An Article Review on

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For e nt of An Overview
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LA W 55 1: Jeeva Rachelusun Pragas

L A W Jeeva's

BA N K IN G
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What is Bay' Inah?
Bay' means sale, and‘inah means facade - it is a sale in appearance only.
Its a sale and re-purchase contract between 2 similar people by differed
payment.
By selling an asset on deferred payment and buying it back on cash at a lower
price- basically a loan in a form of sale - aim to get cash rather than to sell.
ie. A customer needs RM150k financing from Islamic bank.
in the 1st sale contract, the Bank "sells" a product ('inah) to customer for RM 300k on
deferred payment.
In the 2nd sale contract the customer then "sells back" the product for RM 150k cash.
The bank produces profit through the difference of selling and buying price ie above: RM 150k.
The customer will get the real amount that they want in cash - Rm 150k
The bank profits from the difference in selling price that is to be paid by the customer over a
differed period.
Example of financing products using Bay' Inah
1. Bay' bithaman ajil BBA
2. Sukuk BBA
3. Islamic Credit Card
4. Sukuk Murabahah
5. Murabahah Trade Financing
6. Islamic Overdraft
7. House Financing
8. Vehicle Financing
9. Personal Financing
Islam forbids taking loans especially with riba (interest)
(Surah Al-Baqarah - 275)

Bay' Inah is just a loophole

1
basically a loan but with a face of selling and buying because
intention isnt to sell and buy,
but parties are looking for cash
and benefits from loaning (giving money)

Its a practice that involve elements of trickery (hilah) and usury (riba)
Basically just trickery to justify getting cash.
Even though its not technically a loan 2
there are still elements of ursury
as there is a huge difference in selling price between parties
Islamic Jurists have divergent views on the validity of Bay' Inah

Forbid Allow
Hanafi, Maliki
Shafie but with strict restrictions
Syariah Council of Accounting and
Endorsed by SAC of BNM
Auditing Organization for Islamic
Supported by Ibn Hazm, Abu Daud,
Financial Institutions t h e
Abu Thur, Abu Yusuf. as lo n g a s
(AAOIFI) r e a l
pract ic e is a
a c t o f se l li ng
contr s
n g th at d o e
Intention between buyer and seller Its a sale contract and buyi or
v e l o a n i ng
is to loan not sell and buy not invol e
Example in Hadith Al Bukhari: n g th e n t h
lendi
Involve elements of trickery PBUH purchased camel in exchange ra ct is le g a l
(hilah) and usury (riba) for delayed payment of 2 camels
cont
 SYARIAH PRINCIPLES
For a contract under Bay' Inah to be valid, there must be a valid offer (ijab),
acceptance (qabul) and solemnization for both contracts.

FIRST CONTRACT SECOND CONTRACT RESULT

Bank offers a product to Bank gets back their

a customer (ijab) and Customer offers to
product and customer
the customer accepts sell back product to
gets cash from contract
the sale with an agreed bank at a lower price
but has to repay to
period of repayment but in cash (ijab) and
Bank sum agreed upon
(qabul) Bank accepts offer
Asset belongs to
in 1st contract via
(qabul)
the customer. monthly installments
 BNM GUIDELINES
CBM has imposed related guidelines and circulars on bai' inah to ensure the product is properly
structured and compliant to Syariah rulings which is clean from usury, trickery and coercion.

Documentation must be made thoroughly which The 1st Sale Contract must be finished before
should involve two separate sets of documents, the 2nd Purchase Contract occurs,
if not the bay' inah is void because its like
1 sale and purchase agreement. The application purchasing something that does not exist
should be executed in a proper sequence, to Selling something that does not exist at the
ensure the ownership of the seller and vice versa. time of contract as well as involving in in two
dealings at the same time is prohibited in Islam
No conditional obligation should be imposed on Date and time is also important to show that
either party, other than the sale and purchase there was a time difference
2 when entering the 2 contracts
agreements. Every party should be free in
The sequence will reflect on the Shariah
taking part in both of the agreements. compliance where the arrangement of aqad
should be made in orderly manners
During the early years of the Islamic Banking and Financing, bay'inah contract was widely used
by Islamic banks as an underlying contract for financing, such as under bay' bithaman ajil (BBA)

Bay' inah take place when a
customer applies for personal
financing
The deferred payment as intended in
the bay' inah is in line with the
phrase of bithaman ajil which means
“delayed payment”.
Therefore, the contract is fit for
financing purposes and has been
developed for providing cash
assistance either for personal support
or home financing
1. Bay’ Inah involves Sales Agreement (PSA)
or Asset Sales Agreements (ASA) and a
Property Purchase Agreement (PPA) or Asset
Purchase Agreements (APA).
2. To fulfil the meaning of bay' inah, the PSA
or ASA agreement will come first, then
followed by the PPA or APA agreement.
3. The act of purchasing should come after the
selling contract is completed.
Bay’ Inah has been What is Tawarruq?
criticized as a back
door to usury as the Tawarruq is a sale contract by purchasing a commodity on deferred payment by
practice is like a the mutawarriq (seeker of cash) and selling it to a person other than the
loaning activity initial seller (3rd party) for price lesser than the deferred price on cash.
whereby the practise The buyer's intention to attain liquidity (waraqh maliah) not utilize the benefit
involves a sales from the purchased asset
contract with Al-tawarruq is almost like bay’ inah except it involves more than two parties.
immediate repurchase It also involves a sale and purchase of asset based on deferred payment
As a result, the
followed by the asset being sold again for cash, but the asset is sold to a
number of bay' inah
different party other than the original seller.
contract has declined
The element of hilah is said to reduce as the repurchase is by a different
due to the
seller at a different price.
denunciation
Ergo many IFIs have It is similar to bay' inah as the commodity purchases is not for the buyer's
offered an alternative use or ownership, but for getting cash.
contract to Bay’ Inah There are two types of Tawarruq
a.k.a bay' al-tawarruq 1) Classical Tawarruq 2) Organized Tawarruq
 In 2009, the
Organization of

Organised Tawarruq
Classical Tawarruq

Islamic Cooperation
Fiqh Academy
reaffirmed the
impermissibility of
organised tawarruq

1. IFI purchases commodity from Trader in the commodity market on cash basis
2. Ownership of commodity is then be transferred to IFI
3. IFI then sells commodity to Counterparty on deferred price,
(i.e. cost price plus profit margin)
1. Ownership of the commodity is transferred to the Counterparty
2. Counterparty then sells the commodity to a different trader on cash basis
(at cost price) in the commodity market and final ownership is owned
by that trader
Immediate cash is obtained by the Counterparty as a result of their sale but they
have to still have to pay back their initial purchase with IFI (cost price + mark
up) So IFI profits from the hike up but profit is paid by Counterparty over
deferred period
1. IFI purchases warrant from Trader A and pays cash.
2. IFI then sells warrants to a Counterparty who purchases it on a deferred
payment basis where mark-up price.
3. Counterparty then appoints IFI to sell warrants on its behalf
4. IFI sells to different party. Warrants are sold at their market value
(lower than counterparty bought).
5. Warrant is owned by an unrelated party.
6. Proceeds of the sale to Trader B by the IFI acting on behalf of the
Counterparty are then deposited to Counterparty.
Counterparty gets immediate cash as a result of sale (cost price of warrant)
but IFI will be paid back by Counterparty over deferred period (cost price +
agreed mark up) and make their profit from there.
Controversial like Bay' inah as the intention of purchasing commodity is not
for the buyer's use or ownership, but for getting immediate cash.

Like Bay' inah: contains all the prohibited pretexts, such as the narrowed meaning
of inah, explicit usury, loan, sale of debt, transfer of debt, debt scheduling, buy or
1
sell of deferred payment of ribawi items, buying something at a marked up price,
and selling something to the first seller or to somebody else at a price lower than
the original purchase price.

Its just a loophole to charge riba - Counterparty purchases on a marked up price

2 but only gets cash from the principal price of asset. Also a loan with a sales
purchase face

Mustawriq (Counterparty) is not interested in the product per se, rather he is

interested in the money, and the sale in question is an illusionary sale. The whole
3
issue boils down to obtaining cash immediately, to be paid for later on with a
greater amount
The concept of tawarruq had been accepted since the meeting
between Malaysian Shariah board members at the 58th meeting on
27 April 2006.

Tawarruq is more acceptable by Islamic principles.

As a result, many Islamic banks such as the United Arab Bank,
QNB Al-Islamic, Standard Chartered of United Arab Emirates,
Bank Islam and Bank Muamalat of Malaysia prefer Tawarruq
as an alternative to bay’ inah
Bay’ Inah contract is still used by some IFIs in Malaysia even though it has been frowned upon by many
Shariah scholars.

Regardless, as Malaysia practices the Shafie school of thought and they approve of Bay’ Inah as it is a
contract authorized in Islam and complies with the meaning of sale and purchase between seller and
purchaser, it is still a valid instrument to be used by IFIs in Malaysia
But the strict guidelines underlined by CBM have to be followed by IFIs to form valid Bay' Inah contracts.
Emphasis also should be put on the date and time between contracts.

Conversely, for reluctant parties, Al-Tawarruq is an alternative and a way out for those who feel that
there an element of compulsion to repurchase under Bay' Inah.
Tawaruq not only involves the shariah-compliant sales process, it also includes the elements of business
freedom and subsequently the return of profit.
As a result, many overseas banks, especially from the Middle East, accept al-tawaruq and reject bay 'inah.
Thank you for
your time!
Have a
good day!
Jeeva's
Doodles

Inside
my
ADHD
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