UNIVERSITY TECHNOLOGY MARA CAMPUS SABAH

FACULTY OF ACCOUNTING

PROGRAM CODE : AC110

GROUP ASSIGNMENT

LAW240 : INTRODUCTION TO COMMERCIAL LAW

GROUP : LAW2403G2

Prepared by
No. Name Student ID
1 DIVIANIE BONIE 2022475594
2 ELSIE ANN PEDILIS 2022642872
3 ELVIORRA LEO 2022864086
4 NUR ATIQAH HANI BINTI YASKAN 2022896744

Prepared for
DATIN DR RAFIDAH @ MALISSA BINTI SALLEH

Date of Submission:
11 January 2024
 TABLE OF CONTENTS

NO. CONTENTS PAGES

1. Introduction 2–4

2. Mudharabah (Profit Sharing) 4–8

3. Murabahah (Cost Plus) 8 – 10

4. Qardh (Loan) 10 – 13

5. Wakalah (Agency) 13 – 16

6. Bai’ Bithaman Ajil - BBA (Deferred Payment 16 – 18

Sale)

7. Conclusion 19

8. References 20

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TASK 2
INTRODUCTION

Malaysia saw the establishment of the first Islamic bank in 1983. Islamic Banking
was established under the Islamic Banking Scheme (IBS) in 1993. Islamic banking
products and services were made available to commercial banks, merchant banks, and
finance companies. The funds and operations of Islamic banking transactions must be
kept apart from those of non-Islamic banking operations (conventional banking) by the
IBS banks. Because of this, the Islamic Bank was governed by the Islamic Banking Act
of 1983, while other non-Islamic banks that offer Islamic banking products are governed
by the Banking and Financial Institutions Act of 1989 (which is currently known as the
Financial Services Act of 2013 and the Islamic Financial Services Act of 2009).

Islamic banking is defined as banking that complies with Shariah. It adheres to the
fiqh muamalat, or Islamic rules on transactions, which is the Shariah. The Quran, the
Sunnah, and other secondary sources of Islamic law, including the views reached by
Shariah scholars collectively (ijma'), analogies (qiyas), and individual reasoning (ijtihad),
are the sources of fiqh muamalat's rules and practices. "Islamic banking business" is
defined in Section 2 of the Islamic Banking Act 1983 as a banking business whose
objectives and activities do not involve any elements that are not approved by the Islamic
religion. Therefore, a transaction involving Islamic banking must not include any
prohibited elements found in Islam, such as usury, gambling, fraud, or gharar
(uncertainty). The absence of interest-based transactions (riba'); avoiding speculative
activity (gharar); avoiding oppression (zulm), promoting socio economic justice through
Islamic taxation (zakat) and discouraging the production of goods and services that are
detrimental to humankind (ethical business) and go against Islamic principles or values
("haram") are the four guiding principles of Islamic banks.

Shariah Committees have been established by all Islamic and IBS banks to provide
guidance on Shariah matters and ensure that their operations are compliant with Shariah.
To further ensure consistency in opinions and practices, the highest Shariah body
established at Bank Negara Malaysia, the Shariah Advisory Council, can be consulted.

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Academicians and Shariah specialists in Islamic banking and finance make up the
members of the Shariah Committees and the Shariah Advisory Council.

The Differences between Conventional Banking System and Islamic Banking

System.

CONVENTIONAL BANKING SYSTEM ISLAMIC BANKING SYSTEM

Its operations and functions are entirely Its operations and functions as closely as
founded on concepts created by humans. possible adhere to the Sunnah and the
Qur'an.

An investor is promised a fixed rate in its An Islamic bank encourages investors

investment product. It is actually a loan
activity based on riba.
and investment fund managers to share
risk and profit through its investment
products. No set profit is guaranteed.
Real profit serves as the basis for profit
division.

Profit-driven without regard to morality or Pursuing profit while abiding by Islamic

religion. law and keeping it to the extent necessary
to advance society.

Ignore zakat. Pays zakat because Islamic banks are

obligated to do so as a social duty.

The retail loan product uses a multiplied Instead of using loan contracts, its retail
interest loan distribution system. products make use of asset trading or
rental.

Assessing a compound interest penalty Charges compensation for any late

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 for late loan payments. payments; however, this compensation is
not deducted from the bank's profits.
Rather, it is allocated straight to charitable
causes.

Product of Islamic Banking

1. Mudharabah (Profit Sharing)
INTRODUCTION
A mudharabah is a contract that binds an entrepreneur (mudarib) and a capital provider
(rabbul mal). Under the terms of the agreement, the mudarib manages the capital that the
rabbul mal provides, and any profits made from the capital are divided between the two
parties in accordance with a mutually agreed profit sharing ratio (PSR). The rabbul also
bears any financial losses as long as they are not the result of the mudarib's misconduct
(ta’addi), negligence (taqsir), or violation of specific terms (mukhalafah al-shurut). Two
categories exist for Mudarabahs, which are Mudarabah (Mudarabah Mutlaqah) without
limitations. A contract known as an unrestricted Mudarabah allows the rabbul to give the
mudarib unrestricted management authority over the Mudarabah capital. On the other
hand, Mudarabah with restrictions (Mudharabah Muqayyadah): A contract in which the
rabbul places particular limitations on the Mudarabah terms is known as a restricted
Mudarabah. Conditions limiting the mudarib, such as the choice of location, time frame
for investment, kind of project, and money mixing, may be specified by the rabbul mal.

An agreement known as a "mudharabah" is one in which an entrepreneur provides

labour, expertise, and management in exchange for the ability to mobilise funds from a
bank, or other capital provider, for the former's business activity. The entrepreneur and
the bank split profits according to a predetermined ratio; in the event of a loss, the bank
loses its capital and the entrepreneur loses his labour. Mudharabah contracts are
commonly used for Islamic bank accounts. Under this arrangement, a client, often
referred to as an investment account holder (IAH), "provides funds" in return for

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investment returns. The bank offers to oversee the IAH's finances in return for a portion
of the earnings. Although a lot of these bank accounts in Mudarabah are marketed as
"investment accounts," they are now more closely managed and advertised as deposits.

When Mudharabah constitutes the fundamental agreement for a bank account, there is
an inherent risk that the account holder will be responsible for losses resulting from the
use of the funds. Therefore, regardless of the actual performance of the investment,
banks may attempt to provide Mudharabah account holders returns that are similar to an
indicative rate of return in order to protect consumers and preserve financial stability. We
call this displaced commercial risk (DCR). To guarantee that the account holder receives
returns that are consistent with the previously stated profit rate, the bank would use
"smoothing techniques." In Malaysia, the most widely used smoothing method is called
profit equalisation reserves (PER). A portion of the bank's and the account holder's
excess returns over the specified rate are transferred into the PER reserve account, which
is then used to make payments when future periods see lower-than-expected returns.

LAW

1. Islamic Financial Services Act 2013 (IFSA)

i) Deposits will be defined as those in which the nature of the contract guarantees
the principal (equity) of the depositors.

ii) Deposits where the nature of the contract does not guarantee the principal
(equity) of the depositors will be considered investments.

iii) A contract must be categorised as an investment if it has inherent risks of

principal loss during its operations.

iv) Unit trusts and stock market share purchases are two examples. There is a
chance that principal will be lost at any point during redemption because of market
circumstances (market price).

v) Section 29 (1) and (2): These sections deal with the Minister's authority to
instruct the Bank in general terms in order to maintain the stability and robustness
of the financial system.

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 vi) Section 57 (1): This section deals with the Bank's authority to request data and
carry out inquiries.

vii) Section 135 (1): The authority of the Bank to cancel or suspend a licence or
registration is covered by this section.

vii) Section 277: The authority of the Bank to compound offences is covered in this
section.

2. Development Financial Institutions Act 2002 (DFIA)

i) A Malaysian law known as the Development Financial Institutions Act 2002

(DFIA) was passed with the intention of regulating and supervising development
financial institutions (DFIs) and covering related topics.

ii) Bank Negara Malaysia is in charge of overseeing the DFIA, which is divided into
nine sections and one schedule.

iii) The main objectives of DFIA:

● Provide a regulatory framework for DFIs, which are specialized

institutions that offer a range of specialized financial products and
services to suit the specific needs of the targeted strategic sector.
● Ensure the stability and resilience of the financial system by
regulating and supervising DFIs.
● Encourage the expansion of DFIs and their contributions to a range
of industries to further the development of the economy.

3. The basis of the Islamic law of contract can be seen from the Quran
Injunctions and Sunnah of the Holy Prophet (saw).

i) The Holy Prophet's (saw) Sunnah and the Quran's injunctions serve as the
foundation for Islamic contract law. Four fundamental guidelines are provided by
Islamic jurisprudence when determining whether a contract's terms are legitimate.

6
 ii) These regulations cover the validity of terms that are not in conflict with the
contract as well as the acceptance of terms that, while appearing to be in conflict
with the contract, are consistent with market practice, so long as their voidness
isn't demonstrated by unambiguous verses from the Holy Quran and Sunnah.

iii) Islamic law, as supported by the Sunnah of the Prophet (saw) and Quranic
verses, places a high value on the performance of contractual terms and
conditions. The fundamental texts of Islamic law, the Quran and the Sunnah, serve
as the foundation for the rules guiding Islamic agreements and transactions.

iv) Scholarly works also address the Islamic legal doctrine of contract freedom.
Islamic law does not recognise the same liberty of contract as Western legal
systems, even though it does allow for some degree of freedom within specific
bounds.

4. Termination of Mudharabah

i) A Mudharabah contract may be terminated at any time by either party as long as

notice is given in accordance with the terms of the agreement.

ii) A Mudharabah contract may be terminated in a number of circumstances,

including:

● If there has been a profit and the assets are in cash, the parties will
split the profit based on the predetermined ratio.
● Working Partners may sell and liquidate assets if they are not in cash
in order to ascertain the true profit. Constructive liquidation,
however, is another option.
● If the contract has a set duration, it is the responsibility of all parties
to fulfil it.
● The investor will receive their capital back, with any money left over
being deemed a profit. This profit will be allocated in line with the
predetermined ratio.

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CONCLUSION

In conclusion, we can say that Mudarabah is an Islamic banking product in which the
bank and the entrepreneur split the profits in accordance with a predefined ratio. In the
event of a loss, the entrepreneur forfeits his labour provisions, while the bank loses its
capital.

2. Murabahah ( Cost Plus)

INTRODUCTION
Murabahah refers to a sale with a shared profit and also referred to as cost plus financing
in Islamic Banking. In a legal sense, it is a sale agreement in which the seller discloses
his costs and profits. This has been utilised as a form of funding by Islamic banks. It
functions as a financing strategy in which the client asks the bank to make particular
purchases on his behalf. The bank does that in exchange for a predetermined profit above
the cost by complying with the client's request, the bank establishes a contract setting the
cost and profit for the item, with repayment typically in installments. Then, a set fee is
charged rather than riba (interest), this type of loan is legal in Islamic countries. Thus,
murabahah is not a loan given on interest, it is a sale of commodity for cash or deferred
price. Besides, Islamic banks are prohibited from charging interest on loans according to
the religious tenet that money is only a medium of exchange and has no inherent value,
so banks must charge a flat fee for continuing daily operations.
In many different industries, the murabahah method of funding is frequently employed in
place of loans. For instance, consumers use murabahah to pay for home goods,
automobiles, or real estate. This kind of finance is used by businesses to buy machinery,
equipment, or raw materials. A frequent application of murabahah is the issuance of
letters of credit to importers for short-term trade.
Murabahah is also commonly used for a short-term trade, such as issuing letters of credit
for importers. A murabahah letter of credit is issued on behalf of an applicant (importer).
The bank issuing the letter of credit agrees to pay an amount of money in compliance
with the terms described in the letter of credit. Then, the bank’s credit worthiness replaces
that of the applicant, the beneficiary (exporter) is guaranteed payment. This benefits the
exporter because the bank assumes the payment risk. Following the murabahah contract
provisions, the importer is required to repay the bank for the cost of goods plus a profit
markup amount.

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LAW

1. The basis of the Islamic law of contract can be seen from Quran Injunctions
and Sunnah of Holy Prophet (SAW), which are as follow:
“O ye who believe! Fulfill the contractual obligations” ( Surah Al-Maidah : 1 )

2. Analysis of Murabahah Cases in Malaysia

Bank Islam Malaysia Bhd v Sunwai Trading Sdn Bhd & Ors [2012]
The defendant had been granted the right to use three Islamic banking facilities,
including Murabahah Working Capital, to finance its import and export operations. The
plaintiff issued a notice of default dated 28 January 2010 to stop the defendant’s banking
capabilities after the defendant missed installment payments. In relation to the notice and
default, the plaintiff was awarded summary judgement against the defendants. However,
in the complaint, the defendant argued that the plaintiff had illegally suspended the
defendant’s banking facilities on the basis of an email sent to several plaintiff employees
on 15 January 2010.
The defendant argued that the plaintiff had wrongfully frozen its account and that the
defendant was unable to proceed with the contracts it had entered into with suppliers. In
response to that, the plaintiff claimed that the defendant’s account was frozen due to
some suspicious invoices submitted to the bank (plaintiff). However, the plaintiff judge
found the RM2 million claim unsubstantiated. No reference to the Shariah Advisory
Council is recorded.

3. Dissolution of Murabahah contract

A Murabahah contract is dissolved under the following circumstances:
a. The purchaser in a Murabahah arrangement with earnest money (‘urbun)
exercises the option not to continue the contract within the specified time.
b. The purchaser exercises the defect option (khiyar al-’ayb) to terminate the
murabahah contract.
c. Any of the contracting parties exercises the mutually agreed options to terminate
the murabahah contract within the agreed time period.
d. The contracting parties exercise the option to terminate the murabahah contract
due to breach of terms, or
e. Both contracting parties mutually agree to terminate the sale contract.
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 4. Completion of Murabahah contract
The Murabahah contract ends upon fulfilment of the contracting parties’ obligations
which include the following:
a. Full settlement of the selling price.
b. Transfer of the obligation to pay the selling price to a third party (hiwalah).
c. Waiving the right by the seller to receive the selling price through a rebate (ibra’);
or
d. Set-off (muqassah) of debt obligations between the contracting parties.
CONCLUSION
In conclusion, we can conclude that Murabahah is also one of the products of Islamic
Banking. Under this arrangement the bank discloses its cost and profit margin to the
client. In other words, rather than advancing money to a borrower, which is how the
system would work in a conventional banking agreement, the bank will buy the goods
from a third party and sell those goods on to the customer for a pre-agreed price.

3. Qardh (Loan)
INTRODUCTION
Within Islamic banking and finance, the term "qardh" is very important in Malaysia. The
Arabic word "qardh" means "loan" or "debt" in English, and it refers specifically to an
interest-free loan that a lender extends to a borrower. Deeply ingrained in Shariah
principles, the idea prohibits the charging or payment of interest (riba) on financial
transactions, promoting equity and moral behaviour in financial transactions. The central
theme of qardh is altruism, with a focus on kindness and helping those in need without
anticipating payment in kind. Within the context of Islamic finance, it represents a kind of
altruism and empathy, with the main goal being to give money to those who are in dire
need or who are temporarily strapped for cash.

The fundamental tenet of Qardh is the return of what has been borrowed, without
modification or further fees. When given without any expectation of payment, it is
regarded as a charitable act, embodying the Islamic principles of altruism and community
support. Qardh is utilised in Malaysia by a number of Islamic financial institutions, such

10
as Islamic banks and cooperatives, as a means of satisfying immediate financial needs
while upholding Shariah-compliant standards. These organisations provide qardh-based
financial assistance to people who need it for emergencies, unforeseen costs, or urgent
needs. In a qardh transaction, the borrower and the lender sign a formal agreement that
specifies the loan terms, the repayment plan, and the borrower's obligation to repay the
exact amount borrowed within the allotted time. Even though the loan itself doesn't make
money, Islamic financial institutions may charge administrative fees to offset their
overhead.

Furthermore, qardh offers Muslims who want financial assistance but still adhere to their
religious principles and beliefs an effective substitute for traditional interest-based loans.
It is consistent with the mutual aid, equity, and justice tenets that underpin Islamic finance.
The Malaysian practice of qardh further highlights the nation's endeavours to cultivate a
strong Islamic finance industry, which has helped Malaysia establish itself as a global
centre for financial services that adhere to Shariah. The implementation of qardh is
subject to stringent guidelines and standards, overseen by regulatory bodies such as
Bank Negara Malaysia. This ensures compliance with Shariah principles and ethical
business practices.

LAW

1. Islamic Financial Services Act 2013 (IFSA)

i) Section 29 (1): According to Section 29(1) of the Islamic Financial Services Act
2013 (IFSA), the Bank may establish Shariah-related guidelines for an institution's
conduct of business, affairs, or activities that call for the Shariah Advisory Council
to determine Islamic Law and to implement any recommendations or decisions it
makes.

ii) Section 29(2): Gives the Bank the authority to set Shariah-related guidelines for
how an institution may conduct its affairs, business, or activities. These guidelines
must be followed by the Shariah Advisory Council in order to determine Islamic
law and to implement its recommendations or decisions.

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 iii) Section 57: Deals with the Bank's authority to request data and carry out
inquiries.

iv) Section 135 (1): The authority of the Bank to cancel or suspend a licence or
registration is covered by Section 135(1).

v) Section 155: Provides for the power of the Bank to impose penalties for non-
compliance with the provisions of the IFSA.

2. Development Financial Institutions Act 2002 (DFIA)

i) Section 33E (1): A development financial institution (DFI) may not purchase or
hold any interest in any company or other entity that is not a subsidiary of the DFI
without the Bank's prior written consent, according to Section 33E(1) of the
Development Financial Institutions Act 2002 (DFIA).

3. Completion of Qardh

i) A qardh contract is considered fulfilled when all of the contracting parties have
fulfilled their obligations, which include paying the qardh amount in one of the
following ways:

● Complete payment of the loan amount upon maturity.

● Early settlement agreed upon by both parties to the contract.
● Complete transfer of the borrower's duty to a third party to settle the
outstanding amount.
● The lender's complete waiver of his claim to the principal amount.
● The entire amount of the qardh being set off (muqassah) between the
parties to the contract.

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CONCLUSION

In conclusion, we can conclude that Qardh is the term used in Malaysia to describe a
non-interest-bearing loan in which the lender gives the borrower a loan without
anticipating any further repayments. The original loan amount must be repaid by the
borrower within the predetermined time frame. The idea behind this is rooted in the
Quranic concept of Qardhul Hasan, or charitable lending, which is recommended for the
benefit of the underprivileged.

4. Wakalah (Agency)
INTRODUCTION
In the context of Islamic banking, wakalah is a contract-based agency arrangement in
which one party gives another permission to act on their behalf in a given situation or
transaction. Wakalah, which has its roots in Shariah law, is a concept that combines
responsibility, delegation, and trust. The principal (muwakkil) and the agent (wakil) are
the two main parties involved in wakalah. The agent agrees to act in line with the terms
and conditions outlined in the contract, and the principal gives the agent the authority to
carry out a specific task or handle an issue on their behalf.

Transparency, consent from both parties, and accountability characterise this contractual
arrangement, which is consistent with Islamic finance principles that place a premium on
morality and justice. It's critical that both parties specify the exact duties or transactions
assigned to the agent, the extent of the agent's authority, and any restrictions or
conditions pertaining to the agency. Wakalah is frequently used in financial contexts to
refer to a range of Islamic banking services and products. For example, in an investment
agency, or wakalah bil istithmar, the principal gives the agent—typically a financial
institution—authority to make investments on their behalf. The agent then applies its
knowledge to the management of the investment, seeking to maximise profits while
staying within the bounds of Shariah-compliant operations. Usually, the principal and the
agent split any profits from these investments according to previously decided terms.

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Additionally, wakalah can be used in Islamic insurance, or takaful, where policyholders
designate an operator to act as their agent and oversee contributions and payouts within
the insurance pool. As an agent for the participants, the operator's responsibilities include
managing claims, investing the money, and guaranteeing adherence to Shariah
regulations. Wakalah places a strong emphasis on fiduciary responsibility, which requires
the agent to act in the principal's best interest and abstain from any conflicts of interest.
The agent is responsible for their choices and actions, and they are expected to act with
caution and diligence when completing their tasks. In Islamic finance, wakalah is an
essential contractual arrangement that facilitates a range of financial transactions and
services while maintaining the values of openness, confidence, and moral behaviour
among the parties involved.

LAW

1. Affin Bank Berhad V. Zulkifli Abdullah (2016):

● Facts: Zulkifli Abdullah and Affin Bank Berhad signed a wakalah
agreement. According to the terms of the wakalah agreement, Zulkifli
Abdullah would represent Affin Bank Berhad in certain financial transactions
and services as the agent (wakil). The parties disagreed about how to carry
out and complete their responsibilities under the wakalah agreement.
● Held: Within the context of Islamic banking and finance, the court looked
into the wakalah agreement's enforceability and validity. It evaluated
whether the agreement adhered to Islamic finance guidelines and met
Shariah principles, taking into account the nature of the transactions. The
ruling concentrated on the fundamental components—mutual consent,
lucidity of terms, conformity to Shariah compliance, and the performance of
duties by both parties—that are necessary for a wakalah contract to be
legally enforceable in Islamic banking. The court stressed how crucial it is
to make sure that wakalah agreements in Islamic banking follow Islamic law
and adhere to Shariah principles. The ruling offered direction regarding the
legal ramifications and specifications of wakalah contracts in the Malaysian

14
 Islamic banking sector, emphasising the need for clarity, openness, and
adherence to Shariah principles in order to justify such contracts.

2. Dissolution of Wakalah

A wakalah contract shall dissolve under any of the following circumstances:

● The principal's death, dissolution, or loss of capacity to act legally.

● Death, dissolution, or loss of legal capacity of the agent if the wakalah
contract specifies that the agent must carry out the task in person.
● The principal forfeits his claim to the wakalah's subject matter.
● Mutual consent between the contracting parties to end the wakalah
agreement.
● The principal may choose to end the wakalah contract if the agent engages
in improper behaviour, is careless, or violates any of the terms of the
agreement.

3. Completion of Wakalah
● A wakalah contract is considered completed when all of the contractual
parties have fulfilled their obligations, including the principal's payment of
the wakalah fee.
● The wakalah fee can be satisfied in one of the following ways:

(a) by the principal paying the agreed-upon amount in full

(b) by the agent waiving its right to collect the outstanding wakalah fee

(c) by the contracting parties setting off (muqassah) their obligations

(d) by transferring the debt (hiwalah al-dayn) to a third party, which releases
the principal from payment of the fee.

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CONCLUSION

To sum up, wakalah is a fundamental contract that underpins a range of financial

transactions in Malaysian Islamic banking while respecting the ethical, transparent, and
equitable principles of Shariah. It emphasises the significance of carrying out contractual
obligations within the parameters of Islamic finance principles and embodies trust and
accountability between parties. In Malaysia, the wakalah framework places emphasis on
adhering to legal and Shariah guidelines, thereby guaranteeing a strong and moral basis
for financial transactions in the Islamic banking industry.

5. Bai’ Bithaman Ajil - BBA (Deferred payment sale)

INTRODUCTION
Bai Bithaman Ajil is a “deferred payment sale”, which works like a murabahah contract,
but with payment generally made on a deferred basis. It is a sales contract in which the
payment of the price is deferred and payable at a certain particular time in the future. It is
a contract whereby the commodity is delivered immediately and the price paid by
instalments. The typical assets for such contracts are the land, building, machinery and
equipment.
Bai Bithaman Ajil is one of the most popular Islamic financing techniques used in Malaysia
and it can be considered as a substitute of the finance lease. It is used by customers to
purchase assets of substantial value in installments, from which they can generate future
cash flows. The sale price quoted for the asset in the contract is inclusive of the profit.
The sale price quoted for the asset in the contract is inclusive of the profit. The sale price
quoted for the asset in the contract is inclusive of the profit. Besides, the payment is
delayed to a fixed and stipulated period of time. The selling price includes the cost of price
plus an agreed profit margin which will increase depending on the length of period over
which the deferment is agreed upon.Other than that, the customer purchasing the asset
is required to pay the profit to the financial institution that arranges the assets. The
commodity will be purchased by the bank from the third party at the request of the client
and sold to the client at cost plus profit margin. The client need to settle payment within
a period and in a manner agreed.

Scholars have noted that excessive ambiguity (gharar) must be avoided in formulating
the contract. Hence, an asset having physical existence and identified by the customer,
the risks of gharar are minimized. However, if the sale or purchase agreement is for the
house which is to be constructed it may raise concerns over the legality of Bai Bithaman
Ajil as the outcome of such an agreement will be uncertain. The concept of Bai Bithaman
Ajil has been implemented in almost all financial institutions of Malaysia since 1983.

16
LAW

1. Related Verse from the Qur’an

“Those who devour usury will not stand except as stand one whom the Evil one by his
touch Hath driven to madness. That is because they say: “Trade is like usury,” but Allah
hath permitted trade and forbidden usury. Those who after receiving direction from their
Lord, desist, shall be pardoned for the past; their case is for Allah (to judge); but those
who repeat (The offence) are companions of the Fire. They will abide therein (forever).”
(Al Quran, Al Baqrah, 2:275)

2. Analysis of Bai’ Bithaman Ajil Cases in Malaysia:

Bank Islam Malaysia Bhd v Pasaraya Peladang Sdn Bhd [2004] 7 MLJ 355

In Bank Islam Malaysia Bhd v Pasaraya Peladang Sdn Bhd [2004] 7 MLJ 355 the
court explained that the BBA contract practiced in Malaysia consists of three separate
agreements. The agreements are:

i. The Property Purchased Agreement (PPA) This agreement provides that the bank
would purchase the property concerned from the customer instead of from the
vendor/developer/ proprietor at a price (which is actually the amount of financing).

ii. The Property Sale Agreement (PSA) The Bank later would sell the very same
property it has purchased back to the customer at a higher price which includes the profit
margin pursuant to this second agreement. The customer will then repay the amount of
the agreed purchased price by instalments according to financial tenure and nature of
repayment as agreed by the parties at the time the contract is made.

iii. The Charge Agreement The customer will charge the purchased property to the
Bank as a security to enable the bank to sell the property in the event of default of
repayment by the customer.

3. Contractual clauses for Bai’ Bithaman Ajil:

a) Seller
b) Buyer

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 c) Purchased items
d) Price
e) Sales contract

4. Legal terms of the contract:

a) The buyer must be cleared with respect to cost and capital.

b) The amount of profit margin charged must be explained to the buyer.
c) The sale and purchase transaction does not involve goods or ribawi (riba) prices.
d) The buyer has the option (khiyar) to cancel the contract if there is any doubt in
determining the actual cost.
e) The first buying and selling process must be valid in the Shariah.

CONCLUSION

In conclusion, Bai Bithaman Ajil is a deferred payment sale contract used in Islamic
finance in Malaysia. It allows customers to purchase assets in installments, with payment
made at a specified future time. The contract includes a profit margin in the selling price,
and the payment is delayed for a fixed period. Bai Bithaman Ajil is used to minimize
ambiguity, the contract requires an asset with physical existence and identification. Bai
Bithaman Ajil has been widely implemented in Malaysian financial institutions since 1983,
providing customers with an Islamic financing option to acquire high-value assets.

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CONCLUSION

In conclusion, Islamic banking incorporates various products such as Mudharabah,

Murabahah, Qardh, Wakalah, and Bai Bithaman Ajil. Mudharabah involves profit-sharing
between an entrepreneur and a capital provider, often used in Islamic bank accounts with
techniques like profit equalization reserves to manage displaced commercial risk.
Murabahah, or cost-plus financing, discloses costs and profits, serving as a Shariah-
compliant alternative to interest-based loans. Besides, Qardh emphasizes interest-free
loans for altruistic purposes, promoting community support within Islamic finance
principles. Other than that, Wakalah represents a contract-based agency arrangement,
ensuring transparency, consent, and accountability in various financial transactions.
Finally, Bai Bithaman Ajil is a deferred payment sale commonly used in Malaysia, allowing
customers to purchase assets in installments while including a profit margin.

These Islamic financial contracts demonstrate a commitment to Shariah principles,

emphasizing fairness, transparency, and avoiding interest (riba). The application of these
contracts in various financial contexts contributes to Malaysia's position as a global center
for Shariah-compliant financial services. Each contract serves a specific purpose,
catering to diverse financial needs while aligning with Islamic ethical standards.

REFERENCES

1. Human Verification. (n.d.). https://www.bnm.gov.my/islamic-banking-takaful.

2. A. (2022, November 14). Islamic Banking VS Conventional Banking | AIMS UK.
AIMS. https://aims.education/study-online/difference-between-islamic-banking-
and-conventional-banking-system/.

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3. Human Verification. (n.d.).
https://www.bnm.gov.my/documents/20124/938039/Mudarabah.pdf/2ea1c2df-
b084-1b3b-f640-d7993d1e38ea?t=1592218042807.
4. Laldin, M. A., & Furqani, H. (2018, June 19). Islamic Financial Services Act
(IFSA) 2013 and the Sharīʿah-compliance requirement of the Islamic finance
industry in Malaysia. ISRA International Journal of Islamic Finance.
https://doi.org/10.1108/ijif-12-2017-0052.
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6. Islamic Finance: Riba, Wakala and Other Basics Global Business Leaders Need
to Know | Darden Ideas to Action. (2019, October 17). Darden Ideas to Action.
https://ideas.darden.virginia.edu/islamic-finance.
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rulings/question-answers-shariah-rulings/murabaha
8. Julie Young, (28 October 2020), Murabaha: Definition, Example, and Financing
Under Islamic Law, [ONLINE], Available at:
https://www.investopedia.com/terms/m/murabaha.asp
9. Nurfadhlina Abd Halima, Abd Aziz Arrashid Abd Rajakb and Saiful Hafizah
Jaaman @ Sharman (June 2016), Bai Bithaman Ajil (BBA) Modelling by Qardhul
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odelling_by_Qardhul_Hasan
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11. Islamic Markets, [ONLINE], Available at :
https://islamicmarkets.com/education/bai-bithaman-ajil

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