One of the latest innovative Islamic financing products is the variable rate bai` bithaman ajil product. The main features of this product are as follows:
- The contract used is deferred payment or bai` bithaman ajil. This contract would not change throughout the financing period, except for the effective profit rate, which may vary, depending on the current market rate, by modifying the rate of ibra’ (rebate), on a monthly basis;
- The bank and the customer would execute an asset sale contract based on a selling price. This selling price comprises cost and agreed ceiling profit. The ceiling profit rate would normally be higher than the current profit rate in the market, since the bank needs to provide a buffer to cater for the increase in the market rate; and
- The bank will give monthly rebate to the customer, to make it equivalent to the market rate, if the current profit rate is lower than the agreed ceiling profit rate. In any circumstances, the effective profit rate will not exceed the stipulated ceiling profit rate.
Based on the above characteristics of variable rate bai` bithaman ajil product, there are several Shari’ah issues that need to be resolved. These Shari’ah issues include:
- Whether a clause on ibra’ can be included in the financing agreement document;
- Whether two forms of ibra’ can be incorporated in one single agreement: one clause on ibra’ for early settlement and another clause on ibra’ for monthly basis, to correspond the current profit rate in the market;
- In the event the effective profit rate is increased with the monthly instalment payment to remain unchanged, whether a clause on rescheduling to extend the financing period can be provided for in the agreement, without the need to execute a fresh contract.
The Council, in its 32nd meeting on 27th February 2003 / 25th Zulhijjah 1423, resolved that granting of ibra’ in a variable rate bai` bithaman ajil product is permissible.
In this context, the bank is the party who offered the ibra’ (unilaterally promises to give ibra’) to the customers and the bank may decide to give ibra’, in any manner it feels appropriate. If the bank has promised (binding promise) to give ibra’ to its customers, the bank is bound to fulfill its promise.
Based on the mutual agreement in the contract, the financing period for the customer can be extended without the need to execute a fresh contract, provided that both parties fulfill all conditions in the agreement and the final price charged on the customer shall not exceed the original selling price (based on the ceiling profit rate) contracted earlier.
Issuer: Shariah Advisory Council, Central Bank of Malaysia.