Introduction

Islamic banking is banking or banking activity that is consistent with the principles of Islamic law (Sharia) and its practical application through the development of Islamic economics. Sharia prohibits the fixed or floating payment or acceptance of specific interest or fees (known as Riba or usury) for loans of money. Investing in businesses that provide goods or services considered contrary to Islamic principles is also Haraam (forbidden). While these principles may have been applied to historical Islamic economies, it is only in the late 20th century that a number of Islamic banks were formed to apply these principles to private or semi-private commercial institutions within the Muslim community.

Bai Innah Concept (sale & buy back)

(i) (ii) The alternative to the customer who does not have any unencumbered asset. Bank may first sell its asset to the customer on deferred payment. Subsequently the customer re-sells the asset to the Bank for cash at a lower price than the customers original purchase price. So, the Bai Inah transaction is a combination of 2 successive contracts of sale:A credit sales (by the Bank) and; A cash sales (by the Customer).

Illustration: o o Customer requires RM30,000 cash and will back pay back the amount in 5 The Bank is wiling to provide this sum to the customer and its profit over 5 years time together with profit. years is say, RM10,000. Underlying the Sell and Buy Contract 1. The Bank sells an asset owned by the Bank to the customer on credit terms under Asset Sale Agreement (ASA). The sale price is RM40,000 (RM30K+RM10K). 2. Customer will agree to pay the sale price over the agreed period of 5 years by installments.

3. Then, customer sell the same asset back to the Bank on cash term under Asset Purchase Agreement (APA). Purchase price = Facility amount = RM30K. 4. Bank will pay the Purchase Price immediately to Customer.

There are differences of opinion amongst the scholars on the permissibility of Bai' al 'inah, however this is practised in Malaysia (A set of strict conditions must be complied) and the like jurisdictions.

The Rulings On Bai' 'Inah

One of the unique characteristics of islamic banking and finance is Shariah compliance, whereby islamic bank or islamic financial institution in its operation and business must be in line with the Shariah principles and rulings. Therefore, Shariah compliance is very critical issue which differentiate islamic bank from other conventional banks which involved in certain activities or transactions which are not allowed by Shariah such as riba ( usury ). The Regional Shariah Scholars Dialogue, which was held on 28th and 29th June 2006, aims at harmonizing and promoting understanding amongst the Shariah scholars, who are involved in Islamic finance. The dialogue had specifically focused on finding the best solution to resolve the issue of the use of bai` `inah and tawarruq in the Islamic financial system. The Council and the participating Shariah scholars had taken a comprehensive approach with regard to bai` `inah and tawarruq transactions. Resolution The Council, in the Regional Shariah Scholars Dialogue on 29th June 2006 / 3rd Jamadil Akhir 1427, resolved that: 1. The permissibility of bai' 'inah and tawarruq is still a matter of juristic disagreement among the Shariah scholars, backed by their own basis of justifications; 2. The basis relied upon to justify the permissibility of tawarruq is similar with the basis to justify the permissibility of bai` `inah. Therefore, both concepts shall be ruled similarly; 3. Bai' 'inah is still necessary in the context of local Islamic finance development. However, the market players are required to strengthen and enhance the operational processes and documentation, to comply with the features of bai` `inah, as permitted; and 4. Since bai` `inah is still regarded as a matter of juristic disagreement among the Shariah scholars, it is more desirable that Islamic financial institutions limit its use in

products which face difficulty in structuring them, based on other consensually accepted contracts.

Arguments in the Permissibility of Bai Inah

Bai Al Inah is not acceptable by the Middle Eastern countries, however, is practiced in Malaysia. Some of the scholars regard Bai Al Inah as part of Interest-based transactions and therefore conclude that this is unacceptable under Shariah law. (Bank Negara Malaysia). The Maliki and Hanbali jurists feel that this method of sale is illegal as it constitutes a legal device to obtain a loan with interest, which is not allowed under the Shariah. They based their opinion on the Prophets Sunnah, in which he was reported to have said: And when men become filled with greed towards money (Dinar and Dirhams) and transact through Ainah, and leave out jihad, remember that calamity will strike them until they turn back to their religion.

Opinions of Past Islamic Jurists Past Islamic jurists had differing views on determining the hukm on Bai Inah. Their views as below:Bai Inah was not permissible because it was the zariah (way) or hilah (legal excuse) to legitimize riba (usury). The Hanafi Mazhad was of the opinion that bai inah was permissible only if it involves a 3rd party, which acts as an intermediary between the seller (creditor) and buyers (debtor). The Maliki and Hanbali Mazhab, on the other hand, rejected bai inah and considered it invalid. Their opinion was based on the principle of sadd zariah that aims to prevent practices that can lead to forbidden acts such as, in this case, riba.

The basis for the opinion of the majority of the Islamic jurists was the hadith dialogue between Aishah and Zaid Bin Al-Arqam which showed the prohibition of bai inah. They also held to the hadith of the Prophet S.A.W. in which he warned that those who practiced bai inah would suffer scorn. The SyafiI and Zahiri Mazhab viewed Bai Inah as permissible. A contract was valued by what is disclosed and ones niyyah (intention) was up to Allah S.W.T. to judge. They criticized the hadith used by the majority of the Islamic jurists as the basis for their argument, saying that it (the hadith) was weak and therefore could not be used as the basis for the hukm. From the study done on the opinions of past Islamic jurists on the issue of bai inah, the SAC decided to accept the opinions of the SyafiI and Zahifi Maxhab in permitting baiinah. Therefore, it can be developed into a product for the Islamic capital market in Malaysia. When institutions or individuals are in need of capital for a specific purpose they can utilized this method of payment, using their assets as mortgage. As they still need the assets, this method allows them to liquidate without losing the asset.

Current practice of the application

Bai Inah concept is used in Malaysia Islamic banking system and capital market to facilitate the needs of market players when Islamic financial industry was first pioneered in the country. Even through, majority of Shariah scholars disallow this concept, some of them are of the opinion that it is acceptable as long as all the pillars and conditions of the contract are complied with. Based on this opinion, bai inah concept is accepted to be practiced in Malaysia to ensure that Islamic finance is as competitive as its conventional counterpart. Among others, this concept is applied in money market transaction, bond issuance, debt securitization and credit card facility.

Current issue of Bai Inah in Malaysias Islamic finance

On Apr 1, 2009, the Court of Appeal ruled that Bai Inah, the concept of sale with an immediate 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.)

Islamic Banking Comparison to Conventional Banking Islamic Shariah compliant banking products (halal) Fixed rate financing / variable with a ceiling rate Buy and sell contract with profit & not a merely money lending transaction Under the concept of buyer and seller with option for rebate Financing for all kind of Shariah business activities Conventional Non-Shariah based banking products Variable rate without capping Money Lending with interest Under the concept of debtor-creditor relationship Lending for all kind of business activities

Islamic banking has the same purpose as conventional banking: to make money for the banking institute by lending out capital. Because Islam forbids simply lending out money at interest (see riba), Islamic rules on transactions (known as Fiqh al-Muamalat) have been created to avoid this problem.

Benefits of Bai Inah Transactions are definite based on buy and sell contract. 20% stamp duty remission as incentive until 31-12-2015. No compounding of charges and compensation

Tawarruq Concept
Tawarruq is not a contract but is one of the concepts under the Shariah. It Widely used by the middle eastern bankers as it is the most acceptable New concept to be adopted in Malaysia especially among the local banks In the market, Tawarruq based product is known as Commodity Murabaha can be used to structure both deposit and financing products. approach for creating moneyin Islamic banking

An illustration of the basic tawarruq process:

Nowadays, it is commonly used by Islamic banks as a mode of financing (for example, for personal financing) as well as an important tool for liquidity management (for example, by means of short-term placement mechanism involving the sale and purchase of commodities on the international commodities market i.e. commodity murabaha). An example of the current utilisation of tawarruq is as offered by HSBC Amanah's Personal Finance, where the customer buys metals from the bank at a pre-agreed profit margin (which sum is payable in instalments), and then sells the metals on the customer's behalf to an international broker (wthe proceeds of which sale is transferred into the customer's account. Bank Muamalat Malaysia Berhad also utilises tawarruq in its Muamalat Cash-Line Facility-i, which is offered for working capital purposes. The basic form of tawarruq is considered permissible by all four schools of Islamic thought. Types of Tawarruq: "Classical tawarruq" or "real tawarruq" is the traditional method of tawarruq whereby the financier sells the goods to the mutawarriq, who then disposes of the goods in the open market.

"Organised tawarruq" or "managed tawarruq" is the term bestowed on the type of tawarruq practised by Islamic banks today, i.e. where the financier manages the tawarruq process. One example is when the financier sells the goods to the mutawarriq, financier or its nominee is then appointed the mutawarriq's agent to on-sell the goods on his behalf on the open market. "Reverse tawarruq" is similar to organised tawarruq but where the bank is the mutawarriq/customer seeking liquidity. The Difference Between Tawaruq and Bai Inah: Bai Inah is a mode of financing wherein the financier sells goods to the customer on credit terms, with a mark up of the price, and subsequently purchases the same goods from the customer at the spot price. Although Bai Inah is accepted in Malaysia, it has not been accepted as a shariah-compliant financing instrument in the Middle East as it is considered a legal fiction, in that there is a buy-back of the goods on the part of seller; therefore the sale and purchase transaction is merely to create a debt obligation which is no different from, or tends to lead to, usury. Usury is not permitted in Islamic transactions, pursuant to the oft-quoted Quranic source, Al-Baqarah:275 "Those who consume interest cannot stand [on the Day of Resurrection] except as one stands who is being beaten by Satan into insanity. That is because they say, "Trade is [just] like interest." But Allah has permitted trade and has forbidden interest. So whoever has received an admonition from his Lord and desists may have what is past, and his affair rests with Allah. But whoever returns to [dealing in interest or usury] - those are the companions of the Fire; they will abide eternally therein." Tawarruq is distinguished from Bai Inah in that there is no buy-back; rather, the mutawarriq is free to dispose goods to any other party on the open market. Therefore, it is seen as a true sale and therefore permissible. Tawarruq Now: As previously stated, tawarruq is, among others, an important tool for Islamic banks to manage their liquidity requirements. It is also seen as a shariah-compliant alternative to Bai Inah. However, the Fiqh Academy of the Organisation of Islamic Conference ("OIC Fiqh Academy"), has, by its Resolution No. 179 (19/5) at its 19th Session held on 26-30 April 2009, held that although classical tawarruq is permissible (so long as it complies with the requirements of sale transactions), organised tawarruq and reverse tawarruq are not permissible.

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Even so, in the absence of a more suitable mode of transaction, tawarruq continues to be utilised by Islamic banks. Indeed, some scholars have even argued for the continued use of tawarruq, albeit with some changes so as to strengthen the structure so as to avoid those practices which violate the shariah. Out of the four Islamic juristic schools, only the Shafii school accepts the validity of Bai Inah as it looks to the form of the transaction, i.e. the existence of two valid sale transactions, rather than the intention behind it. Bank Negara Malaysia's Shariah Advisory Council has resolved in its meeting held 12 December 1998 that notwithstanding the objections to Bai Inah by the majority of shariah scholars, Bai Inah is acceptable subject to certain conditions, i.e. that the mechanism practiced is as that accepted by the Shafii school, and the transacted item is not a ribawi item (goods subject to Fiqh rules on riba in sales, meaning monetary units and items sold by weight and/or measure).

Conclusion
Bai al Inah is a financing facility with the underlying buy and sell transactions between the financier and the customer. The financier buys an asset from the customer on spot basis. The price paid by the financier constitutes the disbursement under the facility. Subsequently, the asset is sold to the customer on a deferred-payment basis and the price is payable in installments. The second sale serves to create the obligation on the part of the customer under the facility. There are differences of opinion amongst the scholars on the permissibility of Bai al Inah, however, this type of sale is practised in Malaysia.

References
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Understanding of Bai Inah by Mohamed Ismal Mohamed Shariff Tawarruq Overview & Disccsuion http://azamlaw.com/index.php?p=article001 Bai Inah not contrary to Islamic banking The Malaysian Reserve on Apr 7, 2009. edited by Habhajan Singh Rammal, H. G. and Zurbruegg, R. (2007). Awareness of Islamic Banking Products Among Muslims: The Case of Australia. Journal of Financial Services Marketing, 12(1), 65-74. Saeed, A. (1996). "Islamic Banking and Interest: A Study of the Prohibition of Riba and its Contemporary Interpretation". Leiden, Netherlands: E.J.Brill.

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