Bai Bithaman Ajil, Riba’ & Contractum Trinius

(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

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Bai Bithaman Ajil, Riba’ & Contractum Trinius

17 thoughts on “Bai Bithaman Ajil, Riba’ & Contractum Trinius

  1. aLin says:

    Eye opening facts on islamic n conventional loans..thanks.for i kinda need it.nice blog – i enjoy reading.keep it up, incik lawyer :)

  2. lekiu says:

    You would be pleased to know that in cases where the Borrower defaults on his loan, Wahab Patail today have disallowed Bank’s claim for Selling Price.

  3. idrus ismail says:

    can u pl also comment on Wahab Patail J.’s latest decision in Arab Malaysian Finance v Tmn Ihsan Jaya & 2 others (2008)? this decision is rocking the IB market right now and yr views wd be interesting.

    WP: I am currently working on it. Thanks.

  4. jali says:

    I believe none of the above is haram as long as it does not burden any of the parties.

    Conventional or BBA should be amended eg. when there is default & such default is not defaulter’s intention (due to sudden unfortunate event etc),the interest/ margin charges should stop, but he is still liable to pay the principal balance. btw, banking is also business like any others, its service they are selling. profits is represented by interest. It only become usury when the defaulter under genuine hardship fails to pay, and interest continuously charged.

    There has to be a mechanism for defaulter to inform lender of his situation. The lender will refer to a eg. shariah committee who will decide if the defaulter is genuine claim (good faith, eg. not because of self mistake like intentional robust spending, waster,cheater). if genuine, interest/profit margin charge shall stop & defaulter shall still be liable for principal balance (w/out interest).

    For false claim,defaulter shall be charged interest & existing rule shall be applicable. This also act as dam for defaulter’s deed.

    Total ban of conventional/BBA will only cause hardship to lender and muslim buyer. No lender will give loan w/out profit. Who will pay their staff salary/operation cost. As for buyer, there will be big gap in the nos of home ownership between non muslim owner and muslim owner if its banned or haram.

    I’ve read somewhere but don’t remember where is the article whereby the author (with facts) claim the current definition of usury is incorrect. It is differently meant during the prophet time. As long as Ones do not oppress or being oppressed, its halal. If you feel you are not being oppressed by your home loan & its installment, its halal. That is also my hold & opinion. Wallahua’klam.

  5. insan biasa says:

    If you want the Islamic Bank to finance your purchase of a house, they will first buy it from the seller, pay cash and then sell it to you where you pay the price to the Bank in instalments. Here comes the first objection to Bai’ Bithaman Ajil or BBA, people say why should the price be different between paying cash and paying deferred. I think those with this school of thought does not think things through deep enough. They are alluding of course to the similarity with riba financing where the longer you take to pay the higher you pay. They forgot about the concept of opportunity cost. In other words there is a cost in allowing people to pay deferred instead of paying cash.
    The next objection may be, fine, but why do the Islamic bank take up so much profit such that for a house that cost RM200,000 one may end up paying RM400,000 over a period of 20 years. There are many aspects to this issue. Firstly an Islamic Bank is first and foremost a business. It is not a charitable organization. The money it extends in financing does not belong to the Bank it belongs to depositors and shareholders who demand a return.

    So it has to price its financing to yield a return to its stakeholders. If it prices its financing below market then there is a danger investors will say Islamic banking is not viable compared to conventional banking. The second aspect is, is it really expensive? The truth is if you take a conventional loan and add the total interest over 20 years to the principal you’d find the sum total you pay will not be far different from the total amount you’d pay under Islamic Banking.

    for more details on this click here

  6. asrilamirul says:

    Salam saudara Insan Biasa

    Once I heard a non muslim spoke to a muslim… she said, “dont make your acts disgrace to your own religion.” What was spoken at that time is relevant to the scenario of our so called islamic banking system. We hail the system as islamic but yet it contains the element of riba condemned by islam. To brand something as islamic, the product should comply with all elements propounded by the syara’ not just a mere charade same as the contractum trinius. It will only bring bad name to islam.

  7. Salam my brother,

    I’m glad to have found your site. I could really use it for my research project. But if you have a source that could direct me to the true procedures of the BBA practice, I would really love and you would be really commended in the help of my research. :D

    Still, I admire your read and your knowledge of this principle and the truth behind the Islamic Banking practices. Well done.

    1. asrilamirul says:

      the best way to find out things about BBA procedures is through the banks of course. Get hold on recent agreements relevant with BBA. PPA & PSA are must haves. From that you will be able to see the procedures. Take note that practices differ from one bank to another.

  8. sulaiman says:

    Salam….I took a loan under BBA for RM380,000 for 360 months. The bank capped the selling price at RM1.1 million. My understanding on BBA now is that in event of early settlement or default, the bank will ask for the agreed selling price i.e RM1.1 million. For this, I am really worried and regret taking BBA. BBA has

  9. Hannah says:

    I am also a victim of circumstances as mentioned above. In my case the developer has failed to keep his side of the bargain. The property was never delivered. Now the bank is after us. What is our recourse.

    Who do we turn to. And how does this Islamic concept work in this situation. Please help.

    1. asrilamirul says:

      Dear Hannah,

      I believe your case is pure non performance of developer. The bank will not cease after you as they want their investment back. One recourse is to file your case with the Home Buyers Tribunal or any other similar tribunal that exist in your country.

      The so-called Islamic concept professed by the banks is similar to the conventional one, except for some word magic here and there to make it sounds islamic.

      Take care.

      1. Hannah says:

        Thank you for your kind reply. The bank has filed a Judgement in Default against us. Now we have engaged a lawyer to set this aside. This has been going on for a long time and a lot of money as lawyers fees. Our loan was called Al Bai Bihaman Ajil.
        I will look into the Home Buyers Tribunal you had mentioned. In the meantime if there is anyone out there who had purchased a property under Bukit Unggul Eco Media City please write to me at I would like someone to give me some closure to this long standing issue. Thanks you

  10. Leonidas says:

    Good article…. There is more truth in the article than in the world we live in today…. Do write more article…. It will be an eye opening for those who have their eyes shut.

  11. Leonidas says:

    To those in support of this islamic banking scam and those who give reason that they can be oppressive because they are not charity banks…. I have enough money to buy all the nasi lemak at the stall you always go for breakfast… And sell it back to you for double the price….. I AM NOT A CHARITY PERSON…. IT SIMPLY BUSINESS IS NOT IT? Use your brain to understand my analogy.

  12. research says:

    To those who took BBA and suffers “abandoned housing project/ rumah terbengkalai” please read thoroughly your property purchase agreement (PPA) and property sale agreement (PSA). Compare with the bank’s claim. Sooner you will learn where the bank went wrong.

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