Please read this scenario analysis, to further understand the difference and similarity between Bai Bithaman Ajil and conventional financing.

Say that I would like to finance a car purchase, a Honda Civic Hybrid that is, which cost me RM129,980, with RM20,000 downpayment.

Conventional method:

In a conventional 9 year financing method, where the bank will charge you, say 3% flat interest rate, the monthly payment that I need to pay until the principal is fully repaid is RM1,293. At the end of the 108th month, total accumulative payment that I made throughout the financing tenure is RM159,675 (RM20,000 for the downpayment, RM29695 for the interest, and RM109,980 for the principal)

BBA:

On the other hand, in a BBA agreement, the bank will buy the said vehicle at RM109,980 and later selling it back to me at a price of RM139,675, inclusive of 3% profit rate. The repayment of the secondary purchase to the bank however is made on monthly basis for the tenure of 108 months. Thus, monthly payment to be made is RM1,293.

Please mind that the profit/interest percentage is just an assumption. One could be higher than another, but believe me, in real world where the interest rate parity holds, and difference between the two is very minimal, if not zero.

Differences:

1) Instead of putting the 3% as an interest, BBA will call it as a profit rate

2) Instead of "financing" the car, the bank will buy the car and resell it back at an exorbitant price to cater for the 3% profit.

Similarities:

1) Willing buyer and willing seller for both contract. No ambiguity as the monthly installment amount are agreed by both counterparties upfront.

2) The total amount paid is the same. Profit or interest or whatever you want to call it, is the same.

3) All terms are contractualised, hence no ambiguity again.

I am sorry for my ignorance with this assessment, but I simply cannot see any real difference between conventional and BBA financing. Apart from the creative response of the Islamic bankers to change a term or two in the contract to legalise the financing, the crude analysis of mine above shows nothing but a mere conformation to the syariah requirements that undermines the main spirit of Islamic financing that should differentiate the conventional and Islamic financing.

Putting aside riba’, which in modern language means compensating lenders for postponing consumptions and the time value of lender’s money, BBA should differentiate itself from conventional financing by reducing the uncertainty and speculation that is inherent in the latter financing method, and equitably important, an equitable distribution of wealth where concentration of wealth in a few hands is countered.

Having illustrated that every term has been clearly specified and contractualised in their own contract, the claims that conventional financing induce uncertainty and speculation can be ruled out.

What’s the difference between me opting for Islamic or conventional then when everything looks alike but the buying and resell back concept?

Hmmm..this is the kind of question that I find difficult to answer.

But I can answer the question on why the amount of profit and interest is almost the same.

Because the banks are owned by the same capitalist shareholders, who need the same reward for both Islamic and conventional financing, despite all the good things being preached about Islamic banking. This capitalist do not seeks a system of Redistributive justice where concentration of wealth in a few hands is countered, but money, money and money.

You greed-bloody-CB!

p/s: On what ground the profit rate is based then? I hope not the infamous time value of money!