Academic journal article Global Business and Management Research: An International Journal

Conceptual Understanding of Islamic Housing Loan (Bai-Bithaman Ajil): An Empirical Review

Academic journal article Global Business and Management Research: An International Journal

Conceptual Understanding of Islamic Housing Loan (Bai-Bithaman Ajil): An Empirical Review

Article excerpt


Bai Bithaman Ajil (BBA) house financing is an Islamic financing concept refers to the sale of assets or goods on deferred payments at a fixed price that includes profit margin to the seller. This concept is commonly used in property or asset financing. Bai Bithaman Ajil (BBA) house financing is the popular concept in countries like Malaysia, Indonesia and Brunei. Customer identifies the asset he wants to purchase and approaches the bank for financing. Under the Bai Bithaman Ajil (BBA) house financing concept, the bank will purchase the asset at cost and sell the same to the customer at cost plus profit on deferred payment basis at the duration and price agreed by both parties payable by fixed installment. The current difference between the fixed-rate Bai Bithaman Ajil (BBA) house financing and the conventional mode is that once the profit rate is fixed in the Bai Bithaman Ajil (BBA) house financing, let say at 7% per annum, it will remain the same for the entire duration of financing. The total cost of financing is known upfront at the time of the contract and hence there is no uncertainty or Gharar. Bai Bithaman Ajil (BBA) house financing concept enables the customers to plan their cash flow accurately since their payments would not influence by fluctuating interest rate.

On the other hand, the total cost of the property purchased is determined at the time of contract or 'aqad by applying BBA concept. There is no additional or hidden cost that will change the price of the property purchased. Customers will know exactly when the financing will end. Besides, there will be no compounding of arrears and outstanding penalty charges. Presently there is also no additional/penalty charge on outstanding miscellaneous charges In general, Islamic banks are characterized by the following features:

1. Transactions that is free from the payment and receipt of a fixed or predetermined rate of interest

2. Transactions that are based on profit and loss sharing (PLS) arrangements where the rate of return is not fixed prior to the undertaking of the transactions

3. Business activities and investments that is undertaken on the basis of permissible activities

4. Transactions that is free from elements of gharar (unreasonable uncertainty)

5. Payment of Zakat (alms or taxes) by the bank

6. Transactions that operate through Shariah-compliant modes of financing. Another salient feature of Islamic banks is the requirement for the establishment of Shariah supervisory boards. These boards are responsible for reviewing, scrutinizing and endorsing the activities and operations of Islamic banks to ensure that their activities are in line with Shariah principles.

Islamic banks today represent the majority of Islamic financial institutions, which are spread worldwide. The emergence of Islamic banking was a result of a revival of interest to develop an Islamic economic system as well as the increasing demand from Muslims worldwide for products and modes of investment that are in compliance with Shariah principles. The pioneering establishment of Islamic banks had been the catalyst for growth and provided the foundation for the development of the Islamic financial services industry as a whole.

In the ten years since the establishment of the first private commercial bank in Dubai (1974), more than 50 interest-free banks have come into being. Though nearly all of them are in Muslim countries, there are some in Western Europe as well: in Denmark, Luxembourg, Switzerland and the UK. Many banks were established in 1983 (11) and 1984 (13). The numbers have declined considerably in the following years. As a country which population is dominated by Muslims, Malaysia was also affected by the resurgence that had taken place in the Middle East. Many parties were calling for the establishment for an Islamic bank in Malaysia. For example, in 1980, the Bumiputera Economic Congress had proposed to the Malaysian Government to allow the setting up of an Islamic bank in the country. …

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