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Source: Reuters

INTERVIEW-Popular sharia finance contract's days seen numbered

Published: 03 Mar 2009 17:42:10 PST

* Sharia scholars say Islam does not forbid bai bithaman ajil

* Islamic institutions likely to move away from contract to reach more investors

KUALA LUMPUR, March 3 - A popular but disputed Islamic banking contract will eventually fall out of favour as financial markets strive for wider acceptance, sharia scholars said on Tuesday.

The bai bithaman ajil or deferred payment sale contract is the mainstay of Malaysia's Islamic finance industry. But it is viewed with suspicion in the Middle East where some scholars say it is nothing more than an interest-based loan.

Several Malaysian courts have questioned the validity of the contract, rocking the country's Islamic financial markets and reinforcing doubts about whether it meets sharia standards.

Bai bithaman ajil is frequently used in Islamic home loans where a bank first purchases a house before selling it to the client at a profit.

But two scholars defended the contract on Tuesday, saying it did not violate Islamic principles.

"Bai bithaman ajil is a good contract if it is done correctly," Rusni Hassan, a sharia advisor with HSBC Amanah Malaysia, told Reuters on the sidelines of an Islamic investment forum.

The difficulty arises due to implementation of the structure, which results in linking two contracts, she said.

"Under the sharia, if you have two contracts in one it is not allowed," Rusni said. "Bai bithaman ajil should always have the features of a sale contract whereby I sell to you and then the relationship ends."

"Your two contracts should always be independent contracts. It means that I sell to you and then there will be another contract that you become the seller and I am the purchaser, without tying them up."

But Malaysian Islamic institutions are expected to move away from the structure as they try to reach more foreign investors, she said.

RHB Islamic, the sharia banking arm of Malaysia's fourth-largest lender RHB <RHBC.KL>, said last year it has dropped the use of bai bithaman ajil in a bid to adopt globally accepted sharia standards.

Ahmad Hidayat Buang, another sharia scholar, said bai bithaman ajil differs from conventional banking instruments.

"There is an element of risk in bai bithaman ajil," Ahmad Hidayat told Reuters on the sidelines of the conference. "In conventional banking there is no risk at all for the bank, it's absolutely guaranteed to the bank to get back the capital plus interest."

"Say that in the process of buying, the bank has already bought the property and then you die. What happens? There is an element of risk although it is quite minimal because the sale and purchase are done immediately."

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)

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