Bai Bithaman Ajil (BBA)
Definition
A contract that refers to the sale and purchase transaction for the financing of assets on a deferred and an installment basis with a pre‐agreed payment period. The sale price will include a profit margin.
In Islamic finance a sale of goods in which a bank purchases the goods on behalf of the buyer from the seller and sells them to the buyer at a profit, allowing the buyer to make installment payment.
A sample calculation of a 20 years property financing is as follows:

Assume that you take out a 20 years financing for a house terrace of RM250,000 at a profit rate of 5.88%. The monthly instalments and total repayment would be based on the following formula:

(PMT) = [FA (1 + r)n r] / [1 + (1 + r)n – 1]

Whereby: PMT is payment of monthly instalment
FA is facility amount r is profit rate (per month) n is periodic payment (no of months)

Monthly instalment= [RM225,000 (1 + 0.0049)240 x 0.0049] / [1 + (1 + 0.0049)240 – 1] = RM1,596.43

Whereas the Bank’s selling price is = RM1,596.43 x 240 months = RM383,143.20

• Bai Bithaman Ajil means sale of goods with deferred payment,
• Bai(sale), Bithaman(price), Ajil(deferment).
• BBA is sale with deferred payment and is not a spot sale.
• BBA used for financing property, vehicle, as well as financing of other consumer goods.
Type of product : - Land / property financing - Vehicle financing - Consumer financing - Assets financing 1) Customer identify a house to be purchased(sign S&P agreement)
2a)Bank purchase the house and pays the house developer
2b)Payment to housing developer
3)Back sells the house to the costumer at cost plus mark-up
4)Customer repays the bank cost plus mark-up by deferred payment

Issue on Bai Bithaman Ajil
• BBA is a sale. It is not a loan. But it a sale with deferred payment. It is not a spot sale. Still it constitutes one form of trading and commerce. The Quran says, “Allah has allowed trade and commerce but prohibits riba.” (Al-Baqarah). Hence, profit from sale is lawful and profit from loan is unlawful. The issue here is in Islam, sale must be on the spot. If not it is consider as riba Nasiah.
• There was element of multiple pricing within a single contract of the deferred payment sale. This is a form of violation in the contract, leading to ambiguity (gharar). There was stipulation of grace period profit (GPP) pricing apart from the sale pricing quoted in sale and purchase agreement, within sale and purchase contract of a deferred payment sale.
• Another element of gharar or ambiguity that is present in the practices of administration of the asset by the operator was the issue on method of recognition of profit for the respective asset. This was evidence when reconciling the treatment of a lump-sum payment aimed at reducing the progressive released amount. Instead, the result of treatment made has shown that such payment was merely accepted as free money to be utilized in setting of with the periodical progressive profit. The absent of basis in recognizing the income being used, will impair effort to justify the cost of investment on the part of the customer.
• Bank have beneficial ownership based on the BBA structure, there is transferring of beneficial ownership but not the legal ownership. Some of the jurist considered beneficial ownership as not an actual ownership. However, some of the contemporary researchers claimed that the important matter in determination of ownership is the intent to which the owner is free to do anything on the asset either to rent, sell pawn or etc. If there is any obstacle to the owner, it means the owner is has no full ownership on the asset. According to Dr. Engku Rubiah, the status of full ownership of the bank on the asset of BBA is still in doubt because the bank is has not full right on the asset although it holds the beneficial ownership.
• Another issue on BBA is the bank sell the house that still under construction. By using BBA concept the house suppose to be a finished goods and ready to use. If it is not finished goods it is also a form of violation in the contract leading to gharar.