BBA and Murabah
BBA and Murabah
BBA and Murabah
Introduction
Bai Baithaman Ajil (BBA) is one of the common instrument practiced in
modern Islamic banking & finance. (in Malaysia, Brunei and Indonesia at least)
The BBA is a deferred instalment sale whereby bank capitalizes its profit up
front in the sale of the property to the customer who in turn is required to pay a
fixed sum until the tenure ends.
BBA is an extension of the Murabahah (cost plus) contract, mainly used for
Medium and long-term financing.
It is important to know the difference between Murabahah Sale and BBA for
further clarification.
BBA
(aqd al-amanah)
Long-term financing
defined as in BBA)
In 1997, BIMB used BBA and Murabahah as its main income generating products
of up to 90.5% of its total assets.
Other banks also reported similar percentages as compared to BIMB.
Source: The Council of Islamic Ideology Pakistan, (1977), Elimination of Interest from the Economy: Government of Pakistan
The contracts
involved
The Property Sale
Agreement (PSA) :
the bank sells the house
to the customer at BBA
price.
The Deeds of
Assignment / Charge :
the bank holds the
house as collateral.
Profit
Rate
Tenure
Monthly installment is calculated based fixed profit rate as shown in the above illustration
Normally the profit rate charged would be higher than the conventional mortgage rate by 2% to
3% depending on various factors such as short to middle term monetary environment; the pricing
and cost of funds of each financier
Ibra would be given at the discretion of the financier if the customer redeem the financing earlier
than the contracted tenure.
OR
Normally the contracted profit rate (CPR) is calculated based on the following formula :
CPR = IFR plus 4.0%; which is also benchmarked against the movement in IFR.
In the event that the EPR exceeds the CPR (like in the example below at T1), the EPR charged
will equivalent to CPR. In here, the CPR served its purpose as a maximum ceiling profit rate
charge
Profit
Rate
CPR = IFR + 4.0%
T0
T1(12)
T2( 6)
Tenure
Comparison at a glance
Fixed Rate BBA
Critical Evaluation
Fixed rate BBA financing is no longer offered in the Malaysian Islamic financial
market as at today. Almost all the Islamic banks have moved to offer the alternative
floating rate BBA financing to compete with the conventional banks mortgages
products.
However, all Islamic banks in Malaysia still have the fixed BBA financing in their
assets portfolio base.
Unique product innovation to resolved the issues stated earlier by financier: assetliability mismatch; creation of competitive level playing field with conventional banks
in terms of product flexibility and pricing; risk mitigation arising from this
mismatching.
New issue with this new product : issue of pricing benchmarking against
conventional benchmark based on interest rate (BLR = Base Lending
Rate)
While the customer is ascertained to get ibra or rebate from the financier, the
Shariah requirement that the financier cannot fixed the amount of ibra
upfront and the amount of ibra payable would be at the discretion of the bank,
leaves the customer at the whim and fancy of the financier
Other earlier issues with fixed rate BBA financing remain unresolved.
Court of Appeal
(BIMB v Lim Kok Hoe and Ors
(Unreported )
Conclusion
of BBA
Issues
The Property
Sale
Impact of BBA court cases to the industry in Malaysia
Industry's development and innovation
Conclusion
The Property Sale
Comparison
Between MMP and BBA Contracts
BBA
Uses buying and selling concepts.
Selling price does not reflect the
market price but rather uses
interest rate as benchmark.
Fixed selling price for fixed rate
BBA.
Fixed amount to be paid by
customers. Rebate decided by
the financier.
MMP
Practices Musharakah and Ijarah
concepts.
Rental income reflects the
market price as the rental value
is determined by the market.
Financier
manage
better
liquidity rate by adjustable
rental income.
Total price paid for property can
be lower.
The End.
Thank You.