Bay' al-Inah & BAY’ AD-DAYN

1. Bay' al-Inah & BAY’ AD-DAYN ISLAMIC LAW OF TRANSACTION (LAW737) Presented by: Siti Nurfudhliha bt Ab. Aziz (2009838386) Lily Suryati binti Mohd Jamil (2009831716)

2. QUESTION:The contracts of bay’ al-dayn and bay’ al-inah remain controversial since they are only practised in Malaysia. Discuss the views of the Muslim jurist in this matter.

3. INTRODUCTION • Malay Muslim society in our country is very cautious in involving themselves in riba transactions because of the Islamic injunction against riba since riba forms the integral part of the operation of conventional banks. • Majority of ‘ulama in the Middle East do not agree with concept of the Islamic Accepted Bills or Islamic bonds as applied in Malaysia because it involves transactions such as bay’ al-inah and bay’ al-dayn.

4. INTRODUCTION • In principle, structuring Islamic bonds usually involve three main steps: 1) Bay al- ‘Inah asset securitization: Here, two sale contracts (a buyback sale) will be applied in sequence. That is bay’ al-inah. 2) Issuance of Bond certificates: The payment by issuer to investors via ‘inah sale is made through the issuance of debt certificate (Shahdah al-dayn). Technically, this simply means a bond sale is underway. However, a bond is only a piece of paper evidencing a debt obligation. 3) Bond Trading: For liquidity purposes, the need for trading is vital.

5. Malaysian Islamic Bond • The BIMB Securities Sdn Bhd.:- Two unacceptable methods

6. BAY’ AL INAH

7. What is Bay' al-inah?

8. DEFINITION

9. Example1: • It was reported that Aishah was asked about a transaction conducted by the slave of Zaid bin Arqam. • Acting on behalf of her master, the slave sold another slave of Zaid at 800 dirham in credit to Ata' and bought back the slave at 600 dirham in cash. • Ruling the transaction, Aishah said, "it was very bad sale and inform Zaid that his conduct has eliminated all his rewards for participating in jihad with the Prophet if he does not repent''. • According to the majority of jurists, Aishah assertion clearly indicated that bay' al-Inah was unlawful contract.

10. Example2: • IBN RUSHD: • For instance, a person said to another person, "I lend you 10 dinar for a month and I want 20 dinar (in return)". "That is not permissible", said the other person. "But you can sell to me this donkey for 20 dinar in credit for a month then buy back the donkey for 10 dinar in cash."

11. BANK NEGARA MALAYSIA DEFINITION

12. BNM’s guidelines on Bai Inah

13. The Operation of Bai Inah

14. The Operation of Bai Inah

15. The Application of Bay' al-Inah

16. Islamic Credit card • Malaysia Islamic Bond

17. CREDIT CARD: BIC by BIMB Buy land worth RM15,000 from BIMB in deferred sale 2. Immediately sell it back to the same party with RM 11, 000 in cash Diagram 1: Bay’ al-Inah transaction in BIC card model

18. Modus Operandi: 1st STAGE

19. Modus Operandi: 2nd STAGE Ali is required to pay back the money he had used within a given period of time. Bank will impose additional payment for the late settlement.

20. Islamic Credit Card (BIC)??? • BIMB contends that its additional payment for the late settlement is legitimate since it is regarded as profit not interest. • The profit id referred to the difference between the sell and the buy back prices (RM15000-RM11000) in the bay’ al-inah transaction so executed. • (As referred to example in Diagram 1) In otr words, through the act of selling land to Ali, BIMB is actually entitled RM4000 of profit. • However, the profit is only claimed on Ali when he struggles to pay his debt on time. • The maximum additional payment however is fixed (ex: RM4000).

21. Islamic Credit Card (BIC)??? • According to BIMB, the fixed max. profit demonstrates BIC card main advantage over its conventional counterparts. • This is bcos in the conventional credit card system, the interest is perpetuate as it is charged compounded until cardholders’ outstanding debts are been settled.

22. MALAYSIA ISLAMIC BOND Modus Operandi: Bay’ al-Inah Securitization • Two sale contracts (a buyback sale) will be applied in sequence. • That is bay’ al-inah = spot sale + credit sale.

23. Modus Operandi: Bay’ al Inah Securitization

24. Malaysia Islamic Bond??? • Whether MIB constitutes usury or not?

25. Arguments for the validity of Bay' al-Inah

26. INTRODUCTION • Most ulama’ in their opinions stated that Bay' al-inah is not valid (haram) because it is a device to legitimize riba’ . • However, Hanafi of the opinion that Bay' al-inah is only permissible if such transaction involving third party.

28. Shafi’I: Bay' al-Inah is HALAL • According to Shafi’i school such sales are to be allowed because,in the words of Imam Shafi’I, contracts are valid (Sahih) by the external evidence that they were properly concluded: • the unlawful intention (niyya or qasd) of the parties is immaterial, it does not invalidate their act, unless expressed in that act. • Al-Shafii illustrated his teachings with following example, which concerns the marriage of a man who intends to keep his wife for only a short period of time. That marriage is valid whereas a mut’aa marriage is invalid (Batil). • The Shafii's considered that the intention of the parties is taken into account only when the invalid intention is explicitly mentioned in the contract.

29. Maliki & Hanbali • The Maliki and Hanbali jurists hold that the contract of Inah are not valid (Sahih) because, according to them; • the motive of the parties to the contract determines the legality or illegality of the contracts, • and in the sale under consideration the motive of the parties is illegal and, • therefore, the sales are not valid because they constitutes a legal device (Hilah) to get a loan with interest which should be averted at all costs according to the Shariah.

30. Ibn Qayyim: states that intention influences legal acts: • the formality of legal act can be the same but end results depend on the intention. Rasulullah s.a.w says; “Deeds are judged according to the intentions, and every human being will have to take responsibility for what he intended.” {Sahih al-Bukhari}

32. It is clear in the opinions of above noted jurists that the intentions are to be taken into account in relation to legal acts as they are in the matters of faith, Islam does not tell Muslims to define an objective, and then use what means they observe fit in order to attain it. • Instead, it tells them that if the means are correct, the ends will look after themselves. • Islam does not teach us to overcome usury by competing with usurer at his own game.

33. Bay' al inah is INVALID

34. Bay' al inah is INVALID • Wasil b. `Ata is reported to have said that a right judgment can be arrived at through four sources: • the express word of the Book, • authentic Hadith, • Qiyas and • consensus of the ulama’ community • Hence, Bay' al-inah, is a violation of the established consensus. Since this sort of sale agreement constitutes the taking of usurious interest as most jurists hold that such transaction should be forbidden.

35. Bay' al inah is INVALID

36. Bay' al inah is INVALID • al ShafiI’s method of determining the validity of any contract by its formal evidence that they are legally concluded, cannot be cancelled on account of the intention of the parties, although he had to recognize such intention as forbidden (Haram) but the contractremains valid unless the intention expressed in the contract. 2) there is hardly any satisfactory evidence which enables one to say that al Shafii has expressly declared that al-Inah to be (Halal).

37. Bay' al inah is INVALID • The Shafii may, thus permits contracts because its legal preconditions are fulfilled, but forbids the transacting act of the parties when it conflicts with Shari’ah principle. not every valid contract is a Halalcontract

38. Bay' al inah is INVALID • The following example can illustrate his teaching.

39. Bay' al inah is INVALID Thus, it is forbidden as it is based on unjustified enrichment (fadl mal bil a `iwad) or “receiving a monetary advantage without giving a countervalue”.

40. Malaysia Islamic Bond??? • The use of legal device is therefore an evidence that the niyyah or intention factor is undermined or made secondary in the securitization process of Islamic bonds in Malaysia. • It is apparently clear that most underlying assets used in the Malaysian Islamic bond securitization have no direct relation with the actual project itself. • These assets were simply collaterals, that serve as guarantees to the debt issued. • To retain the basic structure of traditional bonds in Islamic finance, that is providing fixed return to investors, practitioners and the relevant Shariah experts may have wrongly applied Shariah laws, which implies now that the legitimacy of Islamic bonds issued using Bay' al-inah is suppose.

41. Justifications of M’siaShariah Scholars 4) the contract was not clearly prohibited either in the Qur‟an or in the Sunnah. They do not accept the validity of the athar and the hadith which indicate the prohibition of the contract. For them, the athar of Aishah is considered as weak • This justification indicates that the shari'ah scholars try to practice independent ijtihad. In solving fiqh problems of the Islamic banking, they will refer directly to the primary and the secondary sources of Islamic law. • As generally known, the primary sources refer to the verses of the Qur‟an and the Sunnah of the Prophet (pubh), while the secondary sources refer to ijma' (consensus), qiyas (analogy), istihsan (legal preferences), 'urf (custom) and etc.

42. Justifications of M’siaShariah Scholars • They will also examine the prominent classical jurists' opinions but will not blindly restrict to them. • This method contradicts their approach when judging the matrimonial, inheritance, administration of mosque and waqf (endowment) cases where decisions are usually confined to the rulings of the Shafi'is school.

43. Justifications of M’siaShariah Scholars 5) the basis of maslahah, in which refers to the need or interest of Muslims contemporary society. The contract can help the society as well as the Islamic banks achieve their respective goals. Although admitting bay' al-Inah resembles legal stratagem, the contract is accepted for the sake of majority interest. (MIFC) • In accepting the maslahah argument, the local shari'ah scholars adopt 'form over substance' approach. • The approach focuses on changing the legal terminology rather that the essence of the conventional banking products. • As evident in the case of bay' al-Inah, the contract is analogous to usurious transaction.

44. Justifications of M’siaShariah Scholars • Financing products created through bay' al-Inah economically has similar effects to the conventional banking loans. • Perhaps the local scholars' primary concern in adopting such an approach is to demonstrate the usefulness of various Islamic commercial contracts in today's modern world. • By adopting the contracts of bay' al-Inah, bay' murabahah, BBA and etc, they wish to prove that Islamic commercial law has solution to the riba problem even in the complicated banking environment • However, critics of the Islamic banking disagree with the approach. Its implementation is seen as a kind of deception which manipulates the religious notion of Muslims for banks' economic profit.

45. Justifications of M’siaShariah Scholars • However, critics of the Islamic banking disagree with the approach. • Its implementation is seen as a kind of deception which manipulates the religious notion of Muslims for banks' economic profit. • The banking products created through this approach look 'Islamic' in their appearance but maintain the element of riba in their fundamental nature. Therefore, the objective (maqasid) of Islamic banking will never be achieved

46. Al-Qardawi states; concerning Bay' al-inah, that it is a clear case of usury and the device: why should we practice transaction which contains elements of devices while we are in position to have a clear and apparent alternative transaction? Furthermore, muamalat which contains elements of device deviates form the true objective of Shariah.

47. BAY’ AL-DAYN

48. DEFINITION OF BAY’ AL-DAYN • An Arabic term: “sale of debt” = bay’ (sale) + dayn (debt) = sale and purchase transaction of a quality debt. • refers to debt financing, i.e. the provision of financial resources required for production, commerce and services by way of sale/purchase of trade documents and papers. • Article 158 of Majalah al-ahkam al-adliyah: dayn (either monetary, or a commodity, i.e food or metal) = the thing due i.e the amount of money owed by a certain debtor.

49. NATURE OF BAY’ AL-DAYN • Applicable to instruments such as Islamic Accepted Bills (IABs). • IAB was introduced in 1991 to provide a shari’ah compliant instrument to conventional banking, particularly for trade financing . • Formulated on the Islamic principles of Al-Murabahah (deferred lump-sum sale or cost-plus). • The secondary market trading of the instrument is based on Bai ad-Dayn (debt-trading).

50. NATURE OF BAY’ AL-DAYN • There are two types of financing under the IAB facility which apply the concept of bay’ al-dayn, namely:- i) Trade Financing/ Imports ii) Trade Financing/ Exports