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TABLE OF CONTENT

Acknowledgement 1.0 2.0 3.0 4.0 5.0 6.0 7.0 8.0 9.0 10.0 11.0 12.0 Introduction Definition of Al Bai Bithaman Ajil The Legality of Al Bai Bithaman Ajil The Concept and Application of Al Bai Bithaman Ajil Islamic Credit Card Features of Islamic Credit Card Takaful Cover for Islamic Credit Cardholders Cash Back Rebate on Credit Card Annual Fee Islamic Credit Card in Al Bai Bithaman Ajil Sources of Al Bai Bithaman Ajil Recommendation Conclusion References Appendices

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The Application of BBA in Credit Card

1.0 Introduction

Generally, to qualify the credit card as being Islamic, it must be observe to one basic requirement, the card must be completely free from any riba or gharar. Riba is usually translated as interest which means an extra amount charged in transactions dealing with silver, gold, or money while gharar means uncertainty. This means that Islamic credit cards cant be charged with any compounding interest from clients outstanding balance and management fees. Also the profit margin is fixed for the whole tenure of contract, which is basically span up to 3 years.

Al Bai Bithaman Ajil or known as BBA is a consumer financing facility based on sale plus profit mark-up, which widely used by Islamic Banking System in Malaysia. Al Bai Bithaman Ajil is the most popular type of financing in Malaysia. Most Islamic banks in Malaysia is employing this financing concept for their customers for all kind of consumers financing such as houses, land, motor vehicle, consumer goods, shares, education financing package and personal financing. Not all financing provided by the bank is running smoothly in repayment process, some customers may have some difficult to fulfill their obligation towards Islamic banks. In my assignment, I will explain about the definition Al Bai Bithaman Ajil, the legality and the concept and application of BBA in credit card.

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2.0 Definition of Al Bai Bithaman Ajil

Al Bai Bithaman Ajil is a sale and repurchase agreements in the concept of Islamic banking used in the financing of hire purchase or purchase insurance. This concept, the bank provides financing to customers for a property or service to buy the assets from the customer or from the vendor with the cash price. After that, they sell back the assets to the customer with the purchase price plus a profit. Customers can pay back for the bank the installment and total the cost depends on three types. The first types is the total purchase cost involved, second types is a payment risk and the last types is the term of agreement. The Al Bai Bithaman Ajil is considered as a method of financing to replace the loan based on the financing as practiced by the conventional banking system.

3.0 The Legality of Al Bai Bithaman Ajil (BBA)

In general, there is no issues arises from the practice of deferring the payment of the sale price. The legality through the sale contract is considered sufficient by jurists to allow BBA. It is reported in one of the Hadith by a companion, Jabir, that the Prophet, bought a camel from him outside the city of Madinah where by the payment was settled later on in Madinah. Another Hadith was narrated that the Prophet purchased a quantity of grain from a Jew on the basis of deferred payment and he pledged his armor by way of security.

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4.0 The Concept and Application of Al Bai Bithaman Ajil (BBA)

In the concept of BBA, that is refers to the sale of goods or service on deferred payment basis at a mark-up credit price, which include the profit margin agreed to by bank and the customer. The packaging involves a combination of sales, profit margin and deferment, conducted between two parties. The sale (bai) between the customers and the bank, a cost plus sale including a stated profit margin (murabahah), deferred payment (al-ajal) and involves one party selling asset at a higher deferred price and buys it immediately for a lower cash price (bai al inah).

Then, the process of BBA involves a sale and purchase agreement between the buyer and the original seller in situation of financing, which includes a payment of deposit to the seller. The profit earned by the bank is legitimate from the Shariah point of a view since the transaction is based on a sale contract rather than a loan contract. Any predetermined profit arising from the loan is prohibited in Islam as it amounts to riba.

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5.0 Islamic Credit Card

Credit card refers to a card that facilities the cardholder to purchase goods and services as well as to withdraw cash based on the agreed terms and conditions specified in the contracts between the cardholder and card issuer. The cardholder is allowed to pay the purchase transaction based on credit card as an alternative method of payment apart from payment by cash or by cheques. In order to ensure that Islamic credit card is used according to Shariah requirements, various guidelines on the usage of Islamic credit card need to be established.

At this time, the Islamic Credit Card is one of the latest banking products offered by Islamic institutions. For example, using the principles of Al Bai Bithaman Ajil (deferred payment sale), the bank issues an interest free and penalty free credit card. With using this credit card, as goods are purchased and the bank will render the transaction on your behalf and simultaneously sell it back to the customer. This credit is payable over a deferred period through installments within a certain time frame.

In some Muslim countries the wealthy true Muslims can well afford a credit card yet they prefer to go through the inconvenience of carrying bulky wads of cash with them while shopping or travelling abroad. They know carrying large amounts of money makes them vulnerable to thefts but they would rather face robbers than riba : the element of interest involved in banking transaction. To a traditional Muslim riba or usury is haram, or a sin forbidden by the Holy Quran.

Interestingly, the drive to introduce an Islamic credit card in Bangladesh is an international effort spearheaded by two organizations that hail from Malaysia. They are the Arab Malaysian Bank Berhad, the only financial institution in the Asian region with a Islamic credit card. The Arab Malaysian Bank Berhad introduced its Islamic credit p- the Al-Taslif Visa Card in 1996. It is based on the Islamic principle
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of Al Bai Bithaman Ajil that allows for payment through installments within a certain period.

Instead of interest, Al-Taslif charges an annual profit margin fee of 12% - 1% monthly on the banks pricing rate for balance of payments. An Islamic credit card can be subscribed to by a non-Muslims as well and banks with this facility are trying to make it valid globally.

An Islamic credit card will probably get the largest number of subscribers in the United States (US) and Britain. The considerable size of the Muslim community in both the countries has already made conventional banks like the HSBC and UBS introduce Islamic products ranging from house buying schemes to investment funds.

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6.0 Features on Islamic Credit Card

This product is open to Muslims as well as non Muslims. This product a small fee may be charged annually for the credit card. Then, you can enjoy the value added benefits of conventional credit cards. For example, bonus points, gifts, shopping discounts, travelers cheques and others. You may need to have some kind of collateral of some form that has been agreed to earlier with your financial institution may be required. Your credit limit will be based on your collateral value and it may be possible to obtain general Takaful coverage. Some banks may provide other services such as zakah payment with this credit card. It may be possible to apply for a supplementary card.

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7.0 Takaful Cover for Islamic Credit Cardholders

There were proposals by Islamic financial institutions to provide takaful coverage associated with personal accident as one of the privilages of which ujrah will be imposed to Islamic credit cardholders. In this regard, the SAC was referred to on the issue as to whether the proposed provision of takaful coverage with the imposition of ujrah is permissible.

The imposition of ujrah for personal accident takaful coverage is not permissible due to following considerations :

The Islamic credit cardholders are not direct participants in the takaful scheme. However, the payment of ujrah is instead imposed on the cardholders as a consideration for the takaful cover arranged by Islamic financial institutions with a third party. Since the ujrah is paid by the customers to the Islamic financial institutions for benefit coverage against risk, hence such arrangement is prohibited by the Shariah considering that the cash is exchanged with cash at different values.

Therefore, the application of hibah concept is considered as an appropriate alternative compared to ujrah in order to avoid syubhah associated with the prohibition of exchanging cash with cash at different values. In addition, there is no Shariah restriction on the application of hibah.

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8.0 Cash Back Rebate on Credit Card Annual Fee

The Islamic financial institution that offered ujrah-based credit card is not permitted to offer cash back rebate to the Islamic credit cardholder. In regular, this facility may be offered as a hibah to the cardholders without any imposition of ujrah.

9.0 Islamic Credit Cards in Al Bai Bithaman Ajil

An Islamic credit card holder does not pay interest on outstanding debt. The cardholder pays an upfront fee which represents a part of the total payment and through this mechanism it is possible to rollover the outstanding debt balance to the next payment cycle. Some Islamic banks return a part of the upfront fee to an Islamic card holder if the credit is repaid in time. The Islamic credit card is based on the principle of Al Bai Bithaman Ajil (BBA) deferred payment sale. In other words, the bank issues an interest-free and penalty free credit card. As goods are purchased using this credit card, the bank makes the transaction on behalf of the customer and simultaneously sells it back to the customer. This credit is payable over a deferred period through installments within a certain time frame.

However, the Al Bai Bithaman Ajil (BBA) principle is sometimes critized as a two-party transaction that tries to circumvent riba. This is because the financing of the credit amount is normally done based on the bank selling a part of its assets based on cost + margin. Instead of paying cash to the credit card holder, she or he given an overdraft facility which can be utilized when paying using the card. Several banks are doing away with this concept and are using Tawarruq (Commodity Murabaha) and Ijara instead. In Tawarruq, the relationship between the issuer as a bank and borrower as a credit card holder is developed based on actual sale and purchase of a tangible asset through a third party.
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10.0

Sources of Al Bai Bithaman Ajil

Al Bai Bithaman Ajil refers to the law based on the following texts : Word of Almighty Allah which means, And Allah has permitted trading and forbidden usury . (Surah Al-Baqarah, 2:275). This verse explains that trading activity is lawful and unlawful if the activity contains elements of Riba.

Therefore, Al Bai Bithaman Ajil is a mechanism in the sale and purchase of preserving Islamic principles and conditions of sale in Islamic Muamalat. And ye shall bring a witness whenever ye, and let not those who write and who become mutual witness suffer harm. (Surah Al-Baqarah, 2:282). The verse also explains the permissibility of sale. Sale and purchase in the form of debt shall require a written sale and purchase transactions. The purpose of the transaction was created to avoid misunderstanding, fraud and fights in the future and does not pose a problem for both sides. There is no sin for you to find gift (profit from your trading) of the Lord your God. (Surah Al-Baqarah, 2:198). In the verse justify taking profit in the sale and purchase of halal manner. Sale and purchase agreement must be executed feeling pleased with each other and according to Islamic principles. Therefore, the mechanism of trading uses Al Bai Bithaman Ajil involves taking profits through the sale and purchase of business assets with deferred payment is required. Hadith Prophet, from Aisha ra that means : The Messenger of Allah has bought food from a Jew to defer payment of a specified period and secures the shirt as a guarantee. (Al-Bukhari).

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11.0

Recommendation

Islamic Banking Act 1983 does not elaborate in what is the element that is not approved by the religion of Islam. There are some elements that are not approved by the religion of Islam under muamalah transactions. If the act does not state specific elements of what is not approved by the religion of Islam, any court in dealing with the case of Islamic financing default payment will hard to find any reference to which elements that is not approved by the religion of Islam to provide judgement.

Therefore it is recommended that Islamic Banking Act 1983 to be amended with an explanation of what are the elements that is not approved by the religion of Islam, since the characteristics of Islamic bank is not merely an intermediary between a surplus units to a deficit unit such as a conventional bank. Islamic bank has a unique characteristic of business relations to its customers, Islamic bank could become a partner of a business based on the profit and loss sharing agreement and Islamic bank could become a seller based on the sale (bai) contract.

In this respect, bank central should not impose the regulation of Islamic bank as the same with its conventional counter part. New regulation need to be endorsed in relation to Islamic Banking system in order to avoid misinterpretation in case there is any dispute in the future in regards to Islamic financing facilities such as Al Bai Bithaman Ajil (BBA). There are some other alternative of Islamic home financing methods such as musharakah mutanaqqisah, ijarah muntahiyyah bit tamleek, or Istina that bank can offer to its customers in order to avoid the repercussions of the current judgment against the Al Bai Bithaman Ajil (BBA).

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12.0

Conclusion

In conclusion, Islamic Banking Act 1983, are procedure and not substantive in nature. Therefore, the court was in searching of its findings has found some difficulty to define what is the element of not approved by the religion of Islam, it could be riba, gharar and masyir as elements not approved by the religion of Islam.

In this case the court has presented the interpretation of Al-Quran in regard to the Prohibition of Riba in Surah Al-Baqarah verse 275-280 and Surah An-Nisa verse 60-61 and the quotation from the Torah and the Holly Bible.

More ever, the court finds that the sale of Islamic banks financing facility using the mode of Al Bai Bithaman Ajil is not a bona fide sale because the court interpretation of the nature of contact Al Bai Bithaman Ajil as hilah or a way to circumvent riba under the name of sale where it is actually a loan.

The court order is to have the securities of defendants to be placed in a public auction and the proceeds of the sale are to be paid to the plaintiffs including the penalty of delayed in time of payment or tawid.

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References :

Nibra Hosen (2012, June 18). Al Bai Bithaman Ajil (BBA) : Application in Islamic Banking System and its Implication upon Default Payment. Retrieved from nibrahosen.multiply.com Prof. Dr. Mohd Masum Billah (2007, April 1). What is an Islamic Credit Card. Retrieved from islamicbanking.info

Glossary of Islamic Banking in Credit Card. Retrieved from mydailytrade.net

Gulf Times Daily (2002, September 16). Islamic Credit Cards. Retrieved from www.islamweb.net

Saiful Azhar Rosly (2006). Critical Issues on Islamic Banking and Financial Markets, (page 88). Al Bai Bithaman Ajil Financing.

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