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Malaysian court rules divisive Islamic contract valid

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Points of Essence:

  • The Malaysian court of appeal has finally delivered a verdict which is in favor of Bai Bithaman Ajil. The controversy surrounding this Islamic home product in the global Islamic banking arena is well known which is further exacerbated by lower court rulings holding the product  contractual document invalid. However, the latest ruling by the second highest court in the court upholding the validity of the product’s contract will be at least for now set a clear direction for Islamic finance in the country.  Reuters has the report.

KUALA LUMPUR, April 1 (Reuters) – A Malaysian court has ruled that a popular but controversial Islamic finance contract is valid, a move expected to boost sharia banks in Southeast Asia’s most developed Islamic financial market.

The bai bithaman ajil or deferred payment sale contract is the mainstay of Malaysia’s Islamic finance industry and is commonly used in home loans. But some religious scholars, especially in the Gulf, say it is an interest-based loan cloaked in Islamic dress.

But in a judgment delivered on Tuesday, the Malaysian appeal court said that a bai bithaman ajil contract, as practised by most Malaysian banks, is valid.

“The court of appeal also reiterated that a bai bithaman ajil contract is a sale transaction and therefore must not be compared to a loan transaction,” Bank Islam, which was party to the case, said in a statement.

Most Malaysian banks structure bai bithaman ajil home loan contracts as a two-party transaction where a customer who has paid a deposit for a property transfers his rights to the asset to the bank. The bank then charges him a sum that includes the cost price plus a profit, payable in instalments. An earlier decision by a lower court had said such an arrangement resembles a conventional loan, arguing that the bank should first buy the property from the developer before selling it to the customer for a profit.

Megat Hizaini Hassan, an Islamic finance lawyer, said the appeal court decision was positive for Islamic banks.

Bai bithaman ajil, bai inah (sell and buyback contract) and bai al dayn (debt trading contract) account for over 80 percent of the Islamic banking portfolio in Malaysia, according to Maybank Investment Bank.

(Click on [ID:nISLAMIC] for more Islamic finance stories and ISLAMIC for a speed guide)

(Reporting by Liau Y-Sing; Editing by Neil Fullick)



Written by Suapi Shaffaii

April 5, 2009 at 1:38 am

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