In this aricle, the author have been discussed few of these Islamic contracts. First of all, Islamic contracts is defined as an agreement which occurs a person or a group. According to Kharofa, the word ‘aqd (contract) in Arabic language described as tying a rope, it is about firm belief or determination. In Islamic perspective, Islamic contract means an agreement and engagement between two parties in a legally accepted, impactful and binding manner. The author argued in this article about four Islamic contracts or Islamic financial instruments which are Bai Bithaman Ajil (BBA), Rahn or pawn broking, Bai’ al-‘Inah and sukuk. Despite such inspiration of producing wealth, wealth creation should never be done at the stake that involves riba’ activities and other forbidden activities. Islam locates no blessing on such transactions.
First and foremost, Bai Bithaman Ajil (BBA) is also known as the sale of deferred prices. The transaction of al-Bai’Bithaman Ajil involves the process of selling something by expediting the delivery of goods and deferred the payment to a certain time or period where it applies a sale on cost plus margin. This contract very similar to murabahah contract. The very clear differential between these two are Bai Bithaman Ajil contract, the two parties may know or do not know about the cost and margin of the product while in murabahah contract the two parties must know the cost and margin of the product. The margin of product is like Ijarah which is the lease of the services that provided for an agreed payment or charged within an agreed duration.
There are two contracts within these Islamic contracts, the first contract is between the buyer and the bank, where the second one between the bank and developer. The buyer commands a certain property through the bank, and then the bank buys the property from developer and sells it to the client (buyer) with specified profit that have been achieved agreement between these two parties and the client can make deferred payment to the bank. People usually use BBA contracts in the home financing and car finances which these two properties have long-run contracts while murabahah have short-term contracts.
In addition, profit rate for BBA is fixed. However, it rises questions among people because the interest is usually higher than conventional bank. Bank should be liable for the risk of property sold based on BBA contract, therefore many banks do not want take risk because they only owns the property for a minimum period of time. Also, they do not bear any responsibility if the property has defects because they do not own the property anymore. This situation directly violate the principal of “Al-kharaju bil-dhaman’ which renders to same state of riba. Also, BBA financing is calculated based on market price which the amount of profit being the same with interest but it leads to mafasid that does not comply with maqsad (objective) of eliminating injustice, inequality and poverty. The example of mafasid includes profiteering according to floating rate of interest based on market condition.
There are severe criticism faced by BBA financing which is this Islamic contract has involved a ‘hidden bai’ al-‘inah’ contract where the financier buys and sell it back to the customer. Bai’ al-‘inah has been severely condemned by majority scholars including Malaysian scholars.
The second Islamic contract is rahn but in the modern Islamic banking named as a pawn broking. Ar-rahn is introduced to protect the Muslim society especially from transaction that have riba just like the normal pawn shop that run the business using conventional way. Also, the cost of borrowing under this contract is the lowest compared to conventional pawn broking sheme.
In this transaction, the Islamic bank will provide to the customer with a qardh (benevolent loan) and the customer required to guarantees it with rahn such as valuable jewellery to be kept at the bank as collateral. Rahn means necessitating for customer to give the particular asset as a security for a financing or loan. It is found that the need of interest free-monetary, transparent transaction and low cost borrowing scheme is much preferred by pawning customers. Thus, it achieved fundamental maqasid by providing economic welfare, social equality and a free flow of money among the citizen.
The third islamic contract is Bai’ al-‘inah which involves sale and buy back transaction with fixed mark-ups of an asset by the seller. A murabaha and BBA can be change into this contract when the seller and the buyer are same people. This situation when the seller (bank) buys a commodity from the customer and sells it back to the customer at a cost-plus price on a deferred payment and then after the deferred payment is complete, the same seller (bank) will buy it back to the customer in a lower price on cash.
Usually, this method is used in personal financing products. Theoretically, it has two contracts where the first one is the contract between the bank and the customer. The Bank will sell an asset to the customer at a fixed price (installment). Second, repurchase contracts of assets sold to customers. That is, the bank repurchases the asset with a cash price. In this context, it likes bank as a debtor will get a benefit from this deferred and cash payment in this transaction. But, this transaction is deceived from giving loan contract to sale purchase contact that was permitted in Islam and it can avoid from riba’ content. However, it is riba that pretends allowable under Bai’s name.
In islam, bai’ al-‘inah are disallowed because of the rate profit is interchangeable from the rate of interest in conventional banks. The ultimate consequences of this contact that it is a pure riba’ but in the disguise of bai’. Most other scholars considered that this transaction is an alternative to riba but under the name of bai’ (trade/sale). On the other hand, imam al-shafi’i’s personal opinion view that it is a valid contract as long it fulfilled the conditions and pillars, no matter what intention was hidden. It is certainly illegal in maqasid al-shari’ah it defeats the person in need. Also, some scholars reviewed that it invalidates the contract by using a permissible device (hilah) to approve an interest-bearing loan.
The transaction regard to bai’ al-‘inah violate many fundamental objective of maqasid al-shari’ah. The mafasid that produced from this contract is override the masalih. Primarily, the lender forms a debt in the economy to higher speculation and puts economic system in an unclear risk-bearing and uncertain condition. Secondly, there is no sale and trade in real terms because it just exchanges between two parties and the one who sells back only owns the commodity for a minimum period. Third, as mentioned earlier, this contract was clearly a pure riba’ but under disguise of bai’, so people will think it is permissible because the term is in arabic word. Fourth, the profit that the seller get is antagonistic to the right of profit because it is possessing without the real term of ownership, they own the commodity for a few minutes or less. Thus, it explains the profit is increasing without ownership liability. Fifth, the commodity is brought to be sold for the need of some cash, the market price not really resemble the price offered by bank, on this situation it is nothing other than zulm on the customer.
In addition, tawarruq which is the extension of bai’ al-‘inah contract, although it is seemed allowable as long as it is not tawarruq (tawarruq muazzam) which means being a debt-based financing sheme. It is mafasid that overwhelms the maqasid al-shari’ah. The mafasid such a debt-based financing sheme usually creates these bad implications. First, debt expansion leads to gambling like speculation. Second, it creates greater instability in the economy. Third, the money supply that connected to a debt builds inflationary expansion. Forth, it is resulting inequality in the disproportion of income and wealth. Fifth, it results in incompetent allocation of resources.
Last but not least, Islamic financial concept of sukuk. It is different from other contracts like mudharabah, musharakah, murabahah, ijarah and others alike. The author only discussed about mudharabah sukuk in this article. It is like mudharabah concept, where the sukuk are issued from mudharib, the one who provide energy and responsible to run the business while the other one is investors (rabb al-maal), who gives the capital to run the business. If the business get the profit, the profit will distribute according to ratio that already agreed by both parties. As manager, it is mudharib’s responsibility of the management and remains liable for any loss due to carelessness or mismanagement.
However, the sukuk have come up with the provision of “credit enhancement” to bring in more investors. This allows security to guarantee income and the preservation of capital in sukuk contract. The shariah supervisory agreed that this “credit enhancement” which is providing liquidity facility and buy undertaking at par value in the sukuk contract are not permissible in Shari’ah. The shari’ah board suggested to all Islamic financial institutions to invest more on profit-loss sharing in order to achieve the objective of Maqasid al-Shari’ah.