Islamic Banking Product: Personal Financing * Bank Rakyat (Bay

Report
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Islamic Banking
BK5503
Personal Financing
Bank Rakyat
(Bay-al-Inah)
Presented by :
Mohammed Arshadullah (0800905)
Modhaa Munjid(0801015)
Amirudeen Hamid Sultan (1100001)
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Layout
 Product
Description
 Contract
Analysis
 Aqad
 Legal
Documentation
 Impact on Financial Statement
 Advantages and Disadvantages
 Conclusion
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Product Description
Product: Bank Rakyat Personal Financing-I ASLAH (BRPF)

Based on Bay-al-Inah contract
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Most Successful in the Malaysian market

Bank earned a name for itself in the market as ‘House of Inah’
due to it’s successful record (off the record)

Used mainly for facilities upto RM 200,000 with a 20 year
repayment period
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Product Description
PERSONAL FINANCING-I ASLAH


Our personal financing facility can assist individuals in meeting
financial obligations e.g. down payments for a car, houses, home
renovations and others.
Concept


Bay-al-Inah
Eligibility



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Malaysian citizens between the ages of 18 and 55 years (58 years old government employees only)
Government employees with a minimum income of RM700.00
Private sector employees with an income of RM3000.00
Employees in service for not less than 3 years
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Product Description

Financing of up to RM200,000.00* or monthly deductions not exceeding 60% of gross
monthly income

Repayment Period
Maximum of 20 years

Repayment Method
 'Biro PerkhidmatanAngkasa (BPA)'
 Employee Salary Deduction
 Savings Account Deduction
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Special Features
 Low monthly installment
 Fast Approval
 No guarantor and collateral*

Profit rate as low as 3.25%
*Terms and conditions apply
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Product Description
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Product Description
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Contract Analysis - AQAD

Literally: Aqad means “to join” and “to tie”. Thus, the term
has an underlying idea of joining the intentions and
declarations of two parties.

Terminologically: Aqad in the general sense applies to
every act undertaken by an individual with firm
determination. Aqad in the specific sense is defined as “a
combination of an offer and acceptance which gives rise to
certain legal consequences”.

Mejella: Defined Aqad as “the obligation and engagement
of two contracting parties with reference to a particular
matter”.
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Contract Analysis - AQAD
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The Elements of Aqad:

Buyer and seller: Both parties must have complete capacity,
which means that they have reason (Aql) and discretion (Rushd).

Price: The price must be set on the spot and must be known to
the buyer.

Subject matter: The subject matter should be lawful and owned
by the seller, it should be deliverable, and should be precisely
determined at the time of contract.

Offer and acceptance: The form of the contract must comprise
an offer from one party and an acceptance from the other.
Moreover, is necessary that the acceptance must conform to the
offer in all its details.
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Bay-al-Inah- Classical Transaction
(1)
A sells asset to B
on credit basis
B
A
B sells asset to A
on cash basis
(2)
Figure – 1: Structure of Classical Transaction
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Bay-al-Inah – Shariah view

Bay-al-Inah: “Refers to a sale of an asset, which is later

Al-Zaila’i: “It is a deferred sale of an asset with a subsequent
repurchase of the same asset at a lower cash price.”
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
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repurchased at a different price, whereby the deferred price is
higher than the cash price”.
Al-Kharshi: “It is paying less for more”.
Al-Shafi’i: “It is a credit purchase of an asset which is later sold
to the original owner or a third party, at a spot price higher or
lower than the first contract, provided that the second sale is not
connected to the first sale”.
IbnQudamah: “It is a sale of an asset with a deferred price, and
buys back the same asset at a lower price”.
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Bay-al-Inah – Shariah view
Permissibility of Bay-al-Inah:
Scholars are divided into two
permissibility of Bay-al-Inah.
groups
regarding
the

Those who consider it impermissible: The first group of
scholars who reject Bay-al-Inah and consider it a forbidden
transactionare the Hanfies, Malikis, Hanblis, and some
Shafies.

Those who consider it permissible: The second group of
scholars who accept Bay-al-Inah and consider it a legal and
permissible transaction are Imam Shafi’e and some Shafies.
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Bay-al-Inah – Shariah view
Evidence for the rejection of Bay-al-Inah:

Hadith #1: “If you sell and purchase based on inah, and you
cultivate, and you are satisfied with the cultivation, and you
ignore the duty to do jihad, Allah SWT will curse you and He will
not remove the spell until you return to your religion”.

Hadith #2: “If the people count every single dinar and dirham,
and sell and purchase based on inah, and cultivate the land, and
abandon the duty of jihad for the sake of Allah SWT, Allah SWT
will befall misfortune on them, and will not remove it from them
until they return to their religion.”

Reason: Inah is prohibited because it is a device that aims to
circumvent the prohibition of Riba.
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Bay-al-Inah – Shariah view
Evidence for acceptance of Bay-al-Inah:

Hadith #1: Al-Hafiz Al-Mundhri stated that some narrators of
the Hadith are not up to the required standard. However, Ibn
Al-Qayim said otherwise.

Hadith #2: IbnHajr considered this Hadith as weak, because
of some issues in the Sanad of the Hadith. While Ibn AlQattan considered it as authentic Hadith.

Reason: Inah is permissible and is in line with Shari’ah
principles, if we look at the externalities of the contract.
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Contract Analysis – AQAD
Bank Rakyat Personal Financing-I ASLAH (BRPF)
Figure – 2 : Structure of Bank Rakyat Personal Financing Transaction
Activity 1: Customer approaches Bank with ‘Facility’ request
2: Bank gives offer letter to be filled up by the customer
3.Once filled, the bank offers to sell its shares to the customer at
C+I on deferred payment basis
4. Customer is made to ‘touch’ the Certificate of shares as part of
Aqad procedure
5. Customer sells back the shares to the Bank at C price on cash
basis
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Contract Analysis – AQAD
Bank Rakyat Personal Financing-I ASLAH (BRPF)
Figure – 3: Structure of Interest-Based Loan
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Contract Analysis – AQAD
Bank Rakyat Personal Financing-I ASLAH (BRPF)
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The amount ‘I’ constitutes Riba under both structures.

Activity 3 in Figure - 2 involves a mere debt creation exercise.

There is no sale in the real sense, as the commodity does not move from the
bank to the client.

The net result of the above two activities are similar to the conventional loan
transaction.

Under bay-al-Inah, the market price of the commodity need not bear any
relationship with the amount effectively borrowed. There is no genuine trade
and exchange in bay-al-Inah.

The values C or C+Ineed bear no relationship with the market price - cash
or deferred price of commodity X.

The repurchase in bay-al-Inah is for the amount that the client needs to
borrow. The deferred sale is for the loan amount plus profit/interest.
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Contract Analysis –
Legal Documentation
Intent of the transaction:

The customer is applying for a financing facility to be used
for a specific purpose, mentioned in the “asset purchase
agreement” Preamble B, clause 10 (ASA).

In preamble B of the asset purchase agreement, the bank
states that this transaction is a financing facility.

Clause 2 (a) states that the purchase price is the total amount
of the financing facility granted by the bank to the customer

Purpose behind the transaction is not a normal sale and
purchase, but a means to receive a loan (Lending and
Borrowing).
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Contract Analysis Legal Documentation
Two sales in one sale:
•
The content of preamble (C), clause 1, clause 29 (b), clause 7 (b),
clause 32, second schedule section 1 of the (ASA), and the content of
preamble (C) of the (APA), show that both the (ASA) and the (APA) are
linked and dependent upon each other.
•
In preamble (C) of the (ASA) and (APA), the sale and purchase
mechanism is mentioned in one sentence.
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Clause 1 and clause 29 (b) of the (ASA), show that the selling price is
determined by the purchase price.
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Clause 32 of the (ASA) states that the sale and purchase agreements are
instruments employed in one transaction.
•
Section 1 of the second schedule shows that the customer will start
paying the installments only after receiving the purchase price.
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Contract Analysis Legal Documentation
Two sales in one sale (Shariah view):
The ban on combining two sales in one sale is
reported in a number of Hadiths.
 Abu
Hurairah peace be upon him said: “Prophet
Muhammad peace be upon him prohibited two
sales in one”.
 IbnMasud
peace be upon him said: “Prophet
Muhammad peace be upon him prohibited two
deals in one”.
 The
above mentioned clauses show that the
fulfillment of the first sale (ASA) is conditional
upon the fulfillment of the second sale (APA).
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Contract Analysis Legal Documentation
Transfer of ownership:
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Clause 4 of (ASA), and the content of preamble (A) and
clause 5 of (APA), - bank has legal ownership of the asset.
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Clause 4 of (ASA), and clause 5 of (APA), - beneficial
ownership of the assets shall pass to the customer, upon
execution of the agreement.
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Preamble (A) of (APA) - bank is the legal owner of the asset.

Clause 7 of (APA) – Bank to be indemnified by customer for
damages arising from assets.
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Contract Analysis Legal Documentation
Transfer of ownership (Shariah View):
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Sale transaction must result in the transfer of title to buyer.
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Passing of beneficial ownership alone, without the legal
ownership does not constitute full transfer of ownership.

When the customer sells back the asset to the bank he is
selling something that he does not own.

The Holy Prophet (PBUH) said “do not sell what you don’t
own”.
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Ownership risk to reside with owner.
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Contract Analysis Legal Documentation - Miscellaneous
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No Collateral. Unsecured loans.
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No security deposit except for two months of advance payments. This
payment is deducted from ‘Facility’ amount before disbursement
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If guarantor is required, guarantor signs a Letter of Guarantee and
BPA authorization
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Stamp duties are applied only on Sale agreement (when Bank sells to
the customer) and not when the Bank purchases from customer
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It is one sided contract as all the Stamp duties, taxes or any legal costs
are borne by the customer
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Defaults handled by the centralized recovery units
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Late payment charges – paid at predefined rate and credit to Bank’s
profit account – clause 8 (ASA)
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Restricted use of Purchase price (Loan amount) – clause 6 (APA)
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Contract Analysis Financial Statement
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Contract Analysis Financial Statement
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Contract Analysis Financial Statement
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Contract Analysis Financial Statement
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74% of the revenues are derived from Financing and
advances
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Bank made highest profits (~70%) from Personal Financing
from among the Financing products
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This product is based on Bay-al-Inah contract
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72% of the profits from the Islamic contracts is earned from
Bay-al-Inah contract
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Low rate of default – less than 3.01 % of NPL
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Contract Analysis Financial Statement
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Industry leader in Personal Finance
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Main reason for higher profits rate from this instrument can
be attributed to:
 Secure recovery.
 Repayment deduction from the source – Employers
 Majority customers – Government employees
 Tie-ups with organizations like BPA for loan recovery
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Advantages and Disadvantages of
Bay-al-Inah
Advantages
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Provides an opportunity to fulfill basic necessities.
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Provide equitable distribution of wealth.
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Enables the shareholders/depositors to profit.
Disadvantages
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Enrich the shareholders/depositors at the expense of the
customers.
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Increase the amount of dept in the society.
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Perform Hilah to circumvent the prohibition of Riba
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Conclusion
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Intent of transaction is to provide loan
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Two sales in one sale transaction
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There is no actual transfer of assets from Bank to customer
and vice versa.
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The customer legally does not own the assets.
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Bank used to own and show computers as underlying asset of
the Aqad at least. No more required to do so.
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In some cases there need not be any certificate at all.
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THANK YOU
(And No Questions Please )

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