Bai Bithamil Ajil (BBA) is in news in Malaysia and it has generated a good amount of debate on the methodology and morality of deferred payment in Islamic finance as practised in the country. BBA is a favoured financing mechanism used by Islamic banks. Banks buy the properties that the borrowers want to acquire and sell it at a higher deferred price payable in instalments. The margin of profit of the Islamic banks depends on the duration of repayment – longer the period higher the deferred price. Thus the deferred price includes compensation for expected inflation. If for some reason the borrower defaults in payment of instalments the concerned Islamic bank gets the property auctioned to recover the dues. If the default is early in the loan period, a gross injustice occurs because the price was fixed in consideration of long period whereas the auction is done earlier. Banks recover the dues after auction based on the agreed price that was high. The person taking the loan is affected badly.
This injustice was noted by Judge A Wahab bin Patil of High Court of Malaya (Malaysia) who held that the bank was entitled only for the principal sum. This judgement disturbed the financing business of the Islamic banks. It was appealed against and the court of appeal decided in favour of Islamic Banking Institutions, holding that it was a sale agreement and not a loan agreement. The position of the Islamic banks is strong but on the angle of justice the poor man who could not pay instalments, most probably owing to financial constraints, is hit badly. And that too in the name of Islam!