IB1005
DEPOSITS AND FINANCING PRACTICES OF
ISLAMIC FINANCIAL INSTITUTIONS
CHAPTER 6 : AL-MURABAHAH / BAIBITHAMAN AJIL PROPERTY FINANCING
COMPILED BY
HAMDAN HJ IDRIS, BSc Econs, MBA (Islamic Banking & Finance)
Certified Professional Trainer (MIM)
Industry Expert
INCEIF
PRESENTED BY
HJ MAHMUD HJ BUNTAT, MBA (AUOL, UK), DBM (Swansea Inst., UK), CIL (UIA)
Part-time Lecturer (INCEIF)
Former Head of Islamic Banking Division, OCBC Bank (Malaysia) Bhd
Chapter 6:
Finacing - Al-Murabahah/
Bai-Bithaman Ajil Property Financing

In principle, murabahah means mark-up sale. It
is a sale contract (ie. it is not a loan contract) in
which the object of sale is sold to the buyer at a
selling price equivalent to the cost price and
profit margin.
There are two types of murabahah, namely:1. Cash murabahah i.e. a sale contract where
the seller sells a commodity with a price equal to
the cost price and a profit margin. The purchase
is settled on cash basis.
.
2. Credit murabahah i.e. a credit sale with
purchases settled by installment payments. The
price is equal to cash murabahah prices but a
premium is added over the profit margin to
reflect deferment in payment which basically
translates to time value of money.
Al Bai Bithaman Ajil Financing
(BBA)

BBA means sale with deferred payments i.e. Albai’ = sale, thaman = price, ajil= deferment.
BBA is a sale. It is not a loan.

It is not a spot sale. Still it constitutes one form
of trading and commerce. The Quran says, “
Allah has allowed trade and commerce (al-bay’)
but prohibits riba” (Al-Baqarah verse 2; 275).
Hence profit from sale (al-bay’) is lawful, while
profit from loan i.e. riba, is unlawful.
Al Bai Bithaman Ajil concept
1.
Refers to the sale of goods on deferred
payment basis at a price that includes a profit
margin agreed by both parties. Final price
should be contractually agreed and known to
both parties.
2.
The Bank may finance a customer who wishes
to acquire a given asset for a specific period
and to repay by instalment (i.e payment of
price is deferred)
Al Bai Bithaman Ajil concept
3.
Time and mode of payment will be ascertained
and the cost price and amount of mark-up need
not be stated.
4.
Sale and Purchase is the transfer of ownership
between the parties.

Products : House or Term Financing-i (financing
for the acquisition of assets), Working capital-i,
Share financing-i, Vehicle financing-i &
Equipment Financing-i)
Al-Bai Bithaman Ajil (BBA)
(Sales with deferred Payments)
(3) Bank sells the asset to the customer at a selling
price = RM 50,000 + profit margin
BANK
(2) Bank purchases the
asset from owner
(e.g at RM 50,000)
CUSTOMER
(4) The customer repays the bank by
Installments
If n = 60 month and
profit margin = RM 25,000
Monthly installment = RM 75,000 / 60
= RM 1,250
OWNER OF ASSET
(1) Owner identifies
the asset to be
acquired
To summarise, BBA sale consists of three
contracts, namely:

Property Purchase Agreement (PPA): Bank buys
property from customer.

Property Sale Agreement (PSA): Bank sells
property to customer at BBA price.

Deeds of Assignment/Charge: Bank A holds
property as collateral.
House Financing
(Al- Bai Bithaman Ajil)
The packaging involves a combination of sales,
profit margin and deferment, conducted between
two parties. The sales between the customer and
the bank (bai’); a cost plus sale including a:•
•
•
•
stated profit margin (murabahah);
a deferred payment (al-ajal); and
involves one party selling an asset at a higher
deferred price, but
buys it immediately for a lower cash price (bai’
al `inah) as reflected in the financing of a new
home
Al Bai Bithaman Ajil structure
(1) Developer sells house & home-buyer
pays a deposit to seller
Customer
Seller
Home-buyer
Developer
(4) Pays balance to seller who then
transfer title to buyer
(2) Customer sells house
to IFI for the cost of financing
(Selling Price) To settle the
balance with developer
IFI
(3) Customer immediately
Buys the house back from the IFI
Including the IFI’s financing and it’s profit
Margin (Purchase Price) as a deferred credit price

In Malaysia, short-term credit murabahah is
simply called murabahah with payment payable
lumpsum.

A long-term credit murabahah is known as albai-bithaman ajil (BBA). BBA is also known as
bay’muajjal and murabahah in Pakistan and the
Middle-east countries.

Thus, al-bay’, does not have to imply BBA alone
but also other lawful sales as well.
Murabahah Asset Financing

A cost plus sale (bai’ al-murabahah) involves the
asset sold at the price at which it was obtained,
plus a stated profit margin.

Murabahah to order involves a contract whereby
a bank purchases an asset upon the request of a
customer, and then re-sells that asset to the
customer in a murabahah. The contract may be
decomposed into two promises.

A promise by the customer to purchase the
asset, and a promise by the bank to sell the
asset to the customer in a murabahah.

Some may interpret that the OIC Fiqh Academy
requires that promises are binding in commerce
where the promise is induced incurring liabilities,
and subject to enforcement as well as actual
damages broken. (Ref: Structuring Islamic
Finance Transactions, A.Thomas / S.Cox, /
B.Kraty, (Euromoney 2005), p..65)

AAOIFI does not deem a promise as binding, and
that title has to pass from seller to bank first to
establish legal ownership and risk Shari’a
Standards (2004-2005), Shari’a Standard No.8,
Appendix (D), p.128

AAOIFI clarifies that, “the condition that
possession of an item must be taken by the
institution (before its onward sale to the
customer) has a specific purpose: that the
institution must assume the risk of the item it
intends to sell...”

Murabahah without ownership and risk is thus
loan with interest (qard bi al fai’dah). (Ref:
Shari’ah Standards 2004-2005, Shari’ah
Standard No.8, 3/2/2, p.118)
•
In practice, a form of down payment is often
taken by the bank, upon the customer’s promise
to buy the asset, in the form of security deposit
(hamish jidiyyah) or earnest money (arbun), and
often deemed non-refundable where a bank itself
deems the promise as binding, and the bank
always enters into a contractual commitment
with the home-purchaser prior releasing funds to
the home-seller as the OCC discovered.
Musharakah concept
1.
Refers to a partnership agreement or jointventure for a specific business with a profit
motive.
2.
Any profit arising will be shared between the
Bank and customers according to predetermined ratios and in the event of losses,
both parties will share the losses on the basis
of their equity participation.
Products : Project or Equity Financing-i,
Investment in shares.
Workflow of Musharakah
FINANCIER / BANK
• Profit : Shared
according to
agreed ratio or
according to ratio
of capital
Contribution
• Loss shared
according to ratio
of capital
contribution
COMPANY
X%
CAPITAL
Y%
Project
Revenue
Invests in
project
Declining Co-Ownership
(Musharakah Mutanakissa)

The facility combines both musharakah and
ijarah and involves the bank and the customer
entering into a joint venture (musharakah) with
both parties contributing capital (financing and
deposit).
Musharakah Mutanakissa
(Modus Operandi) – Step 1
Financier
Provides
most of
financing
e.g 90%
STEP 1
Customer
Asset to be acquired
Both financier + customer become partners in the
ownershhip of asset (Shirkah al Milk)
Provides
most of
financing
e.g 10%
Musharakah Mutanakissa
(Modus Operandi) – Step 2
Financier
90%
Financier’s
Share
Decreasing
Customer
Pay monthly installment partly
as rental and partly as gradual
purchase proce of part of
financier’s share in Asset
Customer’s
share
increasing
10%
0%
Asset
STEP 2
100%

The home is acquired by the joint-venture, and
the bank gives the sole right of occupancy to the
customer, for which the customer agrees to pay
rent under a rental agreement (ijarah) over the
tenor of the financing to the IFI.
•
Whether rental payments are fixed or floating as
a result of the pricing benchmarking, the
mechanism for the profit rate and the nature of
the reducing participation of the bank, is
reflected in the constant rate of return
calculation and monthly re-payments “are similar
to the payments made under a typical mortgage
agreement.”
•
The customer's share in the ownership increases
until the property is paid for and owned in full.
•
The IFI’s profit payments may be adjustable and
(in the U.S.) is typically linked to an interest rate
index (subject to certain caps). Hence the
diminishing equity of the IFI mirrors the
declining principal under a monthly reducing
balance amortization.

However, in the MMP contract, the capital
contribution ratio (CCP) is not fixed as it can be
adjusted based on negotiation and the nature of
contractual relationship between the partnering
agents.

For example, in the government’s 100%
financing housing scheme, CCR can be based on
a fraction, say 1:99. Therefore, if the house
costs $100,000, the initial capital contributed by
the customer is only $1,000. This amount will
not pose a great burden to public servants, who
have rights to enjoy 100% financing.
•
The objective of MMP is to make profits from the
investment while the object of investment is the
ownership of property, say a house. An al-ijarah
contract will be applied as a mechanism to earn
rental income.
•
The monthly rental paid to the partnership shall
be equivalent to the monthly payment that banks
will receive on term financing.

As rentals are paid, it will be distributed as
profits to the bank and customer using the
contractual profit sharing ratio. The customer can
use the profits to purchase shares from the
bank. In this way, ownership claims by customer
increases over time, while bank’s ownership
decreases.
•
To accelerate the share-purchasing process, a
premium is added onto the true rental value of
the property. This is to ensure that rental
payments are able to reflect market value.
•
As an example, assuming identical cost of
financing and maturities, traditional financing
requires a customer to pay $800 monthly. But in
MMP, rental is valued at $500.To make up the
difference, the customer pays an additional $300
as a share purchase transaction. Total rental is,
therefore, $800

Soon after the first rental payment is made, the
customer will secure $50 profit (that is, 10% x
$500) from rental, plus $300 to buy a portion of
shares that the bank holds.

The customer now owns $10,000 + $350 =
$10,350 as share capital after making the first
payment ($800) while the bank holds a
decreasing $89,650.
(MMP) FOR HOME FINANCING USING AL-IJARAH
AS THE INCOME GENERATING ENGINE
Customer Share Capital
$ 10,000
10%
Bank Share Capital
$90,000
90%
MUSYARAKAH MUTANAQISAH
PARTNERSHIP (MMP)
Reduces
Bank’s
shareholding
Increases
Customer’s
shareholding
The MMP invests the $100,000
Capital in the Al-ijarah-rental business
Customer – 10%
Profit - $50
HOUSE
Monthly
Ijarah
Payment
$800
Actual rental
Value
$ 500
Share purchase
Bank – 90%
Profit - $450
Customer share
Purchase $300
•
The musharakah mutanaqisah contract is
terminated when total sale of shares is
concluded. The way an Islamic bank responds to
interest rate volatility will now depend on the
periodic lease renewal agreement, usually made
every two or three years. This practice is normal
in the rental business.

If money is tight, the bank can direct the
customer to increase the true rental value while
keeping the added premium constant. The
opposite is true when interest rates decline. This
rental adjustment technique, although not
thoroughly transparent from the Shariah
viewpoint, requires more research in order to
gain public acceptance.
•
To apply MMP in banking, one must identify who
owns the asset sold - the bank or the customer?
Theoretically, both hold legal claim on the house.
But kind of business entity MMP should adopt? In
what way BAFIA will recognize the new company
since it has strictly prohibits banks to participate
in joint-ventures?
•
Here, it is the partnership and not the bank
alone who made the purchase. The pricing of
rentals and changes in premium payments for
share buy-back require meticulous care so that
periodic adjustment to market movement in
property and rental prices reflects a “winwin”deal.
 Have
a good day 
 May God bless you
 Thank you & Wassalam