ISSUES IN THE HOUSE FINANCING THROUGH BAY’ BITHAMAN AL-AJIL (BBA) – PART ONE

There are some decided case law which have held that the concept and application of Bay Bithaman al-Ajil (BBA) in house financing is void as the transaction involves riba’ element, an element which is prohibited under Islamic Law. The first case is Arab-Malaysian Finance Bhd v Taman Ihsan Jaya Sdn Bhd & Ors (Koperasi Seri Kota Bukit Cheraka Bhd, third party) [2008] 5 MLJ 631 (High Court). The BBA in house financing, according to the court in this case, is regarded as a loan transaction and not a sale and purchase transaction. Further, the BBA prescribed that if the borrower defaulted on the loan, the defaulting borrower is to repay to the bank the whole total of the sale price which is usually double/higher than the purchase price of the property in the sale and purchase agreement entered into by the borrower (customer/purchaser) and the housing developer. The BBA was held not only contain the riba’ element, its nature and operation were also deemed inequitable and unjust to purchasers/borrowers.

In Malayan Banking Bhd v Ya’kup bin Oje & Anor [2007] 6 MLJ 389 (High Court of Kuching), Hamid Sultan JC (as he then was) held that in the order for sale involving BBA documents, the defaulting borrower should be entitled to a rebate against the whole loan amount due together with the interests which become payable on his default to service the monthly installment. Thus, the term in the Property Sale Agreement (PSA) and the charge document as well as the annexure which prescribes that if the borrower defaults, he shall be required to pay the total amount of the loan together with the profit margin for the whole repayment of installments period, was inequitable and repugnant to Islamic law. The whole amount of debt together with the profit margin chargeable on the borrower should be equitably limited to the length of repayment period which he has occupied, enjoyed or used the charged property, not the blanket amount for the whole repayment of installments period as prescribed in the PSA, charge document and annexure.  Hamid Sultan JC ordered that the plaintiff should amend their affidavit in support for the order for sale to the effect that the amount due by the defaulting borrower should be subject to substantial rebate taking into consideration the length of period the defaulting borrower has enjoyed possession and occupation of the charged property and applied the installment amounts which the borrower had paid to the lender bank against the total loan amount and profit margin due.

Similar findings were made in Affin Bank Bhd v Zulkifli bin Abdullah [2006] 3 MLJ 67 (High Court in Kuala Lumpur) and Malayan Banking Bhd v Marilyn Ho Siok Lin [2006] MLJU 283 (High Court in Kuching).

However, the above findings of the court were contrary to the earlier decisions of the court involving BBA in Bank Islam Malaysia Bhd lwn Pasaraya Peladang Sdn Bhd [2004] 7 MLJ 355 (High Court in Alor Setar), Bank Islam Malaysia Bhd v Adnan bin Omar [1994] 3 CLJ 735, Dato’ Hj Nik Mahmud bin Daud v Bank Islam Malaysia Bhd [1996] 4 MLJ 295 (High Court in Kota Bharu), Dato’ Hj Nik Mahmud bin Daud v Bank Islam Malaysia Bhd [1998] 3 MLJ 393 (Court of Appeal at Kuala Lumpur) and Bank Kerjasama Rakyat Malaysia Berhad v Emcee Corporation Sdn Bhd [2003] 1 CLJ 625 (Court of Appeal), where in these cases courts allowed the plaintiff banks’ applications to recover the whole sale price for the whole tenure of the loan repayment as the outstanding debts together with the profit margin due by the defaulting defendant borrower, under BBA, without taking in account of the length of repayment period on part of the defendant borrower has occupied or enjoyed the property in question.

Nevertheless in a recent historic decision by the Court of Appeal on 26 August, 2009, the Court of Appeal upheld the decisions of the courts in Pasaraya Peladang, Dato’ Haji Nik Mahmud and Emcee Corporation. There were 9 cases (See Bank Islam Malaysia Bhd v Lim Kok Hoe & Anor and other appeals [2009] 6 MLJ, 839 (Court of Appeal at Putrajaya)), brought to the Court of Appeal involving Bank Islam Malaysia Berhad as the appellant. The issue involved BBA and in these 9 cases, the judge in the High Court decided that BBA was contrary to the religion of Islam as it involved riba’ transaction. However, the judge in the Court of Appeal (Raus Shariff, JCA on behalf of the court and the other judges, Abdul Hamid Embong and Ahmad Maarop, JJCA concurring) held that the learned judge in the High Court erred in holding that BBA was contrary to the religion of Islam as it involved riba’. According to Raus Shariff JCA, BBA is not a riba’ transaction, instead it is a sale transaction under Islamic Law. Further, according to Raus Shariff JCA, the High Court judge was not competent to decide the matter, i.e whether BBA is in compliance with Islamic law. The competent persons are those Islamic jurists conversant in Islamic law and in reference to Islamic banking and finance in Malaysia, the Bank Negara Shariah Advisory Committee (Bank Negara SAC) and Shariah Advisory Borad of the Islamic Banks (SAB of the Islamic banks). Further, the High Court judge in the 9 cases had not observed the doctrine of stare decisis (judicial precedent), where before these 9 cases were adjudicated, there were Supreme Court and Court of Appeal cases (Adnan bin Omar v Bank Islam Malaysia Berhad (unreported) (Supreme Court), Datuk Haji Nik Mahmud (Court of Appeal) and Emcee Corporation (Court of Appeal) which held that BBA is valid under Islamic law.

OPINION ON THE BBA OF HOUSE FINANCING IN MALAYSIA

Although judicial decisions have held that BBA does not involve elements of riba’, in the writer’s opinion, BBA as practiced in Malaysia may not be valid on the ground of elements of gharar contained in it. Hence, following the elaboration on gharar al-fahish (exorbitant gharar) and the judicial decisions that BBA contains riba’ element, the following are the findings of the writers in respect of the BBA as practiced in Malaysia by the Islamic financial institutions.

1)      The BBA is void for it inherently involves gharar al-fahish elements, particularly in the case of a transaction financing a house pending completion. The elements of gharar al-fahish are the grievances of the purchasers in abandoned housing projects;

2)      In houses pending completion, where the transaction involves the application of Schedules G, H, I and J of the Housing Development (Control and Licensing) Regulations 1989 or otherwise, normally the purchaser/borrower may pay some portion of the price as deposit. However, on payment of the deposit and on the execution of the sale and purchase agreement with the developer, the purchaser applies for a housing loan (BBA) from an Islamic bank to finance the balance purchase price. This is effected by PPA and PSA as well as other documents such as the charge document or deed of assignment or power of attorney (PA), as the case may be. Normally, in the purchase of house, purchaser pays a deposit representing 10% of the purchase price. The balance purchase price (90%) will be paid by the Bank to the vendor/developer progressively.  The bank granting the loan (90% of the purchase price) to the purchasers to complete the sale will charge the said house as collateral to the loan. The title to the housing unit will not be registered into the purchaser’s name until and unless the purchaser has fully settled that loan (90% of the purchase price) together with the profit margin (the sale price) to the bank.  Once the purchaser has fully settled the sale price (usually in installment), then will the bank discharge the collateral (the house as the security to the loan) and will allow the transfer of the house into the purchaser’s name. However, the issue is, whether the purchaser/borrower had acquired full ownership (milk al-tam) warranting him to become the full and absolute legal owner (not just being an equitable and beneficial owner) to the purported house on the payment of the deposit and on the execution of the sale and purchase agreement when his name has yet to be registered as the registered proprietor of the property at the land office? It is still doubtful that he has obtained any legal ownership (milk al-tam) to the purported house to warrant him to ‘sell’ the purported house to the Islamic bank for the latter to re-sell the purported house to him (the purchaser/borrower) in accordance with Bay’ al-Inah or Murabahah principles. Thus, in transactions involving houses pending completion, the issue of ownership of the purported uncompleted house is still unresolved. In other words, the ownership is not a full (milk ghair al-tam) and unconditional ownership but an incomplete ownership (equitable/beneficial ownership). Incomplete ownership would not give, any absolute power/authority, to the purchaser/borrower to sell the purported house to Islamic Bank. However, it may be argued that, the purchaser/borrower can sell the purported house to the Islamic Bank, even though his ownership of the house is still incomplete, in order to get the housing loan from Islamic Bank, on the condition that the actual owner (the developer or the like) has agreed to such an undertaking. Be that as it may, in the opinion of the writher, still this is not acceptable under Islamic law, as the ownership of the purchaser over the house is still incomplete (milk ghair al-tam) which can justify the selling of the house by the purchaser to the bank and for the bank to re-sell the house to purchaser, under bay’ al-Inah and murabahah modes. This is to avoid possibility of gharar in the transaction. It follows that the charge created over the house (which still under milk ghair al-tam) as the security to the BBA may also not valid under Islamic law, as the house is still not absolutely/fully owned (milk ghair al-tam) by the purchaser/borrower to warrant to selling the said house to the bank for the bank to re-sell bank the house under the BBA transaction.

3)      It is opined that, the current practice of BBA seems absurd, in the sense that, the house which is subject to the charge being a security to BBA, is also considered under the ownership of the bank. The bank’s ownership over the house is explicitly stated in the PPA (Property Purchase Agreement) and PSA (Property Sale Agreement). How could the bank as the ‘owner’ of the house, ‘charge’ their own asset? Thus, the positions and status of the house, the charge, the ownership, the purchaser, the bank and the developer in BBA transaction are ambiguous and not certain. This can lead to gharar. It should be noted, notwithstanding a charge has been created against the land and in abandoned housing project, in the event of default on the BBA repayment by the purchaser, the bank may also not be able to enforce the charge and foreclose the security (see clause 2(2) of Schedules G, H, I and J of the Housing Development (Control and Licensing) Regulation 1989) as the house is still not complete and it is doubtful there is any interested buyer to bid for the purchase of the house/project.

4)      The BBA is void, based on judicial decisions, on the ground that the practice is inequitable and unfair to the general public. The inequitable elements are that the profit margin is higher than the debt owed. This would amount to a riba transaction. Secondly, if the borrower defaults, he has to pay the whole amount of the debt and the profit margin for the whole repayment of the installment period without being entitled to any equitable and appropriate rebate.

5)      There will be no adversity (hardship) in rejecting the Malaysian style of BBA. In other words, the degree of necessity (darurah) does not exist currently in Malaysia for allowing the practice of BBA (hybrid of Bay’ al-Inah and murabahah), which are rejected by majority of jurists as it may involve riba’ elements. Instead other modes which are more equitable must be implemented such as musharakah (partnership) or Ijarah (rental/lease). Some quarters may argue that the practice of BBA is for the maslahah/maslahah amah/maslahah al-mursalah (public interest) of the ummah (Muslim society), in line with the maqasid al-Shariah. However, to reply this, the maslahah must not be in derogation of the express provisions of the primary texts (al-Quran and al-Sunnah) which clearly prohibit gharar, riba’ and other inequitable/unjust practices. It (BBA) may be applicable if there is necessity (darurah) for it. However, the degree of necessity (darurah) for the practice of BBA in Malaysia warranting the application of BBA, it is opined, has not yet actualized. We have the means to replace BBA with better products, but we do not resort to them. This is sinful. This is akin to the requirement that to perform the obligatory prayer (solah fardu), one shall have to stand up (qiyam). If he has the ability to stand up (qiyam) without any difficulty or hardship, but instead he chooses to pray by sitting down, his prayer is rejected as the rukun (pillar) of the prayer (solah) has not been fulfilled. Similarly in BBA, we have the ability and means to use better Islamic products such as musharakah and ijarah in house financing, but we choose BBA (the Malaysian BBA). The reason for this may be economic and/or maximization of profit factors. Thus on this footing, it is opined, the rationale and reason for adopting the Malaysian BBA is not satisfactorily sound.

6)      If the housing project fails and is subsequently abandoned, the purchasers are still required to pay the monthly installments to the Bank. There is no term in the BBA that protects the interest of the purchasers if in the course of construction, the houses are abandoned.

7)      The banks absolve any liability for ensuring the completion of the houses. The banks do not consider the grievances faced by the abandoned housing projects’ purchasers. What the bank want is the installment moneys of the BBA must be fully settled by aggrieved purchasers;

8)      Purchasers are persons aggrieved if abandonment occurs. They must pay monthly installments yet they cannot occupy the purported houses. Consequently, they have to rent other premises and have to face other grievances, pecuniary and non-pecuniary. There is no term in the BBA which can provide measures to face these problems.

9)      In BBA, through the PSA, the banks are owners of the property. Logically, the owner is obligated to ensure that the purported houses will be duly completed and duly handed over to purchasers and the titles can be registered in the purchasers’ names. There is no guarantee that at the end of the day, if the project is abandoned or the property has not been duly constructed, the bank as owner must either do whatever is necessary to protect the interests of the purchasers or to compensate the purchasers or to return back all the moneys paid to them (restitution and indemnity). There is no term prescribing this duty on the banks in the PPA and PSA.

10)  There are no preventive and curative measures provided in the BBA, especially in the PSA, to avoid losses on part of the purchasers due to the abandonment of houses they purchased.

11)  There is no term in the BBA which provides the purchasers with the right to sue the bank for the calamities that have occurred or the right to claim compensation and damages. Provisions such as defect liability period, protection against sub-standard housing constructions, the guarantee that the titles to the property are to be registered into the purchasers’ name on full settlement of the loan and compensation for late delivery of vacant possession and the obligation of the bank to obtain certificate of completion and compliance (CCC), must also be made clear and provided in the BBA.

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