gif Islamic Finance Instruments


Is Bay’ al-Inah shariah’ compliant?


Author: Autumn St John, Global Islamic Finance Magazine Editorial Team, United Kingdom


Abstract: As the Islamic finance industry continues to expand, its appetite for competition with conventional finance understandably increases. Islamic finance institutions compete not just with their conventional counterparts, but also with one another to offer customers products and services to meet their financial needs and desires. As a result of the rapid pace and prolific nature of product development within modern Islamic finance, it is almost inevitable that the sharia’a validity of some of these products’ structures is going to be called into question.


Keywords: Bay’ al-Inah, Regulatory Body, Islamic Finance, Figh, Shariah’ board, Malaysia, Middle East


W 36 Global Islamic Finance February 2011


ith numer-


ous regulatory bodies, Fiqh institutions and sharia’a boards and councils throughout the world, opinions are bound to be almost as diversified as the products themselves. Once such structure that’s a hot topic of de- bate within today’s industry is Bay’ al-Inah. In this article we will look at the main issues surrounding this sales contract. How is Bay’ al-Inah currently used? Who considers it val- id and who doesn’t? What is the case for it and what is the case against?


Bay’ al-Inah refers to the concept of buying and selling between two parties where the bank sells an asset to the customer on a de- ferred payment basis and then the financier immediately repurchases the asset for cash at a discount price (Blog of Knowledge). Consider the customer who wants personal financing from the bank. The customer ap- plies for this personal financing based on


the concept of Bay’ al-Inah. To facilitate the financing arrangement, the bank sells a car to the customer on deferred payment for £5000 and then immediately buys it back for cash at the discount price of £4000. Fig- ure 1 illustrates this example of the transac- tion.


The questionable nature of this practice originates from the matter of intention, or Niyya. The intention of the customer is not to buy a car but to get money from a bank; the intention of the bank is not to buy a car but to give customer money in such a way that it makes a profit. Why then, is the car such a big part of the transaction? In truth, the car is just a formality. Islamic finance expert Warren Edwardes tells Global Islamic Finance Magazine, “[Niyya] comes from the heart. What is the intention behind a struc- tured Islamic product? Is it to genuinely en- ter into a trade transaction relevant to the


business and skills of the participant or is it just a circular device to recreate a conven- tional financial product”? Those who argue that Bay’ al-Inah is not sharia’a-compliant would say that the structure is a circular de- vice to recreate a conventional bank loan. Islamic finance law expert Zulkifli Hasan is certainly of this opinion, stating, “I am of the view that this kind of practice may constitute legal device which is quite equivalent to in- terest-based financing” (Blog of Knowledge). As we shall see, this opinion is echoed by several Fiqh experts (Fuqaha).


Malaysia vs. Middle East


If so much opinion is against Bay’ al-Inah be- ing classified as a sharia’a-compliant struc- ture, how did it become part of the Islamic finance landscape in the first place?It has been commonly used in the structuring of Malaysian sukuk (Rosly and Sanusi, 1999).


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