Bai Inah not contrary to Islamic banking

By HABHAJAN SINGH
AFTER reversing High Court judge Datuk Abdul Wahab Patail's judgment on Al-Bai Bithaman Ajil (BBA), a widely used Shariah enabler in Islamic financing, the Court of Appeal last week also overturned a judgment on the concept of Bai Inah.
Last Wednesday [Apr 1, 2009], the Court of Appeal ruled that Bai Inah, the concept of sale with an imediate repurchase widely used for personal and corporate financing, is a valid transaction, overturning Abdul Wahab's contention that the application of the Bai Inah contracts were against Islamic banking regulations.
The Court of Appeal bench was made up of judges Datuk Md Raus Sharif, Datuk Abdull Hamid Embong and Datuk Ahmad Maarop — the same bench that had delivered what would be a much discussed judgment just the day earlier.
They had earlier delivered the ruling in the case of Bank Kerjasama Rakyat Malaysia Bhd v Fadason Holdings Sdn Bhd and three others.
It was also the same bench that delivered the BBA judgment on March 31. As in the earlier BBA judgment, this ruling will also see local Islamic financial institutions breathing a lot easier now that the matter has been clarified and the Shariah concept cleared for use.
"This judgment will see Bank Rakyat letting out a huge sigh of relief. They have a huge portfolio wrapped around the Bai Inah concept," a banker with a local Islamic bank told The Malaysian Reserve. "We are talking about financing, including personal financing, running into billions of ringgit," he added.
Since Abdul Wahab's string of judgments, mostly dated July 18, local Islamic banks have been rattled on the point of whether their contracts are Shariah-compliant, a key element that has to be observed diligently in any Islamic finance transaction or contract.
These have revolved around the concepts of BBA and Bai Inah, both heavily used by various Islamic financial outfits on the local front, but rejected by Shariah scholars in most jurisdictions in the Middle East and some other parts of the world.
In this most recent case, Khairuddin Abd Ghani from Amir Ruhana & Khairuddin appeared for Bank Rakyat while the respondents were represented by S L Tan of SL Tan Associates.
The court is expected to deliver a written judgment later. On March 31, the same bench had unanimously reversed Abdul Wahab's judgment that BBA contracts were contrary to Malaysia's Islamic banking regulations in Bank Islam Malaysia Bhd v Ghazali Shamsuddin & two others, and nine other cases.
The Malaysian Reserve first reported on Abdul Wahab's BBA judgement on Sept 8, 2008, sending shockwaves through the local Islamic banking fraternity as they began deciphering its impact. Until the news broke, many Islamic finance bankers and lawyers had not had the chance to read Abdul Wahab's 54-page written judgment dated July 18, but which was made available to lawyers involved in the case only sometime in August.
In Bank Rakyat's case, the cooperative bank is claiming from Fadason and three others the sum of RM2.47 million, as at 2004, being the balance from a RM10 million facility granted under the Bai Inah concept.
On the concept of Bai Inah, Abdul Wahah wrote that it is a combination of two separate agreements, the first being the Al-Bai, meaning a sale by the financier to the client, and the second being the buyback by the financier from the client. The purchase price paid by the financier under the second agreement and the deferred payments under the first agreement provides the client with the immediate funds that he desired, and the facility to pay back over a period of time, he added.
In this case, the facility was provided under the Bai Inah concept by the bank selling five blocks of shares quoted on the stock exchange for RM12.31 million (being the sale price) to be paid by the clients in 18 monthly instalments.
On the same day, the bank purchased from the clients the shares for RM10 million, thus making a profit of RM2.31 million while the client obtained funds amounting RM10 million.
In the earlier High Court written judgment, Abdul Wahab acknowledged that Bai Inah is an acceptable concept as it is approved by Bank Negara Malaysia's Shariah Advisory Council.
However, he had deemed the "profit element" as riba, or usury, an element expressly forbidden in Islam.
He wrote: "Such increase or profit may not have been expressed as a percentage but as a sum, but it is no less riba in a usurious loan. "Upon the facts of this case, the foregong reasoning leads to the conclusion that the Bai Al-Inah transaction as impleented contains the element of riba, an element not approved by the Religion of Islam."

(This story appeared in The Malaysian Reserve on Apr 7, 2009. The Malaysian Reserve is a daily business/finance newspaper published out of Kuala Lumpur, with a sectoral page on Islamic finance on Mondays, edited by Habhajan Singh)