BNM asks banks to review over-reliance on BBA

By Habhajan Singh
Bank Negara Malaysia (BNM) has "strongly advised" Islamic banks to review their heavy reliance on Al-Bai' Bithaman Ajil (BBA) concept in their transactions.
The reminder from the central bank to Islamic banking institutions (IBIs) comes hot on the heel of a number of recent High Court judgements declaring a number of BBA-based home financing contracts to be contrary to Malaysia's Islamic Banking Act 1983 (IBA).
The concern on BBA was raised in the central bank's circular to to all chief executives of Islamic financial institutions, a copy of which was viewed by The Malaysian Reserve.
"IBIs are strongly advised to revisit the use of BBA as the underlying concept for providing Islamic financing particularly in financing of uncompleted properties," it told the chiefs of local Islamic banks and banks operating Islamic windows.
The BNM circular is dated Sept 8, the very day The Malaysian Reserve first reported on BAA judgement by High Court judge Justice Datuk Abdul Wahab Patail, sending the industry into a tailspin with regards to their heavy realiance on BBA.
BBA refers to the sale of goods on a deferred payment basis at a price which includes a profit margin agreed to by both parties. The concept, hugely popular in Islamic home financing from local banks, has been the lynchpin of billions of ringgit worth of home financing for some two decades now.
The BNM circular itself noted the industry's seeming over dependence on BBA, adding that BBA is a Shariah concept introduced more than 20 years ago to facililtate growth and development of the Islamic finance.
"Since then, the dynamism of Islamic finance over the years has seen a multitude of Shariah concepts that may be employed to better suit current environment," it said.
Signed by Bakarudin Ishak who heads BNM's department for Islamic banking and takaful, the circular was seen as an effort to get the industry to think beyond BBA, which is already happening with some banks introducing home financing via the concept of musharakah mutanaqisah (diminishing musharakah).
"Truth be told, local Islamic players have been overly reliant on BBA. The entire industry, in fact, is built around BBA," says one Shariah scholar.
In one 54-page judgement dated July 18, Justice Abdul Wahab ruled that the application of the BBA contracts before the court were contrary to the IBA, taking note that the sale element in the BBA is "not a bona fide sale" and bringing into question the profit portion of the facility.
The written judgement was a collective judgement for 11 separate cases involving Bank Islam Malaysia Bhd and one case involving Arab-Malaysian Finance Bhd, as the plantiffs.
At the heart of the written judgement by Justice Abdul Wahab is that since some BBA contracts were structurally faulty, defaulters need not pay more than the original financing amount that they received, depriving banks of the profit that they would have otherwise booked from the transaction.
Bankers also fear the judgement could mean that current BBA financing clients would only need to pay the facility amount and would escape from paying the profit portion.
Some of the players big into Islamic financing include CIMB Bank Bhd, Malayan Banking Bhd, Bank Islam Malaysia Bhd and Public Bank Bhd, all of whom have home financing facilities based on the BBA concept.
It is understood that the banks are appealing to the Court of Appeal to over turn the judgement, which has become a major point of discussion since this paper brought the judgement into the public domain.
BNM has yet to reply to queries from The Malaysian Reserve on the potential implication of the judgements.
(THE MALAYSIAN RESERVE, Oct 13, 2008, Page 1)