In conventional loans, the contractual interest rate is the sum of
· interest rate of deposits
· overhead/transaction cost
· inflation premium
· default risk premium
In the case of al-bai-bithamain ajil
(BBA) facility, the Shariah can only recognize the overhead and profit margin elements. Both usually only command about 2% and 1% respectively. For smaller banks, the lack of scale economies may see higher overhead cost than larger size banks. Overall, the mark-up element should amount to about 3%.
However, banks must also impute the cost of deposit factor. Since, no promise to pay hibah and mudarabah profits is given, this naturally implies that Islamic banks need not worry about determining the contractual rate of return to depositors. But how can this be if they can declare upfront how much profit they want from each of the murabahah and BBA sale made?
For example, the bank sells an asset for $200,00 on BBA credit term. Accordingly, the BBA or murabahah contract gave customers the right to know the cost price. It is then not difficult to see that given the terms of maturity of say, 20 years, the profit rate per annum should amount to 10% with a nominal mark-up of $100,000.
But now, the question is how should the bank explain the $100,000 profit they make from the BBA sale as legitimate (halal
)? Recall the ‘iwad or equivalent contervalue is the condition for a lawful sale. Any increase, according to the majority of jurists in the Shafi’, Hanafi, Maliki, and Hanbali schools must contain ‘iwad.
To benefit from these increases, Islamic banks must be able to provide something of equal value in return. Hence, when someone pays $200,000 on BBA financing at $100,000 cost price, what is the nature of ‘iwad he receives from the bank in exchange for the $100,000 profit?
Certainly, if the transaction is made on the spot or cash basis, problem on the nature of lawful and unlawful gains should not have risen since no time element is involved here. Which means that the bank purchases the goods at direct or wholesale price, it assumes the risk of ownership. While doing so, the bank sells the goods to the customer for $200,000 on cash term.
The legitimacy of the profit made is irrelevant since the bank has indeed delivered the ‘iwad equivalence. This shall be in the form of:
· its ability to make the goods available in the market
· absorbing market risks and risk of ownership (daman milkiyah
In the former, we are looking at the valued-addition( kasb
) factor, while latter describes the ghorm or risk-taking aspects of sale.
However in the BBA sale, it seems that the $100,000 profit is created on the basis of time factor alone. To some extent, we failed to understand how a profit rate of 10% can be determined ex ente when concurrently Islamic banks cannot declare ex ente the rates of return on deposits.
Even if we accept the assumption that the 10% profit per annum charged on every BBA sales arises from 1) cost of deposits, say 3% 2) overhead 2% and 3) inflation premium margin 1%, what then explain the additional 4% stipulated in the contract.
In conventional loans, the 4% can easily be explained by credit or default premium.. This risk premium or spread will vary according to the type and maturity of loans coupled with the credit ratings of borrowers. Normally, bank will charge higher spread when risk of defaults is higher. But these can only hold for loans (qard) and not sale (al-bay’)?
So, what can indeed explain these extra profits that Islamic banks took from BBA sales. If the answer is about risk of default, then certainly it is not about ‘iwad. The risk of default is about the game of waiting for payments and problem of collections. It does not concern market risk. It may be easy to say that profit from BBA is halal since BBA is a not a loan but a sale (al-bay’).
But one has been misled to think that BBA is a spot sale. The mark-up from spot sale is lawful since it contains ‘iwad but can we imply the same for BBA credit sale when no tendency of ‘iwad can be detected there ? This is true since the profit created from BBA is a consequence of waiting i.e. time value. In this sense, the Shariah advisors seemed to have approved gains arising from time value via BBA financing.