the customer can
then approach d bank for financing d remaining balance.
This is done by d customer who sells d property to d bak at a
price equivalent to d financing amount
3. The Islamic bank will purchase the qualified/requested asset
from the developer on purchase price on the cash basis.
(pay in full – the amount normally disbursed direct to the HD)
4. The bank will sells the asset to customer at a marked-up
price.
5. The customer will repay back the selling price on a
instalment basis.
Embedded bay inah (sale and buy back)transactions are
reflected thru step 3-4.
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Modus Operandi of House Financing

16
Modus Operandi of Asset Refinancing

17
Modus Operandi of Umrah Financing

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Modus Operandi of Cash Line facility

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 BBA Financing Practice
Product Features Description
Product Name BBA Financing
Definition BBA house financing is a Islamic financing facility, which is based on the Syariah concept
of Bai Bithaman Ajil (BBA). It is a contract of deferred payment sale,i.e. the sale of goods
on deferred payment basis at an agreed price, which include a profit margin agreed by
both parties. Profit in this context is justified since it is derived from the buying and selling
transaction as opposed to interests accruing from the principal lent out.

Scope of financing 1. Land / Property Financing

a)House/ Shop house
b)Land
c)Apartment/ condominium
d)Factory
2. Vehicle Financing
3. Consumer Financing
a)Computer
b)Umrah package
c)Education package
4. Refinancing of Assets
a)Working Capital
b)Renovation, etc

Types of Account Holder The following types of Saving Account may be opened:
1. Individual Account
2. Joint Account
3. Clubs, Societies ,Association
4. Trustees

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Legal 1. Letter of Offer
Document 2. Property Sale Agreement
3. Property Purchase Agreement
4. Legal charge or,
5. Assignment and power of attorney
6. Or any other Islamic financing document that are require for the house financing
Margin of The margin of financing differs from one bank to another. Generally, the margin ranges from 100% against
Financing the sales and purchase value or the current market value of the asset. Again, the customer’s repayment
capacity will also affect the margin of financing that the bank can offer.

Security/ The property financed by the bank will be used as the security/ collateral for the financing facility under the
collateral BBA house financing. The property is usually secured by the way of first party charge.
requirement The purpose of charging the financing assets as collateral is to minimize the credit risk faced by Islamic bank
should the financing customer fail to pay monthly instalments as agreed upon under the contract of sale.

Takaful Takaful is the equivalent of the MRTA, whereby a protection on the financing amount will be given, in case
(Insurance) any untoward incidents were to befall the customer. Even though it is not compulsory, most banks are
making it a financing condition to encourage the mortgage. Takaful protection is beneficial to the customer
and their next of kin. Most banks provide financial assistance for the Takaful premium. Normally, the
mortgage Takaful premium will be included in the financing amount and will be subjected to the agreed
margin of financing
Security In the view that no charges may be imposed for late payments, the customer is to be place at least 6 to 12
Deposit monthly intalments as security deposit with the bank. The security deposit will be invested by the bank in the
General Investment Account (Al-Mudharabah) or Al-Wadiah savings account on behalf of the customer.
The profit from investment will be returned to the customer, whilst the principal will be keep on renewing
based on the financing tenure. In the event of a default in repayment, the security deposit can be utilized by
the bank to settle the repayment.
Rebate on BBA customer who request for full redemption may be entitle to a rebate (muqasah) which shall be
Early equivqlent to the amount of the unearned income.
Redemption

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Benefit of BBA 1.The total cost of the property purchased is determined at the time of contract or aqad.
Financing to the 2.There is no additional or “hidden” costs that will change the price of the property purchased.
Customer 3.The transaction is transparent.
4.There is no element of uncertainties or Gharar
5.Customers will know exactly when the financing will end.
6.There will be no compounding of arrears and outstanding penalty charges.
7.Unlike conventional loans, repayment is not subjected to fluctuation of the Base Lending Rate (BLR)
8.Allows better financing plan.

Restriction Banks are prohibited from offering financing for haram (forbidden) activities such as casino, disco, factory
operating liquor business, etc.
Bank’s Purchase The bank’s purchase price or cost of financing is equivalent to the amount of financing provided by the
Price bank based on the bank’s policy for margin of financing. Normally the contribution for takaful and/ or legal
fees may be financed by the bank and could be included in the bank’s purchase price.

Bank Selling The bank’s selling price is equivalent to the amount of financing provided by the bank plus the profit
Price margin and the grace period of profit margin, if any. The important feature is that the bank’s selling price,
which has been entered into a contract, will be maintained throughout the financing tenure. The total
selling price represent the maximum ceiling price to be paid by the financing customer of Islamic bank,
that is, on agreed monthly instalments. Any additional amount against the total selling price My lead to the
contract of sale between the financing customer and Islamic bank being declared null and void.
The calculation of profit and selling price can be done in any method, for example a constant rate of
return – monthly, quarterly, half yearly or yearly. The practice differs from bank to bank.
Grace Period of Grace Period of Profit is charged when the bank is financing a property under construction. As such, during
Profit the construction period, customer will be paid the grace period profit only. During this grace period, the
bank may charge a grace period profit to avoid loss of income pending the completion of the dwelling.

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BBA Financing Installment Computation using
Constant Rate of Return (CRR)

} Commonly used bba financing computation practiced by FI is based on CRR. 2 types:

CRR installment finncg computation (bba with no grace period profit) AND bba with
grace period profit

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Bay Bithaman Ajil – installment financing
computation
BASIC FORMULA

Monthly The Selling

Instalment Price

The Amount The

of Profit. Percentage
of Profit

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Bay Bithaman Ajil – Formula for Calculating

ž Monthly Installment

FA x AF x n ; where
n
FA = Financing Amount
AF = Annuity Factor
n = Period of Financing

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Bay Bithaman Ajil – Formula for Calculating

ž Selling Price (SP)

— FA x AF x n ; where

FA = Financing Amount
AF = Annuity Factor
n = Period of Financing

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Bay Bithaman Ajil – Formula for Calculating

ž The Amount of Profit

Profit = SP – FA; where

SP = Selling Price
FA = Financing Amount

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Bay Bithaman Ajil – Formula for Calculating

ž The Percentage of Profit (PoP)

PoP = Profit x 100; where

SP
SP = Selling Price

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 Bay Bithaman Ajil
Example : House financing

} Cost of financing = RM230,000.00

} Period of financing = 15 years
} Mode of financing = Monthly basis
} Constant rate of return = 9.5%
} Annuity factor = 0.0104422206
Please
memorize
the formula.
Let’s do it

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Bay Bithaman Ajil
Example : House financing

žMonthly Installment
FA x AF x n
n
= 230,000.00 x 0.0104422206 x 180
180
= 432, 307.93
180
= RM2,401.71

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Bay Bithaman Ajil
Example: House financing

• The Selling Price

FA x AF x n

230,000.00 x 0.0104422206 x 180

= RM432, 307.93

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Bay Bithaman Ajil
Example: House financing

• Amount of Profit
Profit = SP – FA
= RM432, 307.93 – RM230,000.00
= RM202,307.93

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Bay Bithaman Ajil
Example: House financing

• Percentage of Profit (PoP)

PoP = Profit x 100

SP
= RM202,307.93 x 100
RM432, 307.93
= 46.8%

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Exercise

} Cost of financing/ Financing amount = RM25,000.00

} Repayment Period/ Period of financing = 20 years
} Profit rate/ Constant rate of return = 9.5%
} Annuity factor = 0. 93212943

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Exercise
} Required:

Calculate the different between monthly repayment/

installment with grace period and without grace
period (Grace period is 2 years).

} Solution:
a. Calculate monthly repayment/ installment without grace
period
b. Calculate monthly repayment/ installment with grace
period
c. Calculate the different between monthly
repayment/installment with grace period and without
grace period
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Exercise

Solution:
a. Calculate monthly repayment/ installment
without grace period

= RM25,000.00 x 0.93212943 x 240

240
= RM233.03

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Exercise

Solution:
b. Calculate monthly repayment/
installment with grace period

= (9.5% x 2) x RM25,000.00 / 2
= RM2,375.00 + RM55,927.80 (RM25,000.00 x
0.93212943 x 24)
= RM58,302.8
= RM242.93

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Exercise

Solution:
c. Find different between monthly
repayment/ installment with grace
period and without grace period.

= RM242.93 – RM233.03
= RM9.9

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Past Exam Questions
1. Define Al-Bai' Bithaman Ajil (BBA) Home Financing
and state TWO (2) conditions for:
o asset
o aqad

2. What are the differences between

Bank’s Purchase Price and bank
selling price?

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Cont…
3. Suppose the customer of bank looking forward to buy a
shop house form the developer. The price of the shop
house is RM200, 000.00. The customer requires 100 percent
financing on the basis of deferred contract of exchange. If
the constant return rate (CRR) 7.9 percent, annuity factor is
0.00819911, and debt to be settled within 27 years. From
the above information, calculate:

} Monthly installment
} Bank selling price
} Amount of profit
} Percentage of profit

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Sample Answer (Q1)
} BBA is a contract of deferred payment sale i.e. the sale of
goods on deferred payment basis at an agreed selling price,
which includes a profit margin agreed by both parties. Profits in
this context is justified since it is derived from the buying and
selling transaction as opposed to interests accruing from the
principal lent out

} Asset: Exist at the time of transaction. Must be able to be

delivered by seller to the buyer.
} Aqad: The offer and acceptance must be made at the one
and same meeting or session.

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Sample Answer (Q2)
1. bank’s purchase price or cost of financing is equivalent to the
amount of financing provided by the bank based on the bank’s
policy for margin of financing. Normally the contribution for takaful
and/ or legal fees may be financed by the bank and could be
included in the bank’s purchase price.

1. bank’s selling price is equivalent to the amount of financing

provided by the bank plus the profit margin and the grace period
of profit margin, if any. The important feature is that the bank’s
selling price, which has been entered into a contract, will be
maintained throughout the financing tenure. The total selling price
represent the maximum ceiling price to be paid by the financing
customer of Islamic bank, that is, on agreed monthly instalments.
Any additional amount against the total selling price My lead to the
contract of sale between the financing customer and Islamic bank
being declared null and void.

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Sample answer (Q3)
} Monthly installment : } Amount of profit :

RM200,000.00 x 0.00819911 RM531302.33 - RM200,000.00

= RM1639.82
= RM331302.33

} Bank selling price :

} Percentage of profit :

RM200,000.00 x 0.00819911 x 324

RM331302.33 x 100
= RM531302.33 RM531302.33

= 62.36%

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Activity

} All the students will be assigned in grouping to

demonstrate BBA CASH LINE FACILITY and UMRAH
FINANCING of XXX BANK.
} modes of operation or
} application

} Performance: Method can be used through

producing film/short video/multimedia or roleplay

} Duration of time: 5-10 minutes

44
Sample answer for Modus Operandi of Cash Line
facility – demo

45
46
Lets watch this !!

Now I’m
understand BBA
concept

47
Conclusion
} A sale contract which provides the buyer the
benefit of the deferred payment
} The price is deferred and BBA can also be
categorized as a credit sale and if the
payment is made by installment
} Has been widely used in Asia country and there
have restriction in applying these facility

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 HOME FINANCING –
MUSHARAKAH

49
Musyarakah
ž is a form of partnerships where two or more person combines
either their capital or labor
ž to take on a business venture and share the profit and enjoy
similar rights and abilities.
ž all partners share the profit according to a specific ratio, the
loss is shared according to the ratio of capital contribution
ž agreement whereby the customer and the bank agree to
combine financial resources
ž Bank leave the responsibility of management to the customer
partners and retain the right of supervision and follow-ups.

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Musharakah Classification

51
SHIRKAT – UL – MULK (ownership partnership)
} co – ownership and comes into existence when two
or more person happen to obtain a joint – ownership
for some asset without having to enter into formal
partnership agreement

} The partners have to share the gift or inherited

property or its income, in accordance with their
share in it until they decide to stick together,

} shirkat al-millk is termed ikhtiyariyah (voluntary)

52
Shirkat-ul-Aqd (contractual partnership)
ž affected by a mutual contract, ‘joint commercial enterprise’
ž parties concerned have willingly entered into a contractual agreement for joint
investment and the sharing of profit and risk.
ž The agreement need not necessarily be formal and written; it could be informal
and oral

¡ Shirkat-ul-amal (labor)
¢ ‘Partnership in Services
¢ all the parties jointly undertake to render some services for their customers, and fee charged
from them is distributed among them according to an agreed ratio.
¡ Shirkat-ul-wujooh (goodwill/credit)
¢ ‘Partnership in Goodwill’
¢ purchase the commodity on the deferred price by getting capital on loan due to their
goodwill and sell it for cash on spot. The profit so earned is distributed between them at an
agreed ratio.
¡ Shirkat-ul-amwal (capital)
¢ Partnership in Capital’
¢ all partners invest some capital as well as expertise into the new business.
¢ Shirkat-al-mufawada (equal share)- an equal p/ship btween 2 or more where each
contributes d same amount of capital n to share d same amount of profit n work
¢ Shirkat-ul-ainan / inan (general) – a partner 2 or more to contribute d capital to finance a
project n share d profit btween them
¡ Shirkat-ul-mudharabah (profit sharing)

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Essential Elements of Musharakah Contract
Tenet Mandatory characteristic/ Prohibited characteristic/
Conditions Conditions

Partners 1) Must possess sound mind (aqil). 1) Forced to enter into a

2) Must be at least 18 years old (attains the age of puberty – contract.
(baligh) 2) He must not be prohibited
3) Must be intelligent. from dealing and also
4) Partner can opt to be a sleeping partner. § not a bankrupt
§ not prodigal

Capital 1) In the event capital is in the form of asset, then it should be 1) Establishing a company
valued in money and the value agreement upon by all with borrowed money is
partners. not permitted.
2) It should be in specific amount.
3) It should be existent and easily accessible.
4) The capital contributed by partners should be put into a
capital fund.
5) It is permissible for partners to have unequal ownership in the
company/ venture.

Business 1) The business carried out business by partners should be 1) To impose a condition
permissible and in compliance with Syariah. forbidding one of the
2) All partners have the right to manage. partners from work.
3) Each partner implicitly permits and gives the power of 2) Non-halal business such as
attorney to the other partner(s) to dispose of and work with gambling, dealing in
the capital as deemed necessary to conduct the business. alcohol or interest-based
activities.

54
Tenet Mandatory characteristic/ Prohibited
Conditions characteristic/
Conditions
Profit-sharing 1) Profit-sharing percentage to be known to all partners to 1) fixed lump sum
avoid any uncertainty. amount for profit-
2) Profit-sharing has to be determined in ratio. sharing.
3) Loss has to be borne by the partners according to the
proportion of shares (ownership).
4) It is permissible to have profit-sharing not according to the
proportion of shares (ownership).
5) Liability of partners is limited to the capital contribution.
Contract (Aqad)- 1) Absolute and in definite and decisive language.
Offer and • In the past or present tense.
acceptance • Not in the future or imperative tense.
• Not conditional
• Not limited to a certain period.
2) The acceptance must agree with the offer.
3) The offer and acceptance must be made at the one and
same meeting or session.
4) In principle, a partnership is a permissible and non-binding
contract. But some of the jurists take the view that the
partnership contract is binding up to the liquidation of
capital or the accomplishment of the job accepted at
the contract.
5) Termination of partnership:
• At anytime upon consensus agreement.
• In the event any partner dies/ incapacitated/
insane/ insolvent, etc.

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Diminishing Musharakah
} the bank participates as a financial partner, in full or in part
for a project or business venture

} The agreement clearly stipulates profit-sharing ratio amongst

the partners and also clear definition of the portion of profit
to be paid by partner to the bank as a repayments of the
funds provided by the bank

} the bank’s share of the equity is progressively reduced and

the partner eventually becomes the full owner

} this partnership model, the bank agrees to accept payment

on an installment basis or in one lump sum from the partner
to sell the bank’s partnership interest.

56
Diminishing Musharakah (Musyarakah
Mutanaqisah) Home financing

Ø Can be defined as a form of partnership in which one of

the partners promises (wa’d) to buy the equity is
completely transferred to him
Ø The transaction consist of three(3) steps:
} A bank and a customer form a partnership based on the
contract of “shirkah al-milk”.
} The customer agrees to rent the bank’s undivided share
in the property through the contract of ijarah.
} Throughout the financing tenure, the customer will
gradually buy the bank’s shares through the contract of
“bay”.

57
Modus Operandi of Diminishing Musharakah

58
Explanation – basic (book)
1. Customer identify d property. Sign S&P agreement then pay
deposit, and applies for financing
2. IB and the customer will jointly purchase the real property
based on a determined share (for example 90:10) depending
on the amount of financing requested (enter Musyarakah
Arrangement) with customer
3. The deposit paid by the customer is deemed as his initial share
of ownership
4. IB’s share of ownership will be leased to the customer;
Customer pays rental under ijarah (customer lease d bank’s
share)
5. The monthly instalment by the customer will be used to
gradually purchase the share of IB until the entire share of the
IB is fully purchased by the customer.

59
60
Diminishing Musharakah in Financing
Practice

} These days diminishing musharakah is considered to be an appropriate

mode to finance collective investment due to the benefits to the
respective parties as mentioned below:

} The Bank’s Perspective: It earns periodical profit all the year round.

} The Partner’s Perspective: It encourages the partner to participate in halal

investment. It realises the customer’s ambition to individually own the
asset/ project in the short run when the bank withdraws gradually.

} The Society’s Perspective: It corrects the course of the economy by

developing the mode of the positive partnership instead of the negative
relationship of indebtedness, by doing so it achieves equity in distributing
the results.

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Comparison between Diminishing
Musharakah and BBA Financing
Bai Bithaman Ajil (BBA)
Number of Contracts
The BBA follows the murabahah concept
of buying and selling of property.
Reflection of Market Value
Under BBA, the selling price of the house
does not reflect the market value since
the mark-up for the deferred payment is
quite substantial.
Returns
The return to the BBA is based on a fixed
selling price.
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Diminishing Musharakah (DM)
There are two separate contracts under
the MMP method. The first is a
musharakah mutanaqisah where the
bank and the client enter into a joint
partnership to own the house. The
second contract is ijarah which involves
the leasing of the property to the partner.
On the contrary, the value of the house
under DM always reflects the market
price and the rental is determined by the
market rental values.
Under Dm, the financier is not tied to a
affixed profit rate throughout the
financing tenor. This is because the rental
rate can be revised periodically to reflect
current market conditions. Indeed, the
rental can be tied to some economic
variables like Rental Index, House Price
Index, etc.
Penalty
In the event of payment defaults, the
penalty charges under BBA can be
challenged.
Product Recognition
The BBA is recognized predominantly in
the east, i.e. in Malaysia, Indonesia,
Brunei, etc.
Early Settlement
Customer is entitled for rebate in the
event of early settlement.
Liquidity Risk
This is not possible under the fixed rate
BBA as the profit rate is a constant
throughout the entire tenor of financing
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Under DM, defaults will cause the
equity of financier to remain constant
and therefore entitled to higher rental
portions when payments are made
later.
The DM is accepted globally as Syariah
compliant.
The DM is a more flexible financing
structure as the customer can own the
property earlier by redeeming the
principal sum of the financier faster,
without the need to compute rebates.
The financier can manage the liquidity
risks better as rental payments can be
adjusted at the end of each
subcontract period.
 HOME FINANCING:
ISTISNA

Will be discussed later with bai salam – project financing

64
concept of Istisna
} which literally means “construction” or
“manufacturing” contract.
} Through Istisna’ Financing, the Bank will finance
a Customer who wishes to construct or
manufacture an asset but wants to defer the
payments of construction cost for a specific
period by way of installment. It is done through
Istisna’ bil Wakalah (construction with agency
contract).

65
Purposes

} Purchase of asset under construction or yet to

be constructed
} Project Financing
} Bridging Financing
} Manufacturing / Contract Financing
} Asset Refurbishment
} Renovation Financing

Will be discussed later with bai salam – project

financing

66
67
 HOME FINANCING:
TAWARRUQ

68
Tawarruq Home Financing
} Is another alternative home financing
introduced by an Islamic bank in the Middle
East.
} Beside being used as a home financing
instrument, tawarruq is commonly used by
Islamic bank as a mode of financing to facilitate
cash transactions such as personal financing,
working capital financing and business cash
line.
} Nevertheless, tawarruq concept remain
controversial since many shariah scholars deem
it similar to bai’ inah which used to circumvent
the riba prohibition.
69
70
Additional Info

71
72
 MOTOR VEHICLE FINANCING:
IJARAH / IJARAH THUMMA AL BAI’

73
IJARAH

} Ijarah is an Arabic term with origins in Islamic fiqh, meaning to give

something on a rental basis or wages. Under Islamic jurisprudence, the
term ijarah is used for two different situations as below:

1. Ijarah ‘Amal: It means to employ the services of a person and wages are
paid as a consideration for the services rendered (Maulana Taqi Usmani).
The employer is called mustajir while the employee is called ajir, and
wages paid to the ajir are known as ujrah.

2. Ijarah ‘Ain: This type relates to the hiring of any assets of any or properties
in order to reap its benefits without the transfer of ownership. In English
known as usufruct. The price or consideration of this is the rent. Here the
lessor is called mujir, the lessee is called mustajir and the rent payable to
the lessor is called ujrah. There is no element of interest involved and the
title of assets remains with lessor and there is no option for the lessee to
buy the asset during or upon expiry of the contract.

74
 Modus Operandi of Ijarah Financing
1. The client approach the seller/vendor n
identifies the house or asset he wishes to
lease. He requests the seller to provide a
price quotation n other relevant details
requested by d customer

2. The seller provides d quotation, brochure,

terms n conditions n other relevant details
requested by d customer

3. The customer approaches d bank for

financing n both agress on financing using
ijarah as an underlying contract. The
customer promises to take d asset on lease
for an agreed time period n rental from d
bank upon purchase.

4. The bank purchases d commodity from d

seller based on d asset details provided by
the customer. The bank will purchase it via
cash payment at a purchase price

5. The seller transfers d ownership of d asset

to d bank
75
Essential Elements of Ijarah Contract / Pillars

1. Lessor (mujir)/ Lessee 3. Benefit (usufruct)

(mustajir)
- Must posses sound mind
- baligh
- intelligent
2. Asset/Merchandise
- Exist at the time of
transaction
-Bank must be the owner of
merchandise.
-Must be of pure substance
(lawful)
-Must be of some use or some
value
-Must be able to be delivered
by seller to the buyer
-Known to both the seller and
buyer
-Risk always remains with the
lessor throughout the lease
period.
1. can be fixed in value
2. The lessor has the power and
capacity to use and lease the asset.
3. Must permissible
4. The period of lease must be
determined in clear terms.
4. Rental
-Known by both parties
-Currency and amount are known by
both parties
-Permissible
-The lease period and rental shall
commerce from the date asset
delivery.
5. Contract ( Aqad)
-Absolute and decisive language
-Have offer and acceptance be
made in same meeting

76
Ijarah Financing Practice
Product Name Ijarah Financing
Definition It is a leasing contract whereby the benefits of assets are
transferred by the lessor to the lessee at an agreed price
for an agreed period.

Scope of Financing 1) Capital Goods

2) Production goods ( Machinery, equipment
3) Consumer goods
4) Computer
5) Vehicles

Eligible Entities 1) Individual acc

2) Joint acc
3) Clubs, Societies, Association
4) Companies
5) Sole Proprietorship

Legal Document 1) Undertaking to ijarah

2) Ijarah agreement
(a) Description of the ijarah Assets
(b) Schedule of ijarah rental and receipt of asset

77
Rental Can be fixed or floating. Normally the bank design ijarah
with increase a certain percentage after certain period.

Payment structure On equal installment basis

Financing tenor Up to 7 years as the financing for long term and differs
from bank to bank

Chargers Expenses incurred such as legal fees and other

incidental cost are normally borne by the lessee.

Rebate and Early Prohibited by the Syariah Board since it can make the
Redemption murabahah transaction similar to conventional debt.

Termination The lessor has the right to terminate the lease contract if
the lessee contravenes any term of agreement.

Penalty for the Late Payment The bank can charge 1% on outstanding installment
amount.

78
Ijarah Financing Computation

Computation
Component Formula Details
CF = Cost of Financing
Profit (P) CF * I * D (Purchase Price)

i = Rate of Return Per Annum

D = Year of Financing
Total Lease CF = Cost of Financing
Rental (TLR) CF + P (Purchase Price)

P = Profit

Monthly Rental TLR/n TLR = Total Lease Rental

n = No. of Months

79
Ijarah –Calculating

} Total Lease Rental

} Monthly Lease
} Amount of Profit

80
Ijarah –Formula for Calculating

Total Lease Rental Monthly Lease

FA + (FA x Profit x Tenure) Total Lease Rental
Tenure

Amount of Profit
Total Lease Rental – FA

Please
memorize
the formula.

81
Ijarah –
Example for Calculating:

} Based on the following information:

} Financing Amount (FA): RM78,000.00

} Rate of Profit : 6% p.a.
} Tenure : 5 years

82
Ijarah –
Example for Calculating:

Total Lease Rental

FA + (FA x Profit x Tenure)

= RM78,000.00 + (RM78,000.00 x 6% x 5 years)

= RM101, 400.00

83
Ijarah –
Example for Calculating:

Monthly Lease

Total Lease Rental

Tenure
= RM101, 400.00 = RM1690.00
60

84
Ijarah –
Example for Calculating:

Amount of Profit

Total Lease Rental – FA

= RM101,400.00 – RM78,000.00
= RM23,400.00

85
Ijarah – Exercise 1

Based on the following Information:

Financing Amount (FA) : RM200,000.00

Rate of Profit : 7% p.a.
Tenure : 5 years

Compute:
• Total Lease Rental
• Monthly Lease
• Amount of Profit.

86
Ijarah – Exercise 2

Based on the following Information:

Financing Amount (FA) : RM205,000.00

Rate of Profit : 8% p.a.
Tenure : 8 years

Compute:
• Total Lease Rental
• Monthly Lease
• Amount of Profit.

87
Ijarah – Exercise 3

Based on the following Information:

Financing Amount (FA) : RM300,000.00

Rate of Profit : 9.5% p.a.
Tenure : 9 years

Compute:
• Total Lease Rental
• Monthly Lease
• Amount of Profit.

88
Ijarah – Exercise 4

Based on the following information:

Financing Amount (FA) : RM450,000.00

Rate of Profit : 9% p.a.
Tenure : 10 years

Compute:
• Total Lease Rental
• Monthly Lease
• Amount of Profit.

89
Comparison between Ijarah & Conventional Leasing
Conventional Ijarah
Commencement of the Lease
The lessee purchases the asset on The procedure is that rent will be
behalf of the bank (lessor) who pays its charged after the lessee has taken the
price to the supplier, either directly or delivery of the asset and not from the
through the lessee. day the price have been paid. If the
supplier has delayed the delivery after
receiving the full price, the lessee should
not be liable for the rent during the
period of delay.
Expenses Consequent to Ownership

All the expenses incurred in the Lessor is liable to bear all the
process of purchasing the asset – expenses incurred in the process of
registration charges, import expenses, purchasing the asset.
freight and custom duty are all borne by
the lesse.

90
Liability of the Parties in Case of
Loss

The lessee are not liable for The lessee is responsible for any loss
costs incurred due to events that caused to asset negligence. He cannot be
are out of his control, such as theft made liable for a loss caused by factors
of the asset or damage in the beyond his control.
event of a natural disaster.

Penalty for Late Payment of Rent

Extra monetary amount is
charged normally based on
compounding interest, in the
event the rent is not paid as per
the agreed schedule. The extra
payment paid by the lessee
treated as income.
The lessee is charged 1% of Islamic
money market rate on the outstanding
installment to cover the costs incurred by
the lessor on administration due to late
payment.

91
Termination of the Lease

The lessor usually has an If the lessee contravenes on any terms on

unrestricted power to terminate agreement, the lessor has a right to terminate
the lease unilaterally whenever the lease contract unilaterally. The lessor
desired. must not benefit from the penalties paid by
the lessee.

Insurance

The cost incurred on getting The leased asset insured under the Islamic
the asset insured is borne by the takaful model will be borne by the lessor.
lessee.

92
 Modus operandi of AITAB Financing (Ijarah
Thumma al-Bai’)
Al-ijarah Thumma Al-Bay’ (AITAB) Financing:
Ø al-ijarah thumma al-bay’ can be defined
as a contract of ijarah (leasing) which is
subsequently followed by a bai’ (sale)
contract.

1. Deposit is paid by the customer to the

dealer.

2. The customer approaches the bank for

the car financing and undertakes to
purchase the car once the bank has
purchased it from the dealer.

3. The banks buy the vehicle and takes

ownership of the vehicle.

4. Upon having the ownership of the

vehicle, the banks enters into AITAB
agreement with the client.

5. At the end of leasing period, a sale

contract shall be executed with nominal
price.
93
Essential Elements of AITAB
Tenet Mandatory Characteristic/
Conditions
Seller / Buyer 1) Sound mind (aqil)
2) 18 years old (baligh)
3) Intelligent
Prohibited Characteristic/
Conditions
1) 1 Forced to enter into a
contract.
2) Must not a bankrupt
and not prodigal

1) Exist at the time of

transaction
2) Bank must be owner of the
Asset / asset
Merchandise 3) lawful and valuable
4) Able to delivered by the
seller to the buyer
5) Known by both parties for
the details of goods.

94
 Price 1) Known by both parties
2) Known in currency and amount

Contract (Aqad) – 1) Absolute and in definite and decisive

Offer and language
Acceptance 2) Acceptance must agreed with offer
3) Aqad must be made on the same
session.

95
AITAB Financing Computation

Component Computation Formula Details

CF = Purchase Price
Profit (P) CF * I * T/12 i = Rate of Return Per Annum
T = Year
CF = Purchase Price

Installment Amount CF + P N = Total No. of Periodic Payments

N P = Profit
Income P = Profit

Recognition P - n(n + 1) * P n = Total No. of months remaining

T(T + 1) N = Total No. of Periodic Payments

UIA = Unpaid installment Amount

Penalty in the UIA *PR* OP / 365 PR = Penalty Rate

event of Default OP = Outstanding Period in Days

96
Challenges in implementing AITAB
} Customer Awareness
} Lack of Experience among Bank Officers
} Lack of Awareness and Cooperation among
Dealers
} Documentation
} Competition in the Market
} Syariah Framework

97
Comparison between AITAB & Hire Purchase
Hire Purchase AITAB
Number of use single contract covering both comprises two separate contacts,
Contracts rental and sale aspects i.e. ‘ijarah’ and ‘al-bai’

Contract 1) is considered as a loan to the 1) is considered as a financing to

Terms customer. the customer.
2) The bank charges interest on 2) The bank charges the fixed
the financing amount to profit rate on the cost of
procure the asset. financing.
3) The charges on purchase are 3) The charges on purchase are
borne by the customer. borne by the bank.
4) Late payment interest is 4) Late payment charges, i.e.
charged in the event the maximum 1 per cent on the
customer does not pay the unpaid installment.
installment on time.
Source of There is no such restriction on The financing for AITAB is sourced
Funds sourcing of funds to offer hire from halal funds.
purchase facility.
Acceptance There is no such agreement. Under AITAB, the customer has to
Letter sign the Aqad Letter (Acceptance
Letter) to denote the offer and
acceptance of transactions.

98
 Hire Purchase AITAB
Eligible Goods/ At large, it is limited to consumer it is open to all types of goods as
Assets goods, motor vehicles & Non-Act long as it is in compliance with
goods (corporate). syariah.

Purchase Price It is floating based on the annual It is determined at the end of

rate and is decided upfront. ijarah contract based on the
existing market values of assets.

Responsibility The customer bear all costs of The bank bears all basic and
maintenance and expenses structural maintenance
incurred in the purchasing of asset. expenses including the expenses
incurred in the purchasing of
asset.

Insurance The goods are insured by using The goods are insured using
conventional insurance. takaful.

Penalty Normally, the customer is charged A minimal late payment fee of 1

a fee of 8 per cent p.a. of the per cent p.a. of the installment
installment due and on due will be charged to customer
compounding basis on the event in the event of late payment.
of late payment.

99
 PERSONAL FINANCING:
BAI’ INAH

100
BAI’ INAH PERSONAL FINANCING
} Under this facility, customer who wishes to get
cash loan for any personal reason may get
financing on the basis of Bai Inah.
} Bai Inah is combination of two successive
contracts for sale of goods;
} credit sale and cash sale.
} Bai Inah is considered at least in Malaysia as an
accepted mode of financing under Syariah.

101
Definition of Bai’ Inah
} The selling of an asset with mark up price on
deferred payment, with the intention to sell the
same asset to the debtor with lower cash price,
which is meant to settle his debt

} Bai’ inah conceptually refer to a sale of an asset,

which is later repurchased at different price,
whereby the deferred price is higher than the cash
price

[it refers to contract which involve the sale and buy back
transaction of an asset by a seller. A seller will sell the asset to a
buyer on a cash basis. The seller will immediately buy back the
same asset on a deferred payment basis at price that is higher
than the cash price]

102
Pillars of Bai Inah

} Seller and buyer

} Merchandise /goods
} Price
} Sighah

103
 Illustration: Inah Personal Financing
Contract :
murabahah
Banlk
Customer
(seller/asset 1. BANK SELLS AN ASSET FOR RM 15,600
(buyer)
owner)
c
1.1 Customer pays RM15,600 by 60 equal monthly
instalment of RM260

2. BANK BUYS THE ASSET FOR RM 10,000

} c Customer
2.1 Bank pays the customer RM10,000 (Cash Basis) (asset
Bank
(buyer) owner/
seller)
Contract 2 :
musawamah
104
Modus Operandi of Inah Personal Financing
1. The customer approaches the bank for
financing.
2. The bank identifies the asset that will be traded
under bay’ al-‘inah contract.
3. The bank and customer sign a first sales and
purchase contract where the bank sells at a
selling price on deferred terms. The ownership is
transferred to the customer.
4. The bank and the customer sign a second sales
and purchase contract. The banks buy back the
asset sold to the customer and pays on cash
basis.
5. The customer begins to pay his installment to
the bank.
105
 PERSONAL FINANCING:
BAI’ TAWARRUQ

106
Definition of Tawarruq
} Literal Meaning
} - root word of tawarraqa
} Wariq
} - Dirham that is manufactured from Silver
} - Any silver that was issued to be as a medium of exchange

} Technical Meaning- buying a commodity on differed payment basis and

selling it on cash basis to a person other than the buyer

} Sale for cash of item purchased by instalment

} One party buys as asset from a vendor for deferred payment and then
sells is to a third party for cash at a price that is lower than the deferred
price
} IFI- Customer purchases an item from bank on a deferred payment plan,
then sells it immediately to third party for obtain cash

} Tawarruq or commodity murabahah can be defined as an arrangement

that involves a purchase of an asset based on musawamah or
murabahah

107
Modus Operandi of Tawarruq Personal Financing

1. The customer and the bank enter

into an agreement. The customer
CUSTOMER buy a specified asset from the bank.
The customer appoints the bank as
1 3 5 6 his agent to sell the said commodity.
2. The bank buys a specified
BANK commodity from broker A on a spot
basis.
2 4 3. The bank sells the same commodity
BROKER A BROKER B to the customer on a deferred basis
at cost plus profit.
4. The bank sells the same commodity
to a broker B.
5. The bank pays the customer the sale
proceeds in a lump sum.
6. The customer pays the bank
purchase price of the commodity on
deferred installment basis.

108
 PERSONAL FINANCING:
AR-RAHN

109
Definition of Ar-Rahn
} Pledge, collateral; legally, Rahn means to pledge or
lodge a real or corporeal property of material value, in
accordance with law, as security for a debt or pecuniary
obligation so as to make it possible for the creditor to
recover the debt or some portion of the goods or
property.
} In this pawn broking transaction, valuable thing or asset
(gold) is pledged to secure loan given by the bank - .
Bank charge certain amount of service for safekeeping
of the pledge.
} Computation of the loan amount (based on 60% margin
or the maximum of RM5,000.00 whichever is lower).

110
Advantages of Ar-Rahn
• Interest free
• Minimum service charge
• Service charge is based on safe keeping of
the pledge.

111
Rahn Personal Financing
} Rahn is literally defined as a pledge or collateral.
It refers to an arrangement whereby a valuable
asset is given as security for a debt.

112
Modus Operandi of Rahnu Personal Financing

1
BANK 2 CUSTOMER
3

WADI’AH

1. The customer approaches the bank with a valuable item as

collateral for financing.
2. The bank accepts the pledge asset and grants interest-free
loan to the customer.
3. The customer pays custodian fee for the service rendered in
safe keeping the asset.
4. If the debtor is not able to repay the debt, the pawned asset
will be sold to settle the outstanding debt and any surplus will
be returned back to the customer.
113
} Arrahnu - will be discussed later in next chapter

114
 CREDIT CARDS

115
Credit Card
ž The main concept of the credit card issuance
refers to bay’ al-‘Inah (al-Rajhi Bank used al-
Tawarruq for its credit card and recently BIMB
followed the same step).
ž Bay’ al-‘Inah as the underlying contract consists
of two separate contracts – the property sale
agreement and the property purchase
agreement which are executed separately for
both agreements with different selling prices.

116 L9
ž The mode of operation of this product are as
follow:

Ø Bank sells to the customer an asset on deferred payment

which consist of principal plus profit (i.e. RM9,000.00) for
the stipulated term (i.e. 5 years).
Ø The customer sell back the same asset to the bank on
cash basis at a lower than purchase price (i.e.
RM7,500.00)
Ø The bank disburse that amount (RM7,500) into customer’s
wadiah account maintained with the bank and the
bank gives Islamic credit card to the customer. Any
payment made to retailers (whenever the customer uses
it) is actually paid using the customer’s cash that being
saved in his account

117
ISLAMIC CREDIT CARD

A. Islamic Credit Card based on ‘Inah

1
BANK CUSTOMER
2

WADI’AH
3 ACCOUNT

Modus Operandi of `Inah Based Credit Card

1. The bank sells an asset to the customer on deferred payment

to be paid within a certain period of time
2. The customer subsequently sells the asset back to the bank
for a lower amount (equivalent to credit limit) in cash
3. This amount will be credited into a marginal wadi’ah account
at the bank for the customer’ use.
B. Islamic Credit Card base on Ujrah

BANK 1 CUSTOMER
5
CREDIT CARD
2 ACCOUNT

4 3

MERCHANTS

Modus Operandi of Ujrah Based Credit Card

1. The customer applies for a credit card from a a bank.
2. The bank provides a credit card account based on the customer’s
credit worthiness.
3. The customer pays the merchants for the goods from the credit card
account.
4. The bank provides qard to the customer for the fee to the bank.
5. The customer pays the purchased amount and the fee to the bank. The
customer will be charged a fixed fee structure or other structures which
ic based on the actual cost of managing the transaction and an
annual service fee based benefit rendered by the bank. The bank
earned profit from the service fee and also commission from the
merchants if any.
C. Islamic Credit Card based on Tawarruq

BANK 2 CUSTOMER

MERCHANTS 5
1 3
6
WADI’AH BROKER B
4
BROKER A ACCOUNT

Modus Operandi of Tawarruq Based Credit Card

1. The bank purchases the commodity from broker A.
2. The bank sells the commodity to the customer for deferred
payment for a price equivalent to its credit limit plus profit.
3. The customer sells the commodity to broker B.
4. Broker B deposit the cash into the customer’s wadi’ah account
5. The customer buys the goods from the merchants using the
wadi’ah account
6. The purchase price is transferred to the merchants.
 Syukran jazilan
thank you for your attention

121
References
} Saidin,S (2016). Manual CTU351 Fundamental of Islamic
Banking. UiTM Cawangan Johor Kampus Segamat
} Saiful Azhar Rosly (2007). Critical Issues on Islamic Banking
and Financial Markets. Dinamas Publishing.
} The Application Of Bay` Bithaman Ajil (BBA)
http://www.kantakji.com/media/8269/n301.pdf
} Zaharuddin Abd Rahman (2008). Money, You & Islam. True
Wealth Sdn.Bhd

122