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Analysis Of The Islamic Contracts Practiced By Islamic Banks

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One of the Islamic contracts that have been practiced by many Islamic banks in the South-East Asian region is the Bai’ bithaman ‘ajil. Literally, Bai’ bithaman ‘ajil is the sale on a cost basis contract that gives the advantage to the buyer as they can delay the payment. This contract is quite similar to the Murabaha and Bai’ Mua’ajjal. However, Obaidullah mentioned that there is a simple difference between the BBA contract and the Bai’ Murabaha. In BBA contract, the cost and the mark up price of the product are either known or not known by both sides, while in murabaha contract, it is mandatory for both parties to know the cost and the markup price.

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Despite the popularity of BBA contract across the world, it has been subjected to many controversies. For instance, in the report Elimination of Interest from the Economy, Council of Islamic Ideology in Pakistan stated that even though Shari’ah permit this method of financing, it is not encouraged to use it widely or indiscriminately in the aspect of the risk linked to it as opening back door for dealing on the basis of interest, therefore, it needs to be used only for unavoidable cases.

Furthermore, these contracts faced the criticism from scholars as it profit rates — usually in home financing or in car finances — are identical to the interest rate. Perhaps in cases where the BBA profit rate is fixed, it raises other issues as well because the rate is usually higher than the interest based loans of the conventional banks and the contracts is volatile for long-run. Subsequently, according to BBA contract, the bank should be responsible for the risk of the property sold but many banks do not do so as they only own the property for a short or minimum period of time possible. Hence, it violates the principle of “Al-kharaju bil-dhaman” directly. Same way when the bank does not abide by any responsibility as it does not own the property anymore in cases of default. As well as in case of defects, the bank does not provide any choice or ikhtiyar to the customer. Thus, violation of “Al-kharaju bil-dhaman” portrayed it to the same state of riba.

Second criticism faced by this contract is because the standard of BBA financing is calculated based on the market interest rate. There is no Shari’ah restraint for profit to be the same as interest rate but this issue leads to other mafasid that does not fulfill the maqsad (objective) of eliminating injustice, inequality, and poverty, which were main objectives behind the elimination of riba. It is prohibited in the Shari’ah for such mafasid to mainly include profiteering based on floating fare of interest and roll over the profit based on the market condition. Then again, Murabaha or BBA based financing products are fixed rate product and do not allow for a roll over. Undeniably, it is distressing to learn that the Central Bank of Malaysia has approved a ‘floating-rate’ BBA where the customer pays a monthly installment amount that is on the higher end, but later gets a rebate based on the prevailing market interest rate. Another severe criticism posed at the BBA financing is its involvement in ‘hidden’ bay’ al-Inah contracts, where the financier buys and sells the products back to the customer. Bay’ al-Inah has been severely criticized by majority scholars, including many Malaysian scholars, especially where it is widely practiced.

It has been shown that Islamic banks are also making money ‘out of thin air’ as the Islamic banks are simply emulating the conventional banking system, based on the Fractional Reserve System. This is because, the Islamic banks violates the principles of equal distribution, societal welfare, justice, on the way to create a higher default rate, debt loans, and similar other greater mafasid.

Next Islamic banking contract is rahn, which is a sort of documentation of debt in its original sense. Rahn can be defined as collateral guaranteed by the customer in exchange for the provided qardh (benevolent loan) by the bank. To illustrate, a valuable jewelry is kept by the bank as collateral in case if the customer cannot pay back the money. Despite this, in the modern Islamic banking practices, this contract is widely known as a synonym to pawn broking, which is a tool to generate profit in the business. Consequently, there are a few criticisms posed on this contract. One of it is when the banks demanded the custodianship fee against rahn. This caused a problem because the application of the fees charged subjected to the amount of loan is the same as the bank rate profit as explained by Dusuki and Abozaid in A Critical Appraisal book.

As a matter of fact, manfa’ah (benefit) is cannot be demanded in qardh contracts, unless if it is husnul-qadha (in Sharia’ah literature) the situation where the borrower offers the benefit willingly. Thus, the qardh contract is considered as riba when conditioned to a benefit. As a result, the qardh will violate the fundamental maqasid (objectives) of hifz al-deen particularly and secondarily the maqasid of forming Islamic Banks that deals with interest-free monetary policies for the Muslims, providing economic welfare, social equality, and a free flow of money among the citizens.

11 February 2020

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