Bai-Muajjal: How it functions
Afzalul Haq | Friday, 18 March 2011
Afzalul Haq
With the pace of growth of Islamic banking system around the globe, interest of the mass to know the subject has also been remarkable. People are found particularly interested to know the mechanisms through which Islamic banks collect deposits, how they determine profit thereon and the modes of finance they offer to their clients along with the process of charging cost/profit thereon. This article will, however, cluster around a particular mechanism of finance under Trading or 'Bai' mode (out of many). This particular mechanism as transparent from the caption is nothing but Bai-Muajjal. For the purpose of clarification of the misconception thereof, related modes or bases of classifications of Bai or Trade would also be covered in this piece in a nutshell, with example where possible. But other banking details for handling such deals are not to be within the purview of our discussion in this article. Among different Trading or Bai mode of finance in the Islamic banking industry of Bangladesh, Bai Murabaha and Bai-Muajjal top the list. It goes without saying that although most of Bangladeshi people possess religious spirit, they hardly know the Arabic language. On the other hand, names of most of the Islamic banking products are selected from the Arabic vocabulary. So, most of us look for the Bangla or English connotations of such terms for better understanding. The first thirst of a stakeholder is fulfilled with the word-meaning and then interested ones go for details of the concerned products including the key features and modus operandi thereof and so on. For example, while asked what 'Bai-Muajjal' means, it would have an easy translation in common terms such as credit sale/sale on deferred payment, because 'Bai' means Trade or Sale; 'Muajjal' means deferred or on credit. Therefore, Bai-Muajjal means sale (delivery of goods) now, pay later. Then interested people should be apprised that among key features of Bai-Muajjal mode of investment important ones are a) There must be a time gap between the sale of goods and payment of price there against. So it is neither a cash sale/spot payment sale nor is it an advance payment sale. b) Sales price once fixed must not be changed for delay in payment of the price. c) The vendor must have title and possession to the goods s/he sells. d) Profit, loss, break-even, subsidy (if any), etc. all to be determined according to the classification of the sale based on pricing procedure. On the basis of the pricing procedure (in terms of the nature of profit agreed upon in the contract), a sale may be categorised into the following four types: i) Murabaha: Bai means trade/sale and Murabaha means with declared profit. As such Bai Murabaha means sale at (cost plus) declared profit. It is the sale for the price above the cost price; and profit or addition to cost must be known to both the seller and buyer. In short, it is a cost-plus sale in which the profit is expressly disclosed by the seller. Among the key features thereof, important ones may be mentioned, as a) Necessity to declare the cost and profit separately, b) Sales price once fixed cannot be changed afterwards for extension of time for repayment, if any, and c) The vendor must have title and possession to goods to sell etc. Of course the feature distinguishing it from other kinds of sale is that the seller in Murabaha expressly tells the purchaser how much cost he has incurred and how much profit he is going to charge in addition to the cost. Therefore, if a person sells a commodity for a lump sum price or on installment basis without reference to the cost, this is not Murabaha, even though he is earning some profit over his cost. Why this is not Murabaha? Because, the sale is not based on a 'cost-plus' concept. In this case, the sale is rather called Musawamah (discussed later). Owing to the specialty of declaration of true cost and profit in Murabahah, it has been considered by the jurist as a sale based on trust or amanah. ii) Musawamah: Musawamah sale is basically a sale by mutual consent completed and concluded through negotiations between the seller and buyer. Here no reference need be made to the original cost price. It is also a 'profit sale' but the actual cost price and the amount/ percentage of the profit may be unknown to the buyer because the seller is not bound, in musawamah sale, to disclose the cost price; obviously unlike Murabaha. iii) Tawliyyah: Tawliyyah sale is a sale at cost price without any profit for the seller. It is similar to Murabaha with reference to the basis of the sales (at true cost), namely amanah or trust. iv) Wadi'ah: Wadi'ah sale takes place when the seller agrees to sell a commodity at a lower price than that of the cost price. Since the seller is selling the commodity at a lower price, it is also a trust sale. On the other hand, according to the manner of payment there may be the following three types of sale: i) Cash/spot payment sale in which the purchaser is under obligation to settle the purchase price agreed upon when concluding a contract. If the buyer could not settle the payment for one reason or another, the seller has a right of retaining the thing sold until he has received the payment of the price. ii) Deferred payment (Muajjal) sale may be Lump sum payment payable on a fixed future date. Such transaction may also be payable on installment basis. Usually, the former is called Bai-Muajjal and the latter 'Installment sale' although in spirit both are Muajjal as opposed to cash or spot payment. iii) Besides, there are exceptional modes where price is rather paid in advance and the goods are delivered later. These are Bai Salam and Bai Istisna. Again, Earnest money (bay' al-'arabun) is also an advance payment to the seller which constitutes part of the purchase price should the buyer decides to buy the good. Otherwise, the advance payment may be forfeited to the seller. While dealing with the trading modes of investment, a wrong concept prevails in our Islamic Banking study which disregards two different bases for classifications of Sales or Trade. The fact which is ignored here is that Bai Murabaha is a bai/sale categorised on the basis of pricing procedure whereas, Bai-Muajjal (Baim) is a bai/sale categorised on the basis of mode of repayment. Such misconception of ignoring the aforestated fact has also infected some reference texts even. Thus professional bankers, trainers on the subject as well as the academics in our country could not save the concept from distortion. Perhaps this germ infected Islamic banking in Bangladesh since its inception. Then the initial inadvertent wrong idea/ paper might have been replicated and intruded into the realm of the Islamic banking resources without any prudent cross-check within 27 years of Islamic banking in Bangladesh. What is this wrong? This is the provision for 'declaration of the amount of profit' stated as the point of difference between Murabaha and Muajjal. This is taught in such a way that in a trade where profit is essential to declare, can never be dealt on credit (Muajjal). It is, therefore, unfairly said as two distinct modes, categorised on the same basis of pricing i.e. nature of profit agreed upon. In fact such a trade is never essentially opposed to deal on credit. It seems extremely surprising when university teachers on the concerned subject with practical Islamic banking experience ask their students for and teach them to differentiate between Bai Murabaha and Bai-Muajjal. In fact Murabaha does not have any contradiction with Muajjal. A deal simultaneously can be a Bai Murabaha (for declared profit) and Muajjal (as payment deferred). Murabaha does not tell of the mode of repayment (cash, defer/credit or installment etc.); it stipulates declaration of profit amount (and as such cost also). On the other hand, Muajjal does not tell of the cost, profit, loss, or any declaration thereof. Rather it tells of point of time of repayment of price which must not be on the spot or cash. Payment of price for Bai-Muajjal must be deferred, as it is a credit sale unlike cash or spot sale. If price is paid in cash/ on spot, only non-declaration of cost and profit amount, can never make a deal Muajjal. It is only the 'deferred payment' which can make a deal Bai-Muajjal irrespective of profit/ loss or declaration thereof. In fact, as already classified above it is the 'Musawama' sale where the mandatory stipulation of declaration of profit amount is waived (or not asked for) unlike Murabaha. Most of our day to day shopping (say in the kitchen market) fall under Bai Musawama mode of transaction. Like Murabaha, Musawama can also have any of the payment basis namely cash or credit (Muajjal) including installment. Thus in true sense Bai-Muajjal is not opposed to Bai Murabaha. Rather it is opposed to Bai Salam or Bai Istisna. Bai Salam and Bai Istisna are transactions where price is paid first (in advance), goods delivered later on. Bai-Muajjal contrasts with cash sale or sale on spot payment. The misconception of differentiation between Bai-Murabaha and Bai-Muajjal may be compared with classification of a person on the basis of Gender (male, female) and mingle it with another classification based on Mother tongue. If a male is shown opposed to Bangali that would mean no male can be Bangali. In fact none can insist that a male must not be a Bangali or English. Similarly, an English cannot be restrained from being a male or female. They are independent classes. Both male or/and female are eligible for being Bangali or English. Similarly, Murabaha can be cash or Muajjal. Muajjal can be Murabaha, Musawamah, Tawliyyah or Wadi'ah. Murabaha cannot be Musawama, nor can it be Tawliyyah or Wadiah. Muajjal cannot be Cash or Spot payment sale. A male cannot be female, but can simultaneously be 'male and Bangali' or 'male and English'. Asking a question for the difference between a male and an English is a nonsense; so is the efforts to ask for difference between Murabaha and Muajjal. A similar foolish question may be to ask for the difference between a white and a fat man and so on. The writer is the First Vice President and Head of Islamic Banking of Bank Asia Ltd. He can be reached at email [email protected]
With the pace of growth of Islamic banking system around the globe, interest of the mass to know the subject has also been remarkable. People are found particularly interested to know the mechanisms through which Islamic banks collect deposits, how they determine profit thereon and the modes of finance they offer to their clients along with the process of charging cost/profit thereon. This article will, however, cluster around a particular mechanism of finance under Trading or 'Bai' mode (out of many). This particular mechanism as transparent from the caption is nothing but Bai-Muajjal. For the purpose of clarification of the misconception thereof, related modes or bases of classifications of Bai or Trade would also be covered in this piece in a nutshell, with example where possible. But other banking details for handling such deals are not to be within the purview of our discussion in this article. Among different Trading or Bai mode of finance in the Islamic banking industry of Bangladesh, Bai Murabaha and Bai-Muajjal top the list. It goes without saying that although most of Bangladeshi people possess religious spirit, they hardly know the Arabic language. On the other hand, names of most of the Islamic banking products are selected from the Arabic vocabulary. So, most of us look for the Bangla or English connotations of such terms for better understanding. The first thirst of a stakeholder is fulfilled with the word-meaning and then interested ones go for details of the concerned products including the key features and modus operandi thereof and so on. For example, while asked what 'Bai-Muajjal' means, it would have an easy translation in common terms such as credit sale/sale on deferred payment, because 'Bai' means Trade or Sale; 'Muajjal' means deferred or on credit. Therefore, Bai-Muajjal means sale (delivery of goods) now, pay later. Then interested people should be apprised that among key features of Bai-Muajjal mode of investment important ones are a) There must be a time gap between the sale of goods and payment of price there against. So it is neither a cash sale/spot payment sale nor is it an advance payment sale. b) Sales price once fixed must not be changed for delay in payment of the price. c) The vendor must have title and possession to the goods s/he sells. d) Profit, loss, break-even, subsidy (if any), etc. all to be determined according to the classification of the sale based on pricing procedure. On the basis of the pricing procedure (in terms of the nature of profit agreed upon in the contract), a sale may be categorised into the following four types: i) Murabaha: Bai means trade/sale and Murabaha means with declared profit. As such Bai Murabaha means sale at (cost plus) declared profit. It is the sale for the price above the cost price; and profit or addition to cost must be known to both the seller and buyer. In short, it is a cost-plus sale in which the profit is expressly disclosed by the seller. Among the key features thereof, important ones may be mentioned, as a) Necessity to declare the cost and profit separately, b) Sales price once fixed cannot be changed afterwards for extension of time for repayment, if any, and c) The vendor must have title and possession to goods to sell etc. Of course the feature distinguishing it from other kinds of sale is that the seller in Murabaha expressly tells the purchaser how much cost he has incurred and how much profit he is going to charge in addition to the cost. Therefore, if a person sells a commodity for a lump sum price or on installment basis without reference to the cost, this is not Murabaha, even though he is earning some profit over his cost. Why this is not Murabaha? Because, the sale is not based on a 'cost-plus' concept. In this case, the sale is rather called Musawamah (discussed later). Owing to the specialty of declaration of true cost and profit in Murabahah, it has been considered by the jurist as a sale based on trust or amanah. ii) Musawamah: Musawamah sale is basically a sale by mutual consent completed and concluded through negotiations between the seller and buyer. Here no reference need be made to the original cost price. It is also a 'profit sale' but the actual cost price and the amount/ percentage of the profit may be unknown to the buyer because the seller is not bound, in musawamah sale, to disclose the cost price; obviously unlike Murabaha. iii) Tawliyyah: Tawliyyah sale is a sale at cost price without any profit for the seller. It is similar to Murabaha with reference to the basis of the sales (at true cost), namely amanah or trust. iv) Wadi'ah: Wadi'ah sale takes place when the seller agrees to sell a commodity at a lower price than that of the cost price. Since the seller is selling the commodity at a lower price, it is also a trust sale. On the other hand, according to the manner of payment there may be the following three types of sale: i) Cash/spot payment sale in which the purchaser is under obligation to settle the purchase price agreed upon when concluding a contract. If the buyer could not settle the payment for one reason or another, the seller has a right of retaining the thing sold until he has received the payment of the price. ii) Deferred payment (Muajjal) sale may be Lump sum payment payable on a fixed future date. Such transaction may also be payable on installment basis. Usually, the former is called Bai-Muajjal and the latter 'Installment sale' although in spirit both are Muajjal as opposed to cash or spot payment. iii) Besides, there are exceptional modes where price is rather paid in advance and the goods are delivered later. These are Bai Salam and Bai Istisna. Again, Earnest money (bay' al-'arabun) is also an advance payment to the seller which constitutes part of the purchase price should the buyer decides to buy the good. Otherwise, the advance payment may be forfeited to the seller. While dealing with the trading modes of investment, a wrong concept prevails in our Islamic Banking study which disregards two different bases for classifications of Sales or Trade. The fact which is ignored here is that Bai Murabaha is a bai/sale categorised on the basis of pricing procedure whereas, Bai-Muajjal (Baim) is a bai/sale categorised on the basis of mode of repayment. Such misconception of ignoring the aforestated fact has also infected some reference texts even. Thus professional bankers, trainers on the subject as well as the academics in our country could not save the concept from distortion. Perhaps this germ infected Islamic banking in Bangladesh since its inception. Then the initial inadvertent wrong idea/ paper might have been replicated and intruded into the realm of the Islamic banking resources without any prudent cross-check within 27 years of Islamic banking in Bangladesh. What is this wrong? This is the provision for 'declaration of the amount of profit' stated as the point of difference between Murabaha and Muajjal. This is taught in such a way that in a trade where profit is essential to declare, can never be dealt on credit (Muajjal). It is, therefore, unfairly said as two distinct modes, categorised on the same basis of pricing i.e. nature of profit agreed upon. In fact such a trade is never essentially opposed to deal on credit. It seems extremely surprising when university teachers on the concerned subject with practical Islamic banking experience ask their students for and teach them to differentiate between Bai Murabaha and Bai-Muajjal. In fact Murabaha does not have any contradiction with Muajjal. A deal simultaneously can be a Bai Murabaha (for declared profit) and Muajjal (as payment deferred). Murabaha does not tell of the mode of repayment (cash, defer/credit or installment etc.); it stipulates declaration of profit amount (and as such cost also). On the other hand, Muajjal does not tell of the cost, profit, loss, or any declaration thereof. Rather it tells of point of time of repayment of price which must not be on the spot or cash. Payment of price for Bai-Muajjal must be deferred, as it is a credit sale unlike cash or spot sale. If price is paid in cash/ on spot, only non-declaration of cost and profit amount, can never make a deal Muajjal. It is only the 'deferred payment' which can make a deal Bai-Muajjal irrespective of profit/ loss or declaration thereof. In fact, as already classified above it is the 'Musawama' sale where the mandatory stipulation of declaration of profit amount is waived (or not asked for) unlike Murabaha. Most of our day to day shopping (say in the kitchen market) fall under Bai Musawama mode of transaction. Like Murabaha, Musawama can also have any of the payment basis namely cash or credit (Muajjal) including installment. Thus in true sense Bai-Muajjal is not opposed to Bai Murabaha. Rather it is opposed to Bai Salam or Bai Istisna. Bai Salam and Bai Istisna are transactions where price is paid first (in advance), goods delivered later on. Bai-Muajjal contrasts with cash sale or sale on spot payment. The misconception of differentiation between Bai-Murabaha and Bai-Muajjal may be compared with classification of a person on the basis of Gender (male, female) and mingle it with another classification based on Mother tongue. If a male is shown opposed to Bangali that would mean no male can be Bangali. In fact none can insist that a male must not be a Bangali or English. Similarly, an English cannot be restrained from being a male or female. They are independent classes. Both male or/and female are eligible for being Bangali or English. Similarly, Murabaha can be cash or Muajjal. Muajjal can be Murabaha, Musawamah, Tawliyyah or Wadi'ah. Murabaha cannot be Musawama, nor can it be Tawliyyah or Wadiah. Muajjal cannot be Cash or Spot payment sale. A male cannot be female, but can simultaneously be 'male and Bangali' or 'male and English'. Asking a question for the difference between a male and an English is a nonsense; so is the efforts to ask for difference between Murabaha and Muajjal. A similar foolish question may be to ask for the difference between a white and a fat man and so on. The writer is the First Vice President and Head of Islamic Banking of Bank Asia Ltd. He can be reached at email [email protected]