Islamic Finance Instruments gif


As above-mentioned, the Islamic finance market is increasingly under pressure devel- op and introduce more and more consumer- friendly products. One country historically known for its fast and innovative develop- ment of Islamic finance instruments, includ- ing different sukuk, is Malaysia. It is little wonder therefore, that it is in this South-East Asian country that Bay’ al-Inah has been put to the most notorious use.


As we know, Sukuk must have underlying assets; the packaging of these assets is known as asset securitization. In the case of Bay’ al-Inah asset securitization, the finan- cier purchases an asset from the issuer and sells it back to the same party at a credit price. This ensures that the issuer will re- ceive the money in cash while the financier will be paid a pre-agreed amount at a future date. The difference between the cash and


mark-up price will represent the profit due to the financier. This method of structuring sukuk is not well received in the Middle East, where Bay’ al-Inah is seen as interest-based financing, just as Hasan sees it. In the eyes of Middle Eastern investors, Malaysian su- kuk structured in this way is actually usu- rious and therefore isn’t sukuk at all, but rather just conventional bonds dressed up in Islamic phrasing.


Different Types of Bay’ al Inah


Although Figure 1 illustrates for us the ba- sic structure of Bay’ al-Inah, there are actu- ally two different subtypes of the contract. In the first type, the parties make an explicit statement of their intention to enter into a twin contract and expressly declare that the same bank that sells the commodity on de- ferred payment will repurchase the asset at


a cash price lower than the former deferred price (Islam & Finance from my Perspective blog). This type is not sharia’a-compliant; there is no contention here. It is invalid and impermissible by consensus of all Fuqaha. The second type is the one over which there is controversy. The parties enter into a twin sale where the commodity is sold to the cus- tomer on credit and the bank repurchases it at a cash price lower than the credit price without any condition in the contracts that necessitate it.


This is the key difference: in the first type, the parties are stating that it is their inten- tion for the bank to buy back the asset. Why then, go through the parade of the customer buying the asset when he has already said it is not his intention to acquire such an as- set? In the second type, the parties do not state that the bank has to buy back the as-


2011 February Global Islamic Finance 37


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