UAE Laws and Islamic Finance

Laws of the UAE and Islamic Finance

Al-Bai’ Bithaman Ajil (Credit Sale or Deferred Payment Sale Without Interest)



Al-Bai’ Bithaman Ajil  

This concept refers to the sale of goods on a deferred payment basis at a price, which includes a profit margin agreed upon by both parties.  The profit is not an interest payment, however, it is part of the sale price.    (Wikipedia)

Al-Bai’ Bithaman Ajil  may consist of an agreement whereby a bank buys an asset and sells the asset to a third party customer at an agreed defined price, which the customer is obliged to pay on a deferred basis such as by periodic installments over a defined period of time.  This appears to be the same as a sale and purchase agreement in conventional finance whereby the vendor permits the purchaser to pay the sale price by installments, however, in the Islamic concept, the sale must satisfy the relevant Sharia’h requirements.

In sum, Al-Bai’ Bithaman Ajil is a Sharia’h complaint sale- and- purchase agreement  for the purpose of financing an asset on a deferred payment basis with a mutually pre-determined payment period.  The sale price includes a profit margin, which is not an interest payment.  

‘The authority of the Bai’ Bithaman Ajil is found in the Sunnah in which the Prophet (PBUH) was reported to have said:

‘Three things done, which have a blessing in it, namely, credit sale, Muqaradah (Mudharabah) and a mixture of flour and barley for the purpose of invitation and not for the purpose of sale.’

One does not need to have a legal interest or be a registered proprietor of the property or have full beneficial interest in the property to be able to sell the property in an Al-Bai Bithaman Ajil transaction.  After the customer has executed the sale –and- purchase agreement with the vendor, the customer has the right ‘to sell’ the right to the property to the financing bank for the loan amount.

Nothing in Islamic Law dictates how the price for such a sale is determined. The sale amount is simply the price, which the parties mutually agree to.  Therefore, nothing prevents the seller from linking the sale price to the period of time for which the credit is extended.’ (and utilizing the time value for money concept).

((*The Law and Practice of Islamic Banking and Finance by Dr. Nik Norzrul Thani; Mohamed Ridza Mohamed Abdullah; and Megat Hizaini Hassan.  (2003))

FAQ on Bai’ Bithaman Ajil (BBA) Financing

“Frequently asked questions about BBA house financing

What is Al Bai’ Bithaman Ajil (BBA) house financing?

BBA house financing is an Islamic house financing facility, which is based on the Sharia’h concept of Al- Bai’ Bithaman Ajil (BBA). It is a contract of deferred payment sale, which includes a profit margin agreed by both parties.  Profit in this context is justified since it is derived from the buying and selling transaction as opposed to interest accruing from the principal lent out.

What are the main characteristics of a BBA house financing?

All the components, which determine the selling price have to be fixed in advance because in Islamic Finance the selling price has to be fixed at the time the contract is made.

What are the mechanics of the BBA house financing?

  1. Customer identifies the asset to be purchased.
  2. Bank determines the requirements of the customer in relation to the financing period and nature of repayment.
  3. Bank purchases the assets concerned.
  4. Bank subsequently sells the relevant asset/property to the customer at an agreed price, which consist of:
  • Actual cost of the asset to the bank i.e. financing amount; bank’s profit margin.
  • Customer is to settle the payment by installment payments throughout the financing period. (Schedule Drafted)

What are the differences between BBA house financing and an ordinary conventional housing loan?

An ordinary conventional housing loan is given on the basis of the debtor/creditor relationship where interest is charged on the loan, which is normally quoted at a certain percentage above the base lending rate (BLR) over the loan period, repayable in periodic installments. The BLR will fluctuate up or down and it will affect the total loan cost. Simultaneously, arrears in conventional loans are normally capitalized.

However, under the Islamic banking scheme, since the BBA concept is being applied, a seller-buyer relationship is established in contrast to the debtor/creditor relationship, which exists in conventional mortgages and the selling price is fixed upfront. The sales price is then repaid in periodic installments and the agreed installments will remain fixed throughout the financing period. As such, a customer’s interest rate risk is eliminated. Furthermore, arrears will not be capitalized.

Will my monthly installments change according to the BLR?

The BBA financing scheme is not tagged to the BLR. Thus, the installments will be fixed according to the rates declared upon in the sale-and-purchase agreement.

Is it possible to compute the selling price? Yes, the selling price is computed as per the formula:

Selling price = (monthly installment X number of financing months) + grace period profit (if any).

Note: The monthly installment is computed using the agreed profit rate on a constant rate of return and monthly rest. The grace period profit is charged when the bank is financing property under construction. As such, during the construction period, the customer will pay the grace period profit only.


Financing amount: RM100,000-00

Profit rate: 8%

Financing period: 20 years

Installment per month: RM837-00

Selling price = (RM837-00 X (20 X 12)) + 0 = RM200, 880-00

Is early settlement allowed under the BBA financing facility?

Yes.  In addition, the customer is not required to give advance notice to the bank for the early settlement.  As such, there is no early settlement penalty fees/charges imposed on the customer.

Is the customer entitled for rebate (Ibra’) in case of early settlement?

Yes, the customer will be entitled for a rebate on the concept of Ibra’ for the unearned profit at the bank’s discretion. The rebate is in the form of a reduction in the balance outstanding. The early settlement amount is the net figure after deducting the rebate.

What is the period of financing for the BBA house financing?

Normally, for house or residential property financing, the maximum repayment period is 30 years or at the age of 65, whichever is earlier. It might differ from one bank to another.

What is the margin of financing for the BBA house financing?

The margin of financing differs from one bank to another. Generally, the margin ranges from 70% to 100% against the sale & purchase value or the current market value. Again, the customer’s repayment capacity will also affect the margin of financing that the bank can offer.

Is there security/collateral requirement under the BBA house financing?

Yes, the property financed by the bank will be used as the security/collateral for the financing facility under the BBA house financing. The property is usually secured by way of first party charge.

What are the legal documents for the BBA house financing?

–         Letter of offer;

–         Property sale agreement;

–         Property purchase agreement;

–         Legal charge;

–         Assignment and power of attorney;

–         Or any other Islamic financing documents required for the house financing.

Is there any restriction in applying for the BBA house financing?

Under the BBA house financing scheme, the purpose of the financing is important. The bank must not finance a customer whose income or nature of business income is derived from a forbidden source or haram income under the requirements of the Sharia’h.

These include but are not limited to the following:

  • Customers who are selling alcohol, drugs, pork and items relating to them;
  • Customers who are operating gambling business and entertainment outlets selling liquor;
  • Customers who are involved in immoral business such as prostitution;
  • Properties that are going to be used for haram activities.

Can a non-Muslim apply for the BBA house financing?

Yes, the same financing facility is available to the non-Muslim.

Can a foreigner or non-resident apply for the BBA house financing?

Yes, the financing facility is also open to a foreigner or non-resident. However, they are subjected to the BNM ECM 6, which includes that the property value must be RM250,000-00 and above;  FIC approval is required; and the maximum margin of financing is 60%.

What is Mortgage Takaful?

Mortgage Takaful is the equivalent of the MRTA, whereby protection on the financing amount will be given in case an unfortunate incident was to strike the customer.  Even though this kind of protection is not compulsory, most banks are making it a financing condition as it is beneficial to the customers and their next of kin.

Most banks are providing financing assistance for the Takaful premium. Normally, the mortgage Takaful premium will be included in the financing amount and will be subjected to the agreed margin of financing.

What are the advantages of the BBA house financing?

–         The total cost of the property purchased is determined at the time of contract or aqad;

–         There is no additional or “hidden” cost that will change the price of the property purchased;

–         The transaction is transparent;

–         There is no element of uncertainties or Gharar;

–         Customers will know exactly when the financing will end;

–         There will be no compounding of arrears and outstanding penalty charges;

–         Presently, there is no additional/penalty charge on outstanding miscellaneous charges;

–         Repayment is not subjected to fluctuation of the BLR;

–         It allows better financial planning.”

(Source: The Star, Malaysia, Contributed by Bank Negara Malaysia.)


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