NEW ARTICLE PUBLISHED IN
THE MALAYAN LAW JOURNAL  6 MLJ LXXV;  6 MLJA 75
AND SHARIAH LAW REPORT  3 SHLR 90
SHARIAH AND LEGAL ISSUES IN THE BAY’ BITHAMAN-AL-AJIL (BBA): A VIEWPOINT
Nuarrual Hilal Md Dahlan
College of Law, Government and International Studies
Universiti Utara Malaysia
Sharifah Zubaidah Syed Abdul Kader Aljunid
Ahmad Ibrahim Kulliyyah of Laws
International Islamic University Malaysia
Some of the excerpt
The primary duty of Islamic banks and financial institutions in Malaysia is to carry out Islamic banking and financial activities and to offer products that are in accordance with Islamic teachings. These products are subject to the scrutiny and approval of the Bank Negara’s Shariah Advisory Council (‘SAC’) and the internal Shariah Advisory Bodies (‘SAB’) or the Shariah Committees of the respective financial institutions. Despite having been in existence for more than 25 years, it remains unclear on whether Islamic banks and financial institutions in Malaysia have been satisfactorily carrying out this duty. One area worth examining is the transaction involving house buying, particularly, falling under the purview of the Housing Development (Control and Licensing) Act 1966 (Act 118) and transactions involving houses pending completion. This paper examines this area of transaction and loan agreement, effected via the Bay’ Bithaman al-Ajil (‘BBA’), that Islamic banking and financial institutions in Malaysia provide. The purpose of this paper is to examine the extent of which the sale and purchase agreement and the loan agreement have complied with the requirements of Islamic law in protecting stakeholders and to provide practical suggestions to improve the existing practice. The functions, roles, establishment and problems plaguing the SAC and the SAB are also examined, particularly in respect of their role in advising the institutions on transactions involving house buying in Malaysia, bearing on provisions of the recent statute – the Central Bank of Malaysia Act 2009 (Act 701), enforced on 19 August 2009. The paper concludes that the current practice of the BBA is contrary to the teachings of Islam and should be modified and revamped until it is fully able to protect the interests of the purchaser/borrower.
This paper examines the provisions of the standard BBA agreement as practiced by Islamic banks and Islamic Window Banks (‘IWB’) in Malaysia, as to whether the BBA is compatible with the requirements of the Shariah (Islamic law), specifically insofar as it relates to the purchase of houses-still-pending-completion and abandoned housing projects.
The determination is paramount because of the requirement for Islamic banks and IWB to uphold the principles of Islamic law in its operation. Several questions can be posed as follows:
(1) Whether the said BBA complies with the requirements set out by Islamic law?
(2) If the said BBA does not comply with Islamic law, whether the public or the stakeholders can apply for a court declaration that the BBA, as practised by Islamic banks and IWB, endorsed by the SAC and the SAB, is null and void and is ultra vires to the provisions of the Islamic Banking Act 1983 and the Banking and Financial Institutions Act 1984, in that the operation of Islamic banks and Islamic IWB shall be in accordance with the teachings of Islam?
(3) Whether the decisions and the advice of the SAC and SAB can be challenged in a court of law if the BBA or other types of products are considered null and void under Islamic law, in light of the latest development of the position of the SAC and SAB in the recent decided case law and the new statute — Central Bank of Malaysia Act 2009 (Act 701) enforced since 19 August 2009?
(4) Whether the SAC and the SAB are duty bound to act reasonably and in accordance with the principles of natural justice and observe the duty of care as propounded under the law?
OUR OPINION ON THE BBA OF HOUSE FINANCING IN MALAYSIA
Although judicial decisions have held that the BBA does not involve elements of riba’, in the writers’ opinion, the BBA as practiced in Malaysia may not be valid on the ground of the elements of gharar contained in it. Hence, following the elaboration on gharar al-fahish (exorbitant gharar) and the judicial decisions that the BBA contains the 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 which have been elaborated above.
(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 the 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, the 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 on part of the purchaser to sell the purported house to an 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 writers, this is still 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 the possibility of gharar in the transaction. It follows that the charge created over the house (which is still under milk ghair al-tam) as the security to the BBA may also not be valid under Islamic law, as the house is still not absolutely/fully owned (milk ghair al-tam) by the purchaser/borrower to warrant selling the said house to the bank for the bank to re-sell the house under the BBA transaction.
(3) It is opined that, the current practice of the BBA seems absurd, in the sense that, the house which is subject to the charge being a security to the BBA, is also considered under the ownership of the bank. The bank’s ownership over the house is explicitly stated in the PPA and PSA. 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 the 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 an abandoned housing project, in the event of a default on the BBA repayment by the purchaser, the bank may also be not able to enforce the charge and foreclose the security as the house is still not complete and it is doubtful that 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 element is 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 the 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 the 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 (the Quran and sunnah) which clearly prohibit gharar, riba’ and other inequitable/unjust practices. It (the BBA) may be applicable if there is a necessity (darurah) for it. However, it is opined that the degree of necessity (darurah) for the practice of the BBA in Malaysia warranting the application of the BBA has not yet actualised. We have the means to replace the 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 the BBA, we have the ability and means to use better Islamic products such as musharakah and ijarah in house financing, but we choose the BBA (the Malaysian BBA). The reason for this may be due to the economic and/or maximisation of profit factors. Thus on this footing, it is opined that 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 purchasers of abandoned housing projects. What the bank wants is for the installment monies of the BBA to be fully settled by the aggrieved purchasers.
(8) Purchasers are the aggrieved party when an abandonment occurs. They must pay their monthly installments yet they cannot occupy the purported houses. Consequently, they would 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 the 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 monies 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 which 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 the CCC, must also be made clear and provided in the BBA.