Islamic banking has experienced tremendous growth over the year

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Islamicbanking has experienced tremendous growth over the years. Its rootscan be traced to Sharia law which allows trade but does condone theaspect of interest or riba in business transactions as it isprohibited in the Quran. As a result, Islamic banking was a remedy toconventional banking which allowed riba as it addressed the issue ofinterest among the Muslim community [ CITATION Ari12 l 1033 ].Efforts to start a banking system without ribastarted in the 1970’s when Islam economists, resourceful andcommitted individuals, professional bankers and religious scholarscame together and worked on a banking module that would offerfinancial assistance to the their community while adhering to Sharialaw. The Islamic banking system started taking shape in the 1970’sas Islamic banks started mushrooming in countries such as Iran,Pakistan, Sudan and Malaysia. Currently, Islamic financialinstitutions have investments well over RM 423 billion and have apresence in over 70 countries with more than 200 financialinstitutions open for business around the world [ CITATION Che14 l 1033 ].The Islamic banking sector has one of the fastest growths in thebusiness world as growths of 16% have been experienced annually.

Theexponential growth of the Islamic bank has been due to theiroverwhelming acceptance in the Muslim community. Islamic bankingfinancial institutions strictly follow Sharia law. It gives thecustomers control as it offers them a range of financial instruments.One of the financial products available is the Al-Bai-Bithaman Ajilfinancing (BBA).

Al-Bai-BitamanAjil is a financial product in Islamic banking. It is referred to asBay Muajjal in Pakistan or Bay Muazzal in Bangladesh. It might havedifferent names from one nation to another but the financialinstrument is more or less the same regardless of the country. AlBai-Bithaman Ajil is commonly referred to as BBA in Malaysia. BBA isa popular financial product in Malaysia as it has been in existencein the country since 1983 [ CITATION Ros051 l 1033 ].BBA also hasa presence in South East Asian countries of Brunei and Indonesia. BBAis similar to a sales contract only that in this case, the payment isdeferred to a time in the future. BBA is similar to a Murabahahcontract but the contract payments are deferred. BBA is a way offinancing assets such as Machinery, equipment, buildings and Land andso forth. The sale price of the asset is usually inclusive of profit[ CITATION Bai16 l 1033 ].Clients who agree to use the financial instrument enter into acontract with the bank for the purchase of the agreed upon asset inthecontract. The bank buys the asset for the client and has claim overthe asset until the client pays the final installment. The financialinstitution that arranges the financing however, adds a profit marginon the sale price of the asset [ CITATION Bai16 l 1033 ].The details of the contract are transparent such that the total costof theproperty can be ascertained.

BBAhas been the subject of criticism over the years as disgruntledIslamic sections have argued that the financial product has someelement of profit or usury which is against the teachings of theQuran. The Holy book states that “Allah has permitted trade butusury is forbidden.” In addition, Allah promises forgiveness topeople who have indulged in profit making trades in the past butsuggests that judgment awaits repeat offenders. In this essay, theauthor will delve into the subject of BBA financing as a financialinstrument available in Islamic banking institutions. The author willdiscuss the objectives of BBA and determine whether those objectiveswere met. In order to shed more light into the subject the authorwill utilize a book written by Saiful Azhar Rosly, a renownedeconomist and professor in Malaysia with a wealth of knowledge onIslamic banking. Other resources from the internet will also come inhandy in the research.


Inorder to understand BBA, the author will pick the brains of SaifulAzhar Rosly, a U.S educated professor of economics who has writtenmany books on Islamic banking. Dr. Rosly is an Islamic economics andbanking professor at a leading university in Malaysia. The professorhas worked as a consultant and has offered his advice to leadinginstitutions including the Ministry of Finance in Malaysia on issuesrevolving around Islamic banking [ CITATION INC16 l 1033 ].CriticalIssues on Islamic Banking and Financial Markets is one of the bookswritten by Saiful Azhar Rosly and published in 2005. In the book,professor Roslyn breaks down Islamic banking products such asAl-Bai-bithaman Ajil (BBA) into layman language. It looks at howIslamic banking distributes scarce resources while adhering to theprinciples of Sharia law in Malaysia [ CITATION Ros051 l 1033 ].The additional resources from the internet willassist the author understand how BBA works and its objectives inimproving the lives of the people in the community.


Sincethe onset, BBA was a financial product established to improve thelives of the community while maintaining the principles of sharialaw. According to the Quran, the charging of interest is prohibitedin all business transactions as was the norm in conventional bankingsystems. The formation of interest less institutions was therefore asolution to the Muslim community. BBA had two main objectives. Thefirst objective was to provide financing to customers who could nothave been in a position to afford such assets if cash was the onlyway of acquiring the assets. Secondly, BBA offered flexible ways ofallowing clients to make payments for their credit purchases withouthaving any disruptions. The issue of whether BBA has met itsobjectives has been a subject of debate between different Islamicfactions as some scholars oppose the existence of the financialinstrument while others support the product.

Inorder to answer the question of whether BBA has met its objectivesone needs to understand how BBA works. BBA or Al-Bai bithaman ajil isa financial tool which allows clients to have access to financing.The finance is usually used in acquiring buildings, machinery, Landand equipment just but to mention a few. A client is required toidentify the asset that he wishes to acquire first. The financialinstitution looks at the customer’s requirement such as thefinancial payment period. Once the bank agrees with the client, itpurchases the asset on behalf of the client and then it in turn sellsthe newly acquired property to the client at a predetermined price.The price paid by the customer usually has two components. The actualprice or the payment made by the bank and the profit margin added bythe bank for providing the financial service. The profit margin forthe bank can range between 70-100%. The payment of BBA can take placein three ways. The client can choose to make installments over anagreed period of time. A lump sum payment could also be used tosettle the account [ CITATION Bai16 l 1033 ].Finally, the two parties in the contract can agree to terms clearlystated in the agreement and impliedly agree on other terms in thecontract. The client requires guarantorsin case of any default in installments. However, the property istransferred to the client upon the payment of the last installment asthe financier has claim to the asset. The bone of contention in BBAhas been the pricing of the BBA as some scholars suggest that thetrade is contrary to Sharia law on riba or interest [ CITATION Ari12 l 1033 ].According to Ibn Qayyim, BBA should be allowed as it lacks theelements of haram such as gharar (uncertainty) or gambling (maisir)in its transactions. In addition, he mentions that there is noevidence that the Quran is against such kind of arrangement.Professor Saiful Azhar Rosly on the other hand, decriesthe worrying trend of BBA use in Malaysia as it does not fit into theSharia compliant outfit it was designed for [ CITATION Ros051 l 1033 ].In some way, BBA transactions seem to deviate from Islam and almostresemble conventional banking because the transaction appears as aloan and not a contract of sale between the two parties.

Theissue of riba or interest acquired in the form of profits fromdeferred payments is allowed by a majority of Muslim Jurists.According to the Jurists, the price in most cases will increase dueto the deferred payments. Deferred payments have to factor someconsideration of value in price and finally, five paid in cashamounts to six paid in deferral.


Overall,BBA seems to have achieved its objectives. This is because the numberof Islamic banking institutions has increased sharply over the years.This would only suggest that more customers are enjoying Islamicbanking products with BBA being one of the instruments available toclients. In addition, Islamic institutions seem to have solved theirproblem of having access to loans with an interest or riba on theprincipal borrowed. A comparison between BBA and conventional loansrevealed three things. First, conventional loans require a creditoror debtor relationship where the amount of loan earns a fluctuatinginterest rate over time. BBA on the other hand only requires a sellerand buyer relationship and the selling price is fixed. Underconventional loans, there is interest which is based on the principalamount. In BBA the charging of riba or interest is disallowed underSharia law. Finally, in other banking systems, arrears are added tothe loan and are usually capitalized in the loan. In BBA, arrears arenever capitalized.

Moreover,BBA restricts financing illegal trade or haram for clients who wouldwish to expand their businesses. Islamic banking helps keep a checkon what kind of business their clients engage in since they have tobe in compliance with Sharia law. Certain activities are prohibitedunder the law. Such practices include: the selling or trading ofproducts such as alcohol, pork and drugs. Customers should refrainfrom engaging in gambling (maisir) activities as well asprostitution. BBA ensures that their customers are not charged extracosts in case of default or incur hidden charges in the contract. Thecontract entered between the buyer and the seller is transparent suchthat the total cost of property to be acquired can be ascertained atthe time of the contract. Such qualities ensure that both parties aresatisfied and can only encourage future business dealings.


Froma Malaysian perspective, BBA has experienced lots of success in thecountry according to Saiful Azhar Rosly, in his book Critical Issueson Islam Banking and Financial Markets. However, a few areas need tobe tweaked in order to comply with Sharia law. The two objectives ofBBA have been met as clients can have access to credit easily andmake flexible payments over time. Both Muslims and non-Muslims areencouraged to apply for such facilities. In addition, BBA ensuresthat only clients who engage in legitimate business can have suchfinancial services. Islamic banking institutions check on theclients’ source of income as well as their nature of business. Thisenables only traders who do not engage in haram or forbidden tradingto expand their business while utilizing Islamic banking financialinstruments. It also helps to shape a society that is ethical andhas integrity hence contributing towards the nation’s well-being asit helps in curbing immorality, illegal trading activities and allmanners of criminal activities in the country. The overwhelmingacceptance of BBA can only be a sign of a bright future.


Bai Bithaman Ajil. (2016, August 14). Retrieved August 14, 2016, from Islamic Finance News:

Aris, N. A., Othman, R., Azli, R. M., Arshad, R., Sahri, M., &amp Yaakub, A. R. (2012). Islamic House Financing: Comparison between Bai Bithamin Ajil (BBA) and Musharakha Mutanequisah. African Journal of Management, 266-273.

Che Jaffar, D. (2014). Understanding on Bai Bithaman Ajil Financing Contract Among Employees at AgroBank Northern Region Branches. Retrieved August 13, 2016, from

INCEIF. (2016). Prof. Dr. Saiful Azhar Rosly. Retrieved August 13, 2016, from International Center for Education in Islamic Finance (INCEIF):

Rosly, S. A. (2005). Critical Issues on Islamic Banking and Financial Markets. Kuala Lumpar: Dinamas.

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