Property Investment

Bismillahirahmaniraheem

The common one used in banks is the Bai Bithaman Ajil(BBA). Lately I came accross with Musyarakah Mutanaqisah(MM) which is more reasonable.. any advices?Firstly, I would like to make my position clear that currently I am just a student of Islamic Finance and Management. I am not a "qualified expert" yet (insha'Allah I would be in the position later) to give a proper comment on this issue, but as an individual I do have my personal opinion on this issue.

BBA is widely used in Malaysia and probably also in Brunei. In respects of the Shari'ah scholars I will firstly give their brief opinion on BBA. Majority scholars feels that BBA is not the original concept of BBA. The practised BBA is diverted from its original concept.

From my perspective there are a few issues about BBA that needs to be addressed. Firstly, the problem on the ownership of the asset. There will be confusion on wether who is entitled to the beneficial ownership of the asset and who is entitled to get the legal rights.

Then, there is the problem if the client is unable to pay the debt(deferred payment) to the bank. The bank has the right to auction the property away and if the auction price or value is less than the value that is agreed between the bank and the client, the client still have to pay the remaining balance. My opinion is that logically, if the client who doesn't have the money to pay the debt, would definitely not have the money to pay the remaining balance to the bank. So, the design of this contract seems dodgy to me. One should be careful before signing such contract because if you've signed it, it means that you have an agreement with the bank to go through such things.

If the property development is being abandoned, the burden is on the client as he/she still have to pay the deferred payment to the bank. All the risk is being put onto the client if anything goes wrong. In other words, if something goes wrong the client will be put on blame which in my opinion, every party should be held responsible. Even though BBA is not a risk/loss sharing investment between the bank and the client, it is more like a sale contract. The "Islamic bank" is allowed to get certain amount of profit because of the risk the "Islamic bank" takes. If the bank doesn't take any risk, then it resembles to riba (the legal maxim & also hadith :"al kharaj bi ad-dhaman" which means no gains/reward/profit/income when there is no risk/responsibility). So, again I would like to emphasise that every party should be responsible of any loss or gain.

This figure shows the mode of financing "Bai al-inah" which also resembles BBA. If you refer to the BBA figure "Bai al-inah" resembles in the step 2 and step 3 in BBA. Shari'ah prohibits the combination of two agreements in one transation or contract. It should be done seperately. In "Bai al-inah" and BBA, one could see that buying and selling is being done in one contract. In my opinion, the Shari'ah prohibits the combination of two aggreements in one transaction is because of the hadith which was narrated by Abu Hurairah radiallahuanh : "Allah's Messenger salallahualaihiwassalam forbade selling by Mulamasa and Munabadha. " Munabadha means agree exchanging items without seeing or checking the item. Hence, if the product has problem/defects/undeveloped in the first agreement, it will consequently affects the second agreement. Where else if it is being done in a seperate contract, one could always get a different supplier if there was a problem with the product and would avoid a chain reaction effect.

Musharakah Mutanaqisah or in other words diminishing musharakah, is another way to do asset financing. Generally, this is how the financing is done; a client wants to buy a property and seeks financing from a bank. The bank will buy the asset and then rent it out to the client. The client will also need to pay a percentage of the asset on top of the rent. This will go on until the client fully owns the asset. For example, the bank buys the asset and fully owns it. The bank rents it out to the client for £500. On top of that the client needs to add another £100. This £100 is for the ownership of the asset. Let's say the £100 will get 10% of the ownership of the asset. So the bank ownership of the asset is being reduced to 90% and the client owns 10% of the asset. The contract will go on as agreed between the client and the bank until the client fully owns the asset. Before the term ends, the asset is own by both the bank and the client therefore they are both responsible for the asset.

My personal opinion on this issue is that Musharakah Mutanaqisah is definitely a better choice of asset financing. I do not want to say that BBA is "haram" as I am not in the position to do so. I would not want to prohibit the unprohibited. That can only be done by the Lawgiver(Allah) and I hope to be humble as I can be, to be a person who gives an opinion and advice.