Bai Bithaman Ajil, Riba’ & Contractum Trinius

by Asril Zakariah

(The following is an article I narrated due to my disagreement with the Bai Bithaman Ajil transaction in the current Islamic Banking – tulis dah lama dah benda ni, baru post today) 

“Those who charge usury are in the same position as those controlled by the devil’s influence. This is because they claim that usury is the same as commerce. However, God permits commerce, and prohibits usury. Thus, whoever heeds this commandment from his Lord, and refrains from usury, he may keep his past earnings, and his judgment rests with God. As for those who persist in usury, they incur Hell, wherein they abide forever (Quran 2:275)” 

The Islamic Banking Act 1983 provides the statutory definition for the term “Islamic Banking Business” which means a banking business whose aims and operations do not involve any element which is not approved by the religion of Islam. In a conventional loan transaction, the said element which contradicts Islam and thus considered as haram is the element of Riba’. It means usury and is forbidden in the Islamic economic jurisprudence. According to some, this refers to excessive or exploitative charging of interest, though according to others, it refers to the concept of interest itself.  

With the rise of Islamic understanding, consciousness and its practice particularly in Malaysia, the government has encourage banks to delve into the prospect of implementing an Islamic version of banking that negates all the elements that is haram according to the syariah. The banks in this country accepted this encouragement and provide the public with a form of banking that is the Islamic banking. The public, especially the Muslims greeted this new concept with high hopes and anticipation that the burdensome interest charged by the conventional system will be lifted thus ushering the Islamic concept of banking which has been “thought” as just, fair and affordable. It seems that the new dawn that is hoped for by the Muslims never rises because the Islamic banking concept which has been introduced and implemented by the banks seems to be only an elaborate masking of its conventional counterpart. 

I wish to note that my further views are strictly with regards to the Islamic loan facility with security a.k.a the Al-Bai Bithaman Ajil (BBA). The courts in the case of Bank Islam Malaysia Bhd v Pasaraya Peladang Sdn Bhd [2004] 7 MLJ 355 defines that the Al-Bai Bithaman Ajil facility is a common Islamic banking facility involving immovable properties as collateral. It involved three separate agreements. The bank would purchase the property concerned from the chargor pursuant to the first agreement. In the second agreement, the bank would sell the property to the chargor. The third agreement was a charge given by the chargor to the bank to enable the bank to sell the property in the event of default by the chargor. 

In a conventional loan, the bank will disburse to the borrower a sum of money which the borrower shall, in accordance of the facility agreement entered between the two parties, repay the sum loaned to him periodically together with a sum of money known as interest. On the other hand, the BBA facility is preached to not contain in it the element of interest and this lackness of interest has been substituted with a two tier property purchase transaction where the bank will first buy the property and then later re-sell it to the borrower at a very much higher price, often more than double the purchase price, thus allowing huge amount of profit to be viciously reaped by the bank and at the same time circumventing the element of interest or Riba’.  

This circumvention of a theological canon is relatively not a new practice, back in the middle ages the church condemned and prohibited the element of usury in business transactions. This causes the merchants at that time to circumvent that canon by implementing the Contractum Trinius, a set of contracts that were presented to someone seeking a loan which are an investment, a sale of profit and an insurance contract. Each of these contracts was permissible under Church law, but together they replicated the effect of an interest bearing loan. The way this procedure worked was as follows. The lender would invest a sum equal to the amount of financing required by the borrower. The lender would then purchase insurance for the investment from the borrower, and finally sell to the borrower the right to any profit made over a prearranged percentage of the investment. This system replicated the effects of a loan with any interest rate agreed between the two, yet provided protection to the lender against default, while the borrower remained under the protection of the law when it came to collection of the money by threats or force. 

By looking at the workings of the Contractum Trinius mentioned above we can see the similarity between the mentioned contracts and the BBA under the newly propounded concept of Islamic banking, both seems to try to circumvent those that are illegal and haram. I do believe that the religions’ negation of Riba or usury is caused by the oppressive nature of those elements. The lenders who are of course the rich have power over the borrowers by dictating any terms that favours only one party of the transaction that is themselves. If another form of transaction is applied that eliminates the Riba element but in the same time replicates that element in another way, can we say that the new method conforms to Islamic law? By agreeing to that statement it is as same as propagating mockery to the teachings of Islam which erodes the true spirit of Islam and its application.  

The superficiality of implementation of Islamic law and practice in the BBA facility has been clearly shown by the court’s attitude in this matter. In the case of Bank Kerjasama Rakyat Malaysia Bhd V Emcee Corporation Sdn Bhd [2003] 2 MLJ 408 the court held that, although the facility was an Islamic banking facility that did not mean that the law applicable in this application was different from the law that was applicable if the facility was given under conventional banking. The charge was a charge under the National Land Code. The remedy available and sought was a remedy provided by the Code. The procedure was provided by the National Land Code and the Rules of the High Court 1980. The court adjudicating it was the High Court. So, it was the same law that was applicable, the same order that would be, if made, and the same principles that should be applied in deciding the application. 

There we could see that even though the background of the transaction involves the so-called Islamic principles, still the law that governs it is the same that governs conventional facilities. The mere availability of Arabic terms in an agreement does not mean that the transaction is Islamic and falls under the ambit of syariah, the Islamic law. For those who are pious that seek the blessing of Allah by leaving those that are haram whom then transacted in accordance to this principle may find themselves cheated since they are all labouring under false pretences and misconceptions concocted by the Banks under Islamic guise. 

However in a recent judgment of the court in the case of Malayan Banking Bhd v Ya’kup bin Oje & Anor [2007] 6 MLJ 389 the court held that Islamic contract relating to commercial transaction is not only subject to the terms of the contract but must be decided subject to the Quranic injunctions and/or Islamic worldview as the case may be. For this very purpose, the court can on their own motion decide the issue or alternatively call experts to give their views, pursuant to s 45 of the Evidence Act 1950 or pose the necessary questions to the Syariah Advisory Council for their views. Personally I applaud this judgment because of its attempt in implementing somewhat a degree of Islamic law where advices of the Syariah Advisory Council are accepted in the court of law. This implementation can actually be applied and practised by the court to an extent that that act will bring great benefit to matters that involves Islamic principles in the sense that Islamic view be held relevant in our courts. But still, such an attempt may be easily thwarted because at any time it can be seen and argued as an encroachment of syariah in to the civil courts jurisdiction. 

The public, thinking that a banking product that carries an Arabic name comes with it the best of the Islamic principles may soon be unfazed by the workings of the so called Islamic banking facility in this country. True that BBA will offer a fixed amount of repayment unlike its conventional cousin that the amount of repayments fluctuates depending on the market rate, but why in general the full settlement repayment for a BBA facility usually is greater in amount compared to a conventional loan? On one hand it promotes certainty in repayment, that is good, but on the other hand it slaps and oppresses the borrower with a huge repayment sum, is this what is intended in Islam? I believe the answer is a big “No”. 

The oppression done by an Islamic banking facility can be seen in the case of Affin Bank Bhd v Zulkifli bin Abdullah [2006] 3 MLJ 67. In this case the defendant bought a double storey link house and secured the loan under the Syariah principle of Al-Bai Bithaman Ajil from the plaintiff, who was his employer at that time, for a sum of RM 346,000-00. The loan was to be repaid over 18 year tenure by 216 monthly instalments and a charge was registered against the title. However, at the end of December 1997, the defendant resigned from the plaintiff bank and at his request, the loan facility was restructured whereby under the revised facility, the bank selling price of the house was RM 992,363-40, payable over a period of 25 years. No fresh set of documents was executed, although earlier, the bank had requested. After making several payments totalling RM 33,454-19, the last of which was in June 2001, the defendant again defaulted. The plaintiff issued a notice of default in Form 16D of the National Land Code seeking the repayment of RM 958,997-21. Subsequently, two actions were filed, namely an order for sale and an order to recover such sums in the event of a deficiency in the proceeds of sale. The issue before the court was the actual amount that a customer has to pay to the provider of an Al-Bai Bithaman Ajil facility in the event of a default, in this case, after having paid RM 33,454-19 in instalments. 

Held, granting the order for sale and reducing the amount of repayment:

1.       If the customer is required to pay the profit for the full tenure, he is entitled to have the benefit of the full tenure. It follows that it would be inconsistent with his right to the full tenure if he could be denied the tenure and yet be required to pay the bank’s profit margin for the full tenure. To allow the bank to also be able to earn for the unexpired tenure of the facility, means the bank is able to earn a profit twice upon the same sum at the same time.

2.       The profit margin that continued to be charged on the unexpired part of the tenure cannot be actual profit. It was clearly unearned profit. It contradicted the principle of Al-Bai Bithaman Ajil as to the profit margin that the provider was entitled to. Obviously, if the profit had not been earned it was not profit, and should not be claimed under the Al-Bai Bithaman Ajil facility.

3.       The profit margin could be calculated and derived with certainty. Even if the tenure was shortened, the profit margin could be recalculated with equal certainty. The total due on the date of the judgment was RM 616,080-99 and after crediting the defendant with all the payments he had made of RM 33,454-19, the balance due on the date of judgment was RM 582,626-80.

4.       Once it was established that there had been a default, then unless there was cause to the contrary, the order for sale must be given since a charge is an ad rem right to dispose of the security to recover a secured debt. 

Obiter:When the gratification of being able to satisfy the pious desire to avoid financing containing the elements of Riba gives way to the sorrow of default before the end of tenure of an Al-Bai Bithaman Ajil facility, the revelation that even after the subject of security had been auctioned at full market value there remains still a very substantial sum still owing to the bank, comes as a startling surprise. All the more shocking when it is further realized that a borrower under conventional loan is far better off. The consequence of a default under the Al-Bai Bithaman Ajil facility proved to be far more burdensome upon the unfortunate and bewildered defaulter. 

I believe the obiter by Abdul Wahab Patail J says it all. Tepuk dada tanya selera. Wallahualam.

WP: Special thanks to Wikipedia and the Malayan Law Journal