Part One
ABSTRACT
The primary duties of Islamic banks and financial institutions in Malaysia are to carry out Islamic banking and financial activities and to offer products that are in accordance with the Islamic teachings. These products are subject to the scrutiny and approval of Bank Negara's Shariah Advisory Council (SAC) and the internal Shariah Advisory Bodies (SAB) or the Shariah Committees of the respective financial institutions. Despite having been in existence for more than 25 years, in the authors' view, it is still questionable whether or not the Islamic banks and financial institutions in Malaysia have been satisfactorily carrying out these duties. One area worth examining is the transaction involving house buying, particularly the one that falls under the purview of the Housing Development (Control and Licensing) Act 1966 (Act 118) and transactions involving houses pending completion. This paper examines this area of transaction and the loan agreement, affected via Bay' Bithaman al-Ajil (BBA), provided by Islamic banking and financial institutions in Malaysia….. The paper concludes that the current practice of the BBA contradicts with the teachings of Islam and should therefore be modified and revamped until it is fully able to protect the interests of the purchasers/borrowers.
Keywords: Bay' Bithaman al-Ajil, Gharar al-Fahish, Islamic Banking Law, abandoned housing projects, Malaysia
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It is a trite practice in Malaysia that for some who wish to purchase a house, specifically a transaction falling under the Housing Development (Control and Licensing) Act 1966 (Act 118), they will seek to obtain a loan from an Islamic bank or the IWB. Before the purchasers apply for a housing loan from an Islamic Bank or IWB, they should have entered into agreements of sale and purchase with the licensed developers. Once the said agreements are executed and enforceable, the purchasers may apply for loans from an Islamic Bank or IWB to finance the balance purchase price of the property. The purchasers are required to execute two agreements to facilitate this; firstly, the Property Purchase Agreement (PPA) and secondly, the Property Sale Agreement (PSA). The first agreement (PPA) provides that the purchasers agree to sell the property, which he purchased from the developer, at the price similar to the price he agrees with the developer, to that particular Islamic Bank or IWB and on the undertaking that they (the purchasers) are to re-purchase the property from the Bank. The second agreement is the Property Sale Agreement (PSA). Under this agreement (PSA), the property (which has been vested in the Bank) is sold by the Bank back to the purchasers, at an increased price. The purchasers are required to repay the Bank this price, by way of installments for a specified duration until the sale price is fully settled. The Bank will get a profit, being the difference between the price stipulated in the PPA or the said agreement and the price stated in the PSA (the sale price).
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Although judicial decisions have held that BBA does not involve elements of riba',…, the BBA that is being practised in Malaysia may not be valid on the ground of the elements of gharar al-fahish contained in it. Hence, following the elaboration on the gharar al-fahish (exorbitant gharar) and some judicial decisions that the BBA contains the riba' element, the following are the findings… in respect of the BBA, as practised in Malaysia by the Islamic financial institutions:
1) The BBA is void for it inherently may involve the possible (ihtimal)…, occurrence of gharar al-fahish elements, particularly in the case of a transaction financing houses pending completion. The elements of gharar al-fahish are the grievances of the purchasers in abandoned housing projects which have been elaborated above. This view is based on the provisions of the legal texts (Quran and Sunnah) and Qiyas;
2) In houses pending completion, where the transaction involves the application of Schedules G, H, I and J of the Housing Development (Control and Licensing) Regulations 1989 or otherwise, normally the purchaser/borrower may pay some portion of the price as a deposit. However, on the payment of the deposit and on the execution of the sale and purchase agreement with the developer, the purchaser applies for a housing loan (BBA) from an Islamic bank to finance the balance purchase price. This is affected by the PPA and PSA, as well as other documents, such as the charge document or deed of assignment, as the case may be. Normally, in the purchase of a house, the purchaser pays a deposit representing 10% of the purchase price. The balance purchase price (90%) will be paid by the Bank to the vendor/developer progressively. The bank granting the loan (90% of the purchase price) to the purchasers to complete the sale will charge the said house as collateral to the loan. The title to the housing unit will not be registered into the purchaser's name until and unless the purchaser has fully settled that loan (90% of the purchase price), together with the profit margin (the sale price), to the bank. Once the purchaser has fully settled the sale price (usually in installments), the bank will then discharge the collateral (the house as the security to the loan) and allow the transfer of the house into the purchaser's name. The issue is, whether the purchaser/borrower, in this circumstance, has acquired full ownership (milk al-tam) warranting him to become the full and absolute legal owner (not just being an equitable and beneficial owner) to the purported house on the payment of the deposit and on the execution of the sale and purchase agreement, when his name has yet to be registered as the registered proprietor of the property at the land office? It is still doubtful that he has obtained any legal ownership (milk al-tam) to the purported house to warrant him to 'sell' the purported house to the Islamic bank for the latter to re-sell the purported house to him (the purchaser/borrower) in accordance with Bay' al-Inah and Murabahah principles …. Thus, in transactions involving houses pending completion, the issue of ownership of the purported uncompleted house is still unresolved. In other words, the ownership is not a full (milk ghair al-tam) and not an unconditional ownership but an incomplete ownership (equitable/beneficial ownership). Incomplete ownership does not give any absolute power/authority on the part of the purchaser to sell the purported house to Islamic Bank…. Be that as it may,…the BBA, still is not acceptable under the Islamic law, as the ownership of the purchaser over the house is still incomplete (milk ghair al-tam), which can justify the selling of the house by the purchaser to the bank and for the bank to re-sell the house to purchaser, under bay' al-Inah and murabahah modes. This is to avoid possibility of gharar in the transaction. It follows that the charge created over the house (which still under milk ghair al-tam) as the security to the BBA may also not valid under Islamic law, as the house is still not absolutely/fully owned (milk ghair al-tam) by the purchaser/borrower to warrant the selling of the said house to the bank for the bank to re-sell back the house under the BBA transaction;
3) It is opined that, the current practice of the BBA seems absurd, in the sense that the house, which is subject to the charge being a security to BBA, is also considered under the ownership of the bank. The bank's ownership over the house is explicitly stated in the PPA and PSA. How could the bank as the 'owner' of the house, become a 'chargee' to their own asset? Thus, the positions and status of the house, the charge, the ownership, the purchaser, the bank and the developer in the BBA transaction are ambiguous and not certain. This can lead to gharar al-fahish. It should be noted, notwithstanding a charge is created against the land and in abandoned housing unit, in the event of default on the BBA repayment by the purchaser, the bank may also not be able to enforce the charge as the house is still not complete and the fact that there is a term in the statutory standard sale and purchase agreement (pursuant to clause 2(2) of the Schedules G, H, I and J of Housing Development (Control and Licensing) Regulations 1989), which excludes the charged land from being subject to a foreclosure. Furthermore, it is doubtful if there is any interested buyer to bid for the purchase of the incomplete house/project (abandoned housing unit);
4) The BBA is void, based on the judicial decisions, on the ground that the practice is inequitable and unfair to the general public. The inequitable elements are that the profit margin is higher than the debt owed. This would amount to a riba transaction. Secondly, if the borrower defaults, he has to pay the whole amount of the debt and the profit margin for the whole repayment of the installment period without being entitled to any equitable and appropriate rebate. This practice in the BBA will lead to an inequitable and unconscionable mode of transaction. On the contrary, this rebate is applicable in the conventional system in the house financing loan (Malayan Banking Bhd vs. Ya'kup bin Oje & Anor [2007] 6 MLJ, pp. 390, 399 & 417). Inequitable and unconscionable mode of transaction is prohibited under the Islamic Law (al-Nisa'(4): verse 29), al-Nahl (16): verse 90, Al-A'raf (7): 85 & Al-Syu'araa'(26): 183);
5) There will be no adversity (hardship) in rejecting the Malaysian style of BBA. In other words, the degree of necessity (darurah) does not exist currently in Malaysia, for allowing the practice of the BBA (hybrid of Bay' al-Inah and murabahah), which are rejected by majority of jurists as it may involve the riba' elements. Instead other modes which are more equitable should be implemented such as musharakah (partnership) or Ijarah (lease) or that the current terms in BBA are radically revamped to the effect of eliminating the elements of gharar, riba, and other inequitable terms. Some quarters may argue that the current practice of the Malaysian style of BBA is for the maslahah/maslahah amah/maslahah al-mursalah (public interest) of the ummah (Muslim society), in line with the maqasid al-Shariah…istihsan and 'urf. However, to reply this, the purported maslahah mursalah, istihsan and 'urf must not be in derogation of the express provisions of the primary texts (Quran and Sunnah), which clearly prohibit gharar, riba', and other inequitable/unjust practices. It (BBA) may be applicable if there is a necessity (darurah) for it or if not in use this may cause hardship to the people. However, the degree of necessity (darurah) or hardship to justify the practice of the Malaysian style of BBA in Malaysia, it is opined, are still not proven (premature/fictitious). The persons in authority (the Government of Malaysia, Bank Negara, and Shariah Advisory Committee/Body), it is submitted, have the means and ability to replace the Malaysian style of BBA in house financing with better products, but they do not resort to them. This is sinful. This is akin to the requirement that to perform the obligatory prayer (solah fardu), one shall have to stand up (qiyam). If he has the ability to stand up (qiyam) without any difficulty or hardship, but instead he chooses to pray by sitting down, his prayer is rejected as the rukun (pillar) of the obligatory prayer (solah fardu) has not been fulfilled…. Similarly in house financing, the persons in authority have the ability and means to use better Islamic products, such as musharakah and ijarah in house financing to avoid the occasion of riba' by way of helah (as in the BBA which utilizes Bay' al-Inah and Murabahah modes) and other inequitable modes of transaction (such as no rebate given if any early settlement is made); however, they choose the BBA (the Malaysian style of BBA). The reason for this may be economic and/or maximization of profit factors. Thus on this footing, it is opined, the rationale and reason for adopting the Malaysian style of BBA are not satisfactorily sound;
6) If a housing project fails and is subsequently abandoned, the purchasers are still required to pay the monthly installments to the Bank. There is no term in the BBA that protects the interest of the purchasers if in the course of construction, the houses are abandoned;
7) The banks absolve any liability for ensuring the completion of the houses. The banks do not consider the grievances faced by the abandoned housing projects' purchasers. What the bank want is, it is submitted, the installment moneys of the BBA must be fully settled by aggrieved purchasers;
8) Purchasers are persons aggrieved if abandonment occurs as they must pay monthly installments and they cannot occupy the purported houses. Consequently, they have to rent other premises and face other grievances, pecuniary and non-pecuniary. There is no term in the BBA which can provide measures to face these problems;
9) In BBA, through the PSA, the banks are the owners of the property. Logically, the owners are obligated to ensure that the purported houses will be duly completed and duly handed over to purchasers and the titles can be registered in the purchasers' names. There is no guarantee that at the end of the day, if the project is abandoned or the property has not been duly constructed, the bank as the owner must either do whatever is necessary to protect the interests of the purchasers or to compensate the purchasers or to return back all the moneys paid to them (restitution and indemnity). Apparently, there is no term prescribing this duty on the banks in the PPA and PSA;
10) There are no preventive and curative measures provided in the BBA, especially in the PSA, to avoid losses on the part of the purchasers due to the abandonment of houses they purchased;
11) There is no term in the BBA which provides the purchasers with the right to sue the bank for the calamities that have occurred or the right to claim compensation and damages. Meanwhile, the provisions such as defect liability period, protection against sub-standard housing constructions, the guarantee that the titles to the property are to be registered into the purchasers' name upon full settlement of the loan and compensation for late delivery of vacant possession and the obligation of the bank to obtain the certificate of completion and compliance (CCC), must also be made clear and provided in the BBA. This suggestion is made bearing in mind that the owner of the house (i.e. the bank, is effected through the PPA) must be responsible to hand over the duly completed house to purchaser in receipt and as a consideration of the specified amount of sale price by way of monthly installments paid by the purchasers (effected through the PSA).
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