International Conference of Global Islamic Studies 2014

Modern Application of Baiʿ al-ʿīnah (Same-item Sale-repurchase) in the Malaysian Banking and Finance Industries: An Analysis on Islamic Personal Finance Amir Fazlim Yusoff Postgraduate Researcher Universiti Kebangsaan Malaysia (Malaysia), University of Aberdeen (UK) University of Aberdeen, School of Law, Taylor Building, Old Aberdeen, AB24 3UB, Scotland, United Kingdom amiryusoff@abdn.ac.uk +447707650996 Abstract The instrument of baiʿ al-ʿīnah is a controversial financing method applied in the Malaysian banking and finance industries. Despite being banned by the Islamic Fiqh Academy of the Organization of the Islamic Conference (OIC), the Muslim World League (MWL), the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) and the al-azhar, the Syariah Advisory Council (SAC) of the Bank Negara Malaysia (central bank of Malaysia) and the Securities Commission (SC) maintain that the instrument is permissible according to the school of al-shāfiʿī and al-shāfiʿīyah. The proponent of baiʿ al-ʿīnah relates their ruling entirely on the classical Islamic law pertaining to baiʿ al-ʿīnah without considering its modern practise that may contain prohibited element. The objective of this article is to determine the ruling of the instrument apart from its connection with classical baiʿ al- ʿīnah. It examines the modus operandi of baiʿ al-ʿīnah in personal financing product that has been practised in several Islamic banks in Malaysia. This research depends on textual content analysis, by using Islamic legal methods and maxims. It reveals that when it comes to intentionally executed baiʿ al-ʿīnah through materialised evidence, such as providing a qarḍ (benevolent loan) for a sale, a sale for a sale, selling unavailable or unpossessed item, selling without the responsibility to guarantee and using non Sharia-compliant ḥīlah, the instrument is prohibited. Based on these arguments, any application of baiʿ al-ʿīnah in the Malaysian banking and finance industries, which carries the aforementioned attributes, renders the instrument unlawful even though the instrument is initially permissible according to the school of al-shāfiʿī and al-shāfiʿīyah. Keywords: Islamic Personal Finance Baiʿ al-ʿīnah Same-item Sale-repurchase 41

1. Introduction International Conference of Global Islamic Studies 2014 The instrument of baiʿ al-ʿīnah is widely applied in the Malaysian banking and finance industries such as in personal finance, credit card facilities, real estate mortgages, overdraft facilities, Islamic securities and bond issuance, general investments and money market transactions. Currently, 16 Islamic banks are operating in Malaysia with 10 of them represent local banks while 6 are foreign establishments (Aly, 2004). [i] Some of them are practising baiʿ al-ʿīnah in banking products while some are using tawarruq munaẓẓam or commodity murābaḥah (Nik Norzrul Thani and Madzlan, 2010). This is due to the fact that BNM (2010) has declared both the concepts permissible. Tawarruq munaẓẓam is considered one type of baiʿ al-ʿīnah since its modus operandi bears a resemblance to the latter (Muhammad, 2007). [ii] Both mechanisms are particularly used in Islamic debt-based financing. Since classical Muslim jurists of al-shāfiʿī and al-shāfiʿīyah have delivered their verdict on the permissibility of baiʿ al-ʿīnah, this article examines the application of the instrument in the Malaysian banking and finance industries apart from its relation with classical ruling. It is based on the assumption that the modern practise of baiʿ al- ʿīnah does not reflect the actual classical description of the instrument. 2. Definition According to SAC of SC (2007), baiʿ al-ʿīnah refers to a trading whereby the seller sells his assets to the buyer at an agreed selling price to be paid by the buyer at a later date. After that, the buyer immediately sells back the assets to the seller at a cash price, lower than the agreed selling price. As stated by SAC of BNM (2010) it refers to a contract, which involves sale and buy back instruments of an asset by the seller. In these transactions, the seller sells an asset to the buyer on cash basis and then buys back the asset at a deferred price, which is higher than the cash sale price. It may also be conducted where the seller sells the asset to the buyer at a deferred price and subsequently buys back the asset on cash basis at a lower price than the deferred sale price (Muhammad, 2003). These modern definitions of baiʿ al-ʿīnah are similar to its description in the classical baiʿ al-ʿīnah as described by al-ḥanafīyah (al-sarakhsiy, n.d.), al-mālikīyah (Mālik, n.d.), al-shāfiʿīyah (al-nawawīy, 1985), al-hanābilah (Ibn Qudāmah, n.d.), al-zahiriyah (Ibn Hazm, n.d.), al-jaʿfarīyah (al-ʿāmilīy, n.d.), al- Zaidīyah (al-murtaḍā, n.d.) and al-ibādīyah (ʿAṭfayish, n.d.). However, with regard to definition, the similarity between the classical and modern practise of baiʿ al-ʿīnah alone could not be a reference on the permissibility of its modern practise. 3. Modus Operandi According to conventional finance, moneylending operation generates interest. Islamic banking and finance prohibit such mechanism since it represents al-ribā, which is unlawful according to Sharia (Angelo, 2005). Technically, al-ribā means an increase over the principal in a qarḍ contract, or a debt or in trading transactions, paid to the creditor or a party, as an exchange without similar counter value (Muhammad, 2007). In order to make it lawful, contemporary Muslim jurists particularly from the maḏhab (school of jurisprudence) of al-shāfiʿīyah endorses the mechanism of baiʿ al- ʿīnah as an alternative to the conventional usurious qarḍ (El-Gamal, 2008). Al-Subkīy (n.d.) argues that the mechanism is supposed to be a way to prevent usurious qarḍ rather than committing a qarḍ with ḥīlah (legal device). 42

In a baiʿ al-ʿīnah-based financing instrument, a customer who plans to obtain a qarḍ approaches an Islamic bank. After reaching an agreement, the bank approves the application and identifies certain item for the transaction, such as a car. Subsequently, the bank and the customer sign a first sale and purchase agreement, whereby the bank firstly sells an asset to the customer on a deferred payment basis. Afterward, the bank and the customer sign a second sale and purchase agreement, whereby the bank buys back the same asset from the customer on a cash basis at a price lower than the deferred payment sale. According to the agreement, the customer is obliged to settle his debt in instalment to the bank within the agreed period of time (Roderick, 2008). The operational structure of baiʿ al-ʿīnah is shown in Figure 1. BANK (CREDITOR) CAR CUSTOMER (DEBTOR) The bank as the seller (creditor) sells the car for 12000 to the customer (debtor) in a deferred payment for one-year period. The customer pays 1000 monthly to the bank. The customer sells back the car to the bank for 10000 in cash payment. Figure 1: Process of baiʿ al-ʿīnah instrument between a bank and a customer 4. Analysis on the Modern Practise of Baiʿ al-ʿīnah 4.1 Association with the Prohibition of Two Sales in a Deal The modus operandi of baiʿ al-ʿīnah requires a prior agreement between the bank and the customer in a buy-back process. This is due to the fact that most customers are not familiar with the Islamic finance based on baiʿ al-ʿīnah. The situation requires the bank to teach or guide its customer on how to execute the instrument. The bank needs to instruct the customer to accept the first sale in the form of deferred payment to provide certain profit to the bank. Afterward, the bank certainly needs to ask the customer to sell the traded item back to the bank in a lower price, in order for baiʿ al- ʿīnah to operate and benefit the customer through cash payment. In a simple phrase it means I sell this item to you and you must sell it back to me afterward. The transaction is sometimes called double sale or sale with agreement to resell (Nicholas, 1997). The aforementioned conditional contract related to the application baiʿ al-ʿīnah appears in CIMB Islamic Bank s terms and conditions: If the application of the applicant ("Applicant") named in the application form of Xpress Cash Financing-i ("Facility") has been approved by CIMB Islamic Bank Berhad ("Bank"), the applicant and the bank agrees to execute an agreement in which the bank will sell the asset as determined by the bank 43

(the "Asset") to the applicant and the applicant will purchase the asset of the bank on the purchase price based on the terms and conditions described herein ("Terms"). [iv] (Translation) Obviously, baiʿ al-ʿīnah is a conditional contract between the bank as a creditor and the customer as the debtor. Without the aforementioned steps, there would be no activity of buy-back between the contracting parties since the customer does not benefit from the sale of deferred payment. The prior sale agreement with the intention to resell the traded item indicates the real intention of the contracting parties in the execution of baiʿ al-ʿīnah and it obviously materialises even without being put in the contract documents. In fact, this prior agreement is carried out at the time of the contract as an underpinning element for baiʿ al-ʿīnah. Evidently, the modern practise of baiʿ al-ʿīnah in Malaysian banking and finance industries violates the prohibition of two sales in a deal or providing a sale for a sale as described in an authentic Hadith narrated by Abū Hurairah in al-nasāʾīy (1991): The Prophet forbids (executing) two sales in a deal. A sale for a sale is a transaction whereby a person sells an item with a certain price and simultaneously stipulates that the buyer must sell to him another item with a certain price. The majority of Muslim jurists that includes al-ḥanafīyah (al-sarakhsiy, n.d.), al-mālikīyah (Mālik, n.d.), al-shāfiʿīyah (al-nawawīy, 1997), al-hanābilah (Ibn Qudāmah, n.d.), al-zahiriyah (Ibn Hazm, n.d.), al-jaʿfarīyah (al-ʿāmilīy, n.d.), al- Zaidīyah (al-murtaḍā, n.d.) and al-ibādīyah (ʿAṭfayish, n.d.) concur with the aforementioned interpretation of the hadith. The view of al-shāfiʿīyah is the maḏhab adopted by SAC of SC and BNM. However, only one traded item involves in a baiʿ al-ʿīnah instrument compared to two items that should be traded as mentioned by the aforementioned Muslim jurists. Nonetheless, the issue is not the merchandise per se but more on the element of executing two sales in a deal. It could be executed using one or more merchandises as long as the element of two sales in a deal persists. It is also evident that the modern practise of baiʿ al-ʿīnah differs a lot from its classical description. 4.2 Association with the Prohibition of Selling Unavailable or Unpossessed Item According to the description of baiʿ al-ʿīnah by the Bank Islam Malaysia Berhad (BIMB), it will identify certain item for the purpose of the instrument such as a car. The existence of the traded item is questionable because the customer signs the sale agreement without looking or inspecting the car first. Ironically, the customer does not really know what type of the car that he will buy until the time of the agreement s signature. As stated by Saiful (2008), there were hundreds or thousands of traded items that have been used by the Bank Kerjasama Rakyat Malaysia and the Mayban Finance in their effort to provide baiʿ al-ʿīnah-based transactions. Moreover, financial reporting and disclosure have proved that no genuine sale exists between the bank and the customer because no documentation of asset purchase is evident in the balance sheet of the bank (Saiful, 2010). Evidently, this indicates that the selling and buying process in baiʿ al-ʿīnah transaction is fictitious because it does not involve real asset, thus violates the prohibition of selling unavailable item. 44

The prohibition is based on an authentic Hadith narrated by Ḥakīm ibn Ḥizām in (Abu Dāwūd, n.d.): Do not sell what is unavailable (unowned) to you. The Hadith indicates that selling unowned item is prohibited. Al-Ḥanafīyah (al-sarakhsiy, n.d.), al-mālikīyah (Mālik, n.d.), al-shāfiʿīyah (al-nawawīy, 1997), al-hanābilah (Ibn Qudāmah, 1984), al-zahiriyah (Ibn Hazm, n.d.), al-jaʿfarīyah (al-ʿāmilīy, n.d.), al- Zaidīyah (al-murtaḍā, n.d.) and al-ibādīyah (ʿAṭfayish, n.d.) agree that selling unavailable item is impermissible and renders the contract invalid at the beginning. The reason behind the prohibition is due to the fact that the seller is incapable to deliver the traded item, hence creates uncertainty about it (Babback, 2005). In fact, al- Mālikīyah refers the meaning of the Hadith specifically to baiʿ al-ʿīnah because some practise of the instrument does not involve real trade item (Ibn ʿAbd al-barr, 1986). If the traded item really exists, then the prohibition is not applied to the instrument. The requirement to possess the traded item before the selling process in baiʿ al-ʿīnah instrument is not only restricted to the bank as a creditor. The customer as a debtor is equally required to own the traded item first before selling back to the bank. It is unjustifiable to think that the customer might own the traded item during the selling process if the bank too proved to be not the owner of the traded item. This reality adds more weight to the impermissibility of the instrument. According to Saiful (2008), in some cases where Islamic banks really own the traded item such as a piece of land, the problem with the modern practise of baiʿ al-ʿīnah occurs when the customer sells back the traded item without the requirement to possess it first. The possession of the traded item depends on its type; movables item must be delivered physically and also depends on customary practise, whereas the possession of the non-movables item should demonstrate that the new owner has full authority on his asset without any restriction (al-zuḥailīy, 2002). In this case, the customer has never possessed the land because the buy-back process occurs shortly after the selling in a deferred payment. Normally, the possession of a land requires several procedures such as legal procedures, payment of stamp duty and registration, which takes time to complete. It is obvious that the practise of some baiʿ al-ʿīnah applications in Malaysian banking and finance industries violates the basic requirements of a sale contract, which are the existence, possession and delivery of the traded item, not to mention the prohibition of baiʿ al-ʿīnah per se. 4.3 Association with the Prohibition of Selling without Guarantee When the customer sells an undelivered or unpossessed traded item back to the bank, in the case whereby the traded item does really exist, he is violating the prohibition of selling without the responsibility to guarantee the item. It means that the bank is still responsible for any damage to the traded item under its care until it is delivered to the customer. The issue cause more violation to the sales contract, which renders the modern practise of baiʿ al-ʿīnah invalid. The prohibition is based on an authentic Hadith narrated by ʿAbd Allāh ibn ʿAmrū in (al-tirmiḏīy, n.d.): The Prophet says: It is impermissible to gain profit without a responsibility to guarantee and selling unavailable item. A sale is an act of gaining profit. One cannot guarantee an item unless it is under his possession. 45

However, in the event whereby the traded item does not really exist, there is no significant point of discussion on this topic, because there is no need to guarantee the non-existent item. 4.4 Association with the Prohibition of Providing a Qarḍ for a Sale Proponents of baiʿ al-ʿīnah maintain that the ruling of a contract should be based on its external appearance rather than its inner objective as stated by al-shāfiʿīy (1973). The same ruling applies to the modern practise of baiʿ al-ʿīnah; hence one cannot have suspicion that the instrument aims at approving al-ribā indirectly. However, it is inappropriate to associate al-shāfiʿīy s classical baiʿ al-ʿīnah to its modern practise because there are some differences between the two instruments. It is established from the arguments of al-shāfiʿīy and al-shāfiʿīyah, baiʿ al-ʿīnah is lawful provided that the intention of committing usurious transaction does not materialise at the time of the contract (Oussama, 1997). This is the essence of their verdict on baiʿ al-ʿīnah. Evidently, from their implied or contrary understanding we could deduce that any unlawful intention, which is clearly materialised in relation to the contract, would compromise the validity of baiʿ al-ʿīnah. If we look closely at Islamic bank s product disclosure sheet (PDS), we will discover that all of them regard baiʿ al-ʿīnah as a personal financing-i product. This term clearly indicates that the objective of the instrument is to assist their client with financing, not actually selling trade item to them. [iii] This statement evidently suggests that the instrument s inner objective is no longer indiscernible. As an element of support, Razali (2012) claims that the uncertainty in the instrument is the vagueness related to the intention of the contracting parties, which are deemed deceitful. It is obvious that the proponents of baiʿ al-ʿīnah are using evidence, which is not connected to al-shāfiʿīy s classical baiʿ al-ʿīnah. The modern practise of the instrument is totally different from its classical practise because the element of al-ribā materialises in the form of providing a qarḍ for a sale, which is prohibited in the Hadith narrated by ʿAbd Allāh ibn ʿAmrū in (al-tirmiḏīy, n.d.): The Prophet says: It is impermissible to provide a qarḍ for a sale (in one contract). In order for the customer to obtain a qarḍ from the bank, he is required to commit two sales contracts in return (Walid, 2007). This is the fundamental quality of providing a qarḍ for a sale even though the qarḍ is not clearly mentioned in the transaction. The substance of the qarḍ is materialised from the bank s PDS. As a consequence, the practise of baiʿ al-ʿīnah in Malaysian banking and finance industries obviously violates the view of al-shāfiʿīy and al-shāfiʿīyah in al-nawawīy (1985) related to providing a qarḍ for a sale, not to mention the majority view of Muslim jurists, which include al-ḥanafīyah (al-sarakhsiy, n.d.), al-mālikīyah (Mālik, n.d.), al-hanābilah (Ibn Qudāmah, 1984), al-jaʿfarīyah (al-ṭūsīy, n.d.), al-zaidīyah (al-murtaḍā, n.d.) and al-ibādīyah (ʿAṭfayish, n.d.). 4.5 Association with Ḥīlah Ghair Sharʿīyah (Non Sharia-compliant Ḥīlah) The modus operandi of baiʿ al-ʿīnah reveals that initial objective of the instrument is to provide qarḍ to the debtor. Since Sharia prohibits profit-generating qarḍ, the instrument of baiʿ al-ʿīnah was introduced as alternative way to gain profit from the 46

qarḍ. The element of sale is added into the contract to manifest the sense of permissibility because Sharia evidently endorses its. This mechanism represents ḥīlah because it is not intended to provide a sale contract but rather as a disguise to conceal hidden agenda. According to Ibn Taimīyah (n.d.) and Ibn al-qayyim (1973), ḥīlah represents a changing of certain state of action through hidden process with the help of cleverness to achieve permissible objective. Ḥīlah is permissible provided that the mechanism is carried out based on good intention (al-shāṭibīy, n.d.). However, finding a way to liberate from any hardship is considered a good intention and permissible in Sharia. Hence, such intention in ḥīlah renders it permissible as long as no sign of ill intention established in the contract. The application of ḥīlah also requires Sharia-based instrument as its medium (Ibn al- Qayyim, 1973). According to al-shāṭibīy (n.d.), in order for ḥīlah to be legal, it should not contradict Sharia rulings, principles and its certified objectives. As stated by Ibn al-qayyim (1973), ḥīlah is considered legal if applied to observe religious obligations, disregarding prohibitions, obtaining rights, helping the oppressed, compelling the oppressor and punishing the assailant. The realisation of these elements renders ḥīlah to be Sharia-compliant. The aforementioned application of baiʿ al-ʿīnah in the Malaysian banking and finance industries has been proved to contain the prohibition of providing a qarḍ for a sale, a sale for a sale, selling unavailable or unpossessed item and selling without the responsibility to guarantee. Evidently, the instrument fails to comply with the aforementioned requirements to be a Sharia-compliant ḥīlah. Conclusion This research suggests that when it comes to intentionally executed baiʿ al-ʿīnah through materialised evidence, such as providing a qarḍ for a sale, a sale for a sale, selling unavailable or unpossessed item, selling without the responsibility to guarantee and using ḥīlah ghair sharʿīyah, the instrument is unlawful. Based on these arguments, any application of baiʿ al-ʿīnah in Malaysian banking and finance industries, especially in personal finance, which carries the aforementioned attributes, renders the instrument illegitimate even though the instrument in initially considered valid in the view of al-shāfiʿīy and al-shāfiʿīyah. Unless the prohibited elements are eliminated from the modus operandi of baiʿ al-ʿīnah, the instrument remains valid according to al-shāfiʿīy and al-shāfiʿīyah regardless the status of Hadith that specifically prohibits the instrument. Notes: [i]www.bnm.gov.my/index.php?ch=li&cat=islamic&type=ib&fund=0&cu=0 (accessed 6 December 2011) [ii] www.themwl.org/fatwa/default.aspx?d=1&cidi=155&l=ar&cid=10 (accessed 16 August 2011); www.fiqhacademy.org.sa/qrarat/17-6.htm (accessed 16 August 2011) [iii]www.rhb.com.my/islamic_banking/product-disclosure-sheet/pds_pfi_private.pdf (accessed 14 May 2014); www.affinislamic.com.my/consumer- Banking/Consumer-Financing-i/Personal-Financing-i/Personal-Financing-i/2013-47

AIB-PDS-Personal-Financing-i.aspx (accessed 14 May 2014); www.allianceislamicbank.com.my/personal-banking/financing/personal-financingi/alliance-cashvantage-personal-financing-i.aspx - PDS-tab (accessed 14 May 2014); www.ambankgroup.com/en/islamic/personal/financing/personalfinancingi/pages/def ault.aspx (accessed on 14 May 2014); www.bankislam.com.my/en/documents/consumer/pds-080713- PersonalFinancing.pdf (accessed 14 May 2014); www.bankrakyat.com.my/web/guest/personal-financing-i-aslah-rakan-pintar (accessed 14 May 2014); www.cimbbank.com.my/index.php?ch=19&pg=205&ac=9&bb=attachment (accessed 14 May 2014); www.hsbcamanah.com.my/1/2/amanah/personal/financing/anytime-money-personalfinancing-i (accessed on 14 May 2014); www.kfh.com.my/bpmapp- upload/download/fstore/0a14d004d033d0ca_2718542a_13090a4a452_- 5ac0?fileKey=/fstore/0a14d004d033d0ca_2718542a_13090a4a452_-5ac0/PF- Personal.pdf (accessed 14 May 2014); http://maybankislamic.com.my/download/execash-i_standard-pds.pdf (accessed 14 May 2014); www.ocbc.com.my/ocbcal_amin/download/pds Consumer Cash i- ENG_ibra_v.1.pdf (accessed 14 May 2014); www.publicislamicbank.com.my/pibb/en/en_content/images/bae_personal.pdf (accessed 14 May 2014); www.sc.com/my/_documents/islamic/pf-i/pfi_tnc.pdf (accessed 14 May 2014); www.alrajhibank.com.my/personal_financing_personal_financing-i.shtml (accessed 14 May 2014). [iv]www.cimbbank.com.my/index.php?ch=19&pg=133&ac=302&bb=attachment References Abū Dāwūd, S.A. (n.d.), Sunan Abī Dāwūd, Dār al-fikr, Beirut. al-ʿāmilīy, Z.A. (n.d.), al-rauḍāh al-bahīyah fī Sharḥ al-lumʿah al-dimashqīyah, Dār al-ʿālam al-islāmīy, Beirut. Anas, M. (n.d.), al-mudawwanah al-kubrā, Dār Ṣādir, Beirut. Anwar, M. (2003), Islamicity of banking and modes of Islamic banking, Arab Law Quarterly, Vol. 18, pp. 62-80. Arabi, O. (1997), Intention and method in Sanhuri's fiqh: cause as ulterior motive, Islamic Law & Society, Vol. 4, pp. 200-223. ʿAṭfayish, M.Y. (n.d.), Sharḥ al-nail wa Shifāʾ al-ʿalīl, Maktabah al-irshād, Syria. Ayub, M. (2007) Understanding Islamic Finance, John Wiley & Sons Ltd, West Sussex. 48

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