First, please forgive me for posing the connundrum of Islamic BBA and conventional hire purchase in my previous post, of which I must admit, was written in a wrong perspective and context altogether. It is wrong, wrong and wrong!
However, for the benefit of others who might had missed the article, please allow me to reproduce it here, AND I REALLY HOPE THAT YOU CAN READ IT THOROUGHLY FOR THE MISUNDERSTANDING OF MINE MIGHT HAVE BEEN YOURS AS WELL, and SPECIFICALLY PLEASE PAY ATTENTION TO THE COMMENT THAT I MADE ON MY OWN PREVIOUS ARTICLE. Millions of thanks to Tn Hj Tarmidzi Mohd Nordin from Etiqa Takaful, whose lecture had decoded the connundrum.
Hopefully at the end of this entry, we could appreciate the importance of Islamic banking albeit the similarities with the conventional banking.
The previous entry:
Who should we point our finger to?
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!
…end of previous post.
My comment on my previous post:
Immensing myself looking at all of the similarities between BBA and hire purchase in terms of its contractual clarity, repayment amount and willing buyer and seller requirement, I had forgotten the core difference of the two and simply accused BBA as having no real difference with conventional.
The ultimate question: What is the difference then when the repayment amount is just similar?
Alhamdulillah, this subtle question was answered yesterday.
The core difference, as already noted but were not given its due emphasis in the previous post is BBA resell the car, while conventional hire purchase finance the car. The terms of reselling and financing make a lot of a difference here no matter how similar their amounts are. The former takes profit while the latter charges interest.
In the first place is it haram for BBA to make profit that is equal to the interest charges charged by the conventional system? Definitely not. The rule of willing buyer willing seller which is manifested through aqad does apply. And this similar rule cannot be applied to conventional hire purchase as there is no sale whatsoever in the first place. Similar to conventional banks that earn from interest, rationally, Islamic banks need some margin over its sales as to cover its overhead, management expenses and shareholders’ rewards.
But why bother setting up Islamic banks when financial products are ‘Islamised’ by a mere change in contract terms here and there?
Hard to answer isn’t it?
But let me rephrase the question in a different context, for the answer to this question had cleared up all the doubt that I had before.
"Why bother getting married when you can always have kids without it?"
The earth does not shake when your aqad was accepted. Shaking hand with the wali does not even enhance your performance. The spouse does not look better either after aqad. Everything is just a status quo, equal and similar except for the fact that you are now legally married. The ultimate question is "Why bother getting married when everything is just the same before and after aqad?"
Isn’t it belief and taqwa?
