UAE Laws and Islamic Finance

Laws of the UAE and Islamic Finance

Archive for Bai al Inah

Bai’ Al ‘Inah In Islamic Finance

Bai’Al ‘Inah is a transaction which involves the sale and buyback of an asset by the seller:

1.The seller will sell the asset to the buyer on a deferred basis and later will buy back the same asset on a cash basis at a price, which is lower than the original selling price.

2. Alternatively, it could also be where a customer offers to sell some of his inventory to a bank for an immediate cash payment.  He then buys back the inventory on an installment basis, but at a higher price than the price he sold to the bank earlier.  The difference between the purchase price by the bank and the sale price by the bank is the bank’s profit.

It is generally known as a sale based on the transaction of Nasi’ah (delay):

  • The prospective debtor will sell to the prospective creditor some object for cash, which is payable immediately, the debtor then immediately buys simultaneously the same object for a greater amount for a future date.  The difference between the two prices represents the profit.”  (The Law and Practice of Islamic Banking and Finance (2003) by Dr. Nik Norzrul Thani; Mohamed Ridza Mohamed Abdullah; Megat Hizaini Hassan)

Government Sector (Bank Negara Malaysia)

According to Bank Negara Malaysia, “the Bai’ Al ‘Inah contract is defined as two transactions entered between two parties whereby one party (the Government) undertakes to sell an asset to successful participants on a cash basis and subsequently will purchase back the same asset at a higher price, which is normally at par on a credit basis.”

Private Sector (Bank Negara Malaysia)

“A contract, which involves selling and buying of an asset where a seller will sell the asset to a buyer on a cash basis and subsequently will buy the same asset on a deferred payment basis at mark up price. It can also be applied when a seller sells the asset to a buyer on a deferred basis and will later buy back the same asset on a cash basis with a price, which is lower than the deferred price.

Application:

1) Issuance of Bank Negara Negotiable Notes (BNNN).

2) Issuance of Profit-based GII.

Acceptability:

1) Bai’ Al ‘Inah is not acceptable by the Middle Eastern countries, however, is practiced in Malaysia.

2) Some of the scholars regard Bai’ Al ‘Inah as part of Interest-based transactions and therefore, conclude that this is unacceptable under Sharia’h law.” (Bank Negara Malaysia)

 

According to Wikipedia,Bai’ al ‘Inah is a financing facility with the underlying buy and sell transactions between the financier and the customer.

  1. The financier buys an asset from the customer on spot basis.  The price paid by the financier constitutes the disbursement under the facility.
  2. Subsequently, the asset is sold to the customer on a deferred-payment basis and the price is payable in installments. The second sale serves to create the obligation on the part of the customer under the facility.
  3. There are differences of opinion amongst the scholars on the permissibility of Bai’ al ‘Inah, however, this type of sale is practised in Malaysia.” (Wikipedia)

‘The Maliki and Hanbali jurists feel that this method of sale is illegal as it constitutes a legal device to obtain a loan with interest, which is not allowed under the Sharia’h.’  They based their opinion on the Prophet’s Sunnah, in which he was reported to have said:

‘And when men become filled with greed towards money (Dinar and Dirhams) and transact through Ainah, and leave out jihad, remember that calamity will strike them until they turn back to their religion.’’

 

‘However, the Shafi jurists concluded that such transactions were allowed under the Sharia’h because according to them contracts are valid by the external evidence that they were properly concluded and that the unlawful intention of the parties is immaterial.  It does not invalidate their act unless expressed in that act.  The intention of the parties is, therefore, taken into account when the invalid intention is explicitly mentioned in the contract.’  (The Law and Practice of Islamic Banking and Finance (2003) by Dr. Nik Norzrul Thani; Mohamed Ridza Mohamed Abdullah; Megat Hizaini Hassan)

* Based on Information from The Law and Practice of Islamic Banking and Finance (2003) by Dr. Nik Norzrul Thani; Mohamed Ridza Mohamed Abdullah; Megat Hizaini Hassan, Bank Negara Malaysia, and Wikipedia/

Types of Instruments on the Islamic Interbank Money Market (SBBA) (Bank Negara Malaysia)

http://iimm.bnm.gov.my/index.php?ch=4&pg=4&ac=22

Issuing Procedures for Islamic Treasury Bills – the Bai’ Al ‘Inah Concept (Bank Negara Malaysia)

http://iimm.bnm.gov.my/view.php?id=33&dbIndex=0&website_id=14&ex=1194300189&md=iY%0F%9B%0D%D8%F8Qm+%86%DA%26sQ%C6

Bai’ Al ‘Inah Downloads

http://www.96147.com/no/bai%20al%20inah%3Bpdf.html

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