+Islamic Banking

BK5503

Personal Financing Bank Rakyat (Bay-al-Inah)

Presented by :Mohammed Arshadullah (0800905)

Modhaa Munjid(0801015)Amirudeen Hamid Sultan (1100001)

+Layout

Product Description

Contract AnalysisAqadLegal Documentation Impact on Financial StatementAdvantages and Disadvantages

Conclusion

+Product Description

Product: Bank Rakyat Personal Financing-I ASLAH (BRPF)

Based on Bay-al-Inah contract

Most Successful in the Malaysian market

Bank earned a name for itself in the market as ‘House of Inah’ due to it’s successful record (off the record)

Used mainly for facilities upto RM 200,000 with a 20 year repayment period

+Product Description

PERSONAL FINANCING-I ASLAH

Our personal financing facility can assist individuals in meeting financial obligations e.g. down payments for a car, houses, home renovations and others.

 Concept Bay-al-Inah

 Eligibility Malaysian citizens between the ages of 18 and 55 years (58

years old - government employees only) Government employees with a minimum income of RM700.00 Private sector employees with an income of RM3000.00 Employees in service for not less than 3 years

+Product Description

Financing of up to RM200,000.00* or monthly deductions not exceeding 60% of gross monthly income 

Repayment Period

Maximum of 20 years 

Repayment Method 'Biro PerkhidmatanAngkasa (BPA)' Employee Salary Deduction Savings Account Deduction

Special Features Low monthly installment Fast Approval No guarantor and collateral*

Profit rate as low as 3.25% *Terms and conditions apply

+Product Description

+Product Description

+Contract Analysis - AQAD

Literally: Aqad means “to join” and “to tie”. Thus, the term has an underlying idea of joining the intentions and declarations of two parties.

Terminologically: Aqad in the general sense applies to every act undertaken by an individual with firm determination. Aqad in the specific sense is defined as “a combination of an offer and acceptance which gives rise to certain legal consequences”.

Mejella: Defined Aqad as “the obligation and engagement of two contracting parties with reference to a particular matter”.

+Contract Analysis - AQAD

The Elements of Aqad:

Buyer and seller: Both parties must have complete capacity, which means that they have reason (Aql) and discretion (Rushd).

Price: The price must be set on the spot and must be known to the buyer.

Subject matter: The subject matter should be lawful and owned by the seller, it should be deliverable, and should be precisely determined at the time of contract.

Offer and acceptance: The form of the contract must comprise an offer from one party and an acceptance from the other. Moreover, is necessary that the acceptance must conform to the offer in all its details.

+Bay-al-Inah- Classical Transaction

Figure – 1: Structure of Classical Transaction

B

(1)

(2)

A sells asset to B on credit basis

B sells asset to A on cash basis

A

+Bay-al-Inah – Shariah view

Bay-al-Inah: “Refers to a sale of an asset, which is later repurchased at a different price, whereby the deferred price is higher than the cash price”.

Al-Zaila’i: “It is a deferred sale of an asset with a subsequent repurchase of the same asset at a lower cash price.”

Al-Kharshi: “It is paying less for more”.

Al-Shafi’i: “It is a credit purchase of an asset which is later sold to the original owner or a third party, at a spot price higher or lower than the first contract, provided that the second sale is not connected to the first sale”.

IbnQudamah: “It is a sale of an asset with a deferred price, and buys back the same asset at a lower price”.

+Bay-al-Inah – Shariah view

Permissibility of Bay-al-Inah:

Scholars are divided into two groups regarding the permissibility of Bay-al-Inah.

Those who consider it impermissible: The first group of scholars who reject Bay-al-Inah and consider it a forbidden transactionare the Hanfies, Malikis, Hanblis, and some Shafies.

Those who consider it permissible: The second group of scholars who accept Bay-al-Inah and consider it a legal and permissible transaction are Imam Shafi’e and some Shafies.

+Bay-al-Inah – Shariah view

Evidence for the rejection of Bay-al-Inah:

Hadith #1: “If you sell and purchase based on inah, and you cultivate, and you are satisfied with the cultivation, and you ignore the duty to do jihad, Allah SWT will curse you and He will not remove the spell until you return to your religion”.

Hadith #2: “If the people count every single dinar and dirham, and sell and purchase based on inah, and cultivate the land, and abandon the duty of jihad for the sake of Allah SWT, Allah SWT will befall misfortune on them, and will not remove it from them until they return to their religion.”

Reason: Inah is prohibited because it is a device that aims to circumvent the prohibition of Riba.

+Bay-al-Inah – Shariah view

Evidence for acceptance of Bay-al-Inah:

Hadith #1: Al-Hafiz Al-Mundhri stated that some narrators of the Hadith are not up to the required standard. However, Ibn Al-Qayim said otherwise.

Hadith #2: IbnHajr considered this Hadith as weak, because of some issues in the Sanad of the Hadith. While Ibn Al-Qattan considered it as authentic Hadith.

Reason: Inah is permissible and is in line with Shari’ah principles, if we look at the externalities of the contract.

+Contract Analysis – AQADBank Rakyat Personal Financing-I ASLAH (BRPF)

Activity 1: Customer approaches Bank with ‘Facility’ request2: Bank gives offer letter to be filled up by the customer3.Once filled, the bank offers to sell its shares to the customer at C+I on deferred payment basis4. Customer is made to ‘touch’ the Certificate of shares as part of Aqad procedure5. Customer sells back the shares to the Bank at C price on cash

basis

Figure – 2 : Structure of Bank Rakyat Personal Financing Transaction

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Figure – 3: Structure of Interest-Based Loan

Contract Analysis – AQADBank Rakyat Personal Financing-I ASLAH (BRPF)

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The amount ‘I’ constitutes Riba under both structures.

Activity 3 in Figure - 2 involves a mere debt creation exercise.

There is no sale in the real sense, as the commodity does not move from the bank to the client.

The net result of the above two activities are similar to the conventional loan transaction.

Under bay-al-Inah, the market price of the commodity need not bear any relationship with the amount effectively borrowed. There is no genuine trade and exchange in bay-al-Inah.

The values C or C+Ineed bear no relationship with the market price - cash or deferred price of commodity X.

The repurchase in bay-al-Inah is for the amount that the client needs to borrow. The deferred sale is for the loan amount plus profit/interest.

Contract Analysis – AQADBank Rakyat Personal Financing-I ASLAH (BRPF)

+Contract Analysis – Legal Documentation

Intent of the transaction:

The customer is applying for a financing facility to be used for a specific purpose, mentioned in the “asset purchase agreement” Preamble B, clause 10 (ASA).

In preamble B of the asset purchase agreement, the bank states that this transaction is a financing facility.

Clause 2 (a) states that the purchase price is the total amount of the financing facility granted by the bank to the customer

Purpose behind the transaction is not a normal sale and purchase, but a means to receive a loan (Lending and Borrowing).

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Two sales in one sale:

• The content of preamble (C), clause 1, clause 29 (b), clause 7 (b), clause 32, second schedule section 1 of the (ASA), and the content of preamble (C) of the (APA), show that both the (ASA) and the (APA) are linked and dependent upon each other.

• In preamble (C) of the (ASA) and (APA), the sale and purchase mechanism is mentioned in one sentence.

• Clause 1 and clause 29 (b) of the (ASA), show that the selling price is determined by the purchase price.

• Clause 32 of the (ASA) states that the sale and purchase agreements are instruments employed in one transaction.

• Section 1 of the second schedule shows that the customer will start paying the installments only after receiving the purchase price.

Contract Analysis - Legal Documentation

+Contract Analysis - Legal Documentation

Two sales in one sale (Shariah view):

The ban on combining two sales in one sale is reported in a number of Hadiths.

Abu Hurairah peace be upon him said: “Prophet Muhammad peace be upon him prohibited two sales in one”.

IbnMasud peace be upon him said: “Prophet Muhammad peace be upon him prohibited two deals in one”.

The above mentioned clauses show that the fulfillment of the first sale (ASA) is conditional upon the fulfillment of the second sale (APA).

+Contract Analysis -Legal Documentation

Transfer of ownership:

Clause 4 of (ASA), and the content of preamble (A) and clause 5 of (APA), - bank has legal ownership of the asset.

Clause 4 of (ASA), and clause 5 of (APA), - beneficial ownership of the assets shall pass to the customer, upon execution of the agreement.

Preamble (A) of (APA) - bank is the legal owner of the asset.

Clause 7 of (APA) – Bank to be indemnified by customer for damages arising from assets.

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Transfer of ownership (Shariah View):

Sale transaction must result in the transfer of title to buyer.

Passing of beneficial ownership alone, without the legal ownership does not constitute full transfer of ownership.

When the customer sells back the asset to the bank he is selling something that he does not own.

The Holy Prophet (PBUH) said “do not sell what you don’t own”.

Ownership risk to reside with owner.

Contract Analysis - Legal Documentation

+Contract Analysis - Legal Documentation - Miscellaneous

No Collateral. Unsecured loans. No security deposit except for two months of advance payments.

This payment is deducted from ‘Facility’ amount before disbursement

If guarantor is required, guarantor signs a Letter of Guarantee and BPA authorization

Stamp duties are applied only on Sale agreement (when Bank sells to the customer) and not when the Bank purchases from customer

It is one sided contract as all the Stamp duties, taxes or any legal costs are borne by the customer

Defaults handled by the centralized recovery units Late payment charges – paid at predefined rate and credit to

Bank’s profit account – clause 8 (ASA) Restricted use of Purchase price (Loan amount) – clause 6 (APA)

+Contract Analysis - Financial Statement

+Contract Analysis - Financial Statement

+Contract Analysis - Financial Statement

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74% of the revenues are derived from Financing and advances

Bank made highest profits (~70%) from Personal Financing from among the Financing products

This product is based on Bay-al-Inah contract

72% of the profits from the Islamic contracts is earned from Bay-al-Inah contract

Low rate of default – less than 3.01 % of NPL

Contract Analysis - Financial Statement

+Contract Analysis - Financial Statement

Industry leader in Personal Finance

Main reason for higher profits rate from this instrument can be attributed to: Secure recovery. Repayment deduction from the source – Employers Majority customers – Government employees Tie-ups with organizations like BPA for loan recovery

+Advantages and Disadvantages of Bay-al-Inah

Advantages

Provides an opportunity to fulfill basic necessities.

Provide equitable distribution of wealth.

Enables the shareholders/depositors to profit.

Disadvantages

Enrich the shareholders/depositors at the expense of the customers.

Increase the amount of dept in the society.

Perform Hilah to circumvent the prohibition of Riba

+Conclusion

Intent of transaction is to provide loan

Two sales in one sale transaction

There is no actual transfer of assets from Bank to customer and vice versa.

The customer legally does not own the assets.

Bank used to own and show computers as underlying asset of the Aqad at least. No more required to do so.

In some cases there need not be any certificate at all.

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THANK YOU

(And No Questions Please )