2.3.1 EXCHANGE BASED CONTRACTS BAY' AL-INAH

UMC090
SHARI'AH CONTRACTS FOR ISLAMIC

FINANCIAL INSTRUMENTS

EXCHANGE BASED CONTRACTS

BAY' AL-INAH

By: Dr. Wan Noor Hazlina Wan Jusoh

Learning Outcomes

At the end of this topic,
students should be able to:
To explain bay' al-'inah
contract.

Contents

1. Introduction
2. Definition
3. Evidences
4 Pillars of Bay' al-'Inah
5. Flow of Bay' al-'Inah
6. Forms of Bay' al-'Inah
7. Conditions of Bay' al -'Inah
8. Opinions of Scholars
9. Modern Applications in Islamic Finance
10. Conclusion

1SECTION

Introduction

INTRODUCTION Although all the controversial issues
related to bay' al-‘inah have already been
Bay' al-‘inah is one of the well-known sale- discussed before by Fiqh scholars, due to
based contracts among Islamic financial the implementation of the underlying
products. Shariah concept of bay’ al-‘Inah in current
This type of contract has been Islamic financial products, it appears that
applied by most of the Islamic Financial new issues relating to ‘inah have appeared
Institutions (IFI) particularly in Malaysia and need to be deliberated further by
towards their Islamic financial products. contemporary Islamic scholars to ensure
that it is in line with the development of
Islamic financial products.
One of the main Shariah issues that has
occurred in bay’ al-‘inah based
contracts is the sequence of the
implementation of the aqad (contract)
between the bank and the customers.
.

2SECTION

Definition

DEFINITION

Literally: a loan or an advance
payment

Technically: A situation whereby a
person sells something (commodity)
to another person with deferred
payment and delivers it to him
(buyer), then the seller buys back the
commodity at a lower price in cash
before receipt of payment.

DEFINITION

Imam al-Shafie: 
It is a credit purchase of an asset
which is later sold to the original
owner or a third party, whether at a
deferred or spot , higher or lower
price than the first contract, or for an
exchange of goods.

DEFINITION

Ibn Qudamah: 
It is a sale of an asset with a deferred price, and
buys back the same asset at a lower price.  It is a
bargaining (musawamah) sale and purchase
contract i.e. without disclosing or referring to what
the cost price is. 
Bay` al-`Inah conceptually refers to a sale of an
asset, which is later repurchased at a different
price, whereby the deferred price is higher than the
cash price.

3SECTION Evidences

EVIDENCES

Hadith:

"Rasulullah (s.a.w) has ordered Amru
ibn al As to prepare the army for the
battle. He then purchased a camel
in exchange for a delayed payment
of 2 camels " Narrated by al-
Bukhari

EVIDENCES They are Hanafis, Malikis, Hanbalis
and some Shafi’is.  Imam Shafi’i,
Muslim scholars:  Abu Yusuf, Abu Daud and Abu Thur
Permissible based on analogy, the are of the view that this contract of
contract is similar to other sale and sale is not contrary to Shariah
purchase contracts i.e. the transfer principles.
of ownership is taken place. 

The majority view that such a sale is
forbidden.

4SECTION

Pillars of Bay' al-'Inah

Pillars of Seller & Buyer Merchandise/
Bay' al- Goods
'Inah

Price Sighah

5SECTION

Flow of Bay' al-'Inah

FLOW OF BAY' AL-INAH

6SECTION

Forms of Bay' al-'Inah

FORMS OF BAY' AL-'INAH

A sells a A buys a commodity A sells a
commodity to B from B through an commodity to B
for a certain price intermediary present for a certain prie
with payment at the time of the with payment
delayed until a transactions. The first delayed until a
specific date, and step is that the specific date. He
then buys it back intermediary buys it then buys it back,
from B at a lower from B in cash. He with payment
price in cash. then sells it to A, the delayed until a
seeker of 'inah, at a date later than
price higher than the that of the first
price that the transaction at a
intermediary bought higher price.
it from B with
deferred payment.
Then A sells it to Bon
a cash basis at a
price lower than the
price A paid for it.

7SECTION

Conditions of Bay' al-
'Inah

CONDITIONS 1) Mechanism practised is acceptable to the Shafi'e school.
OF BAY' AL- 2) Transacted item is not a ribawi item.
INAH
3) Consisting of 2 clear & separate contracts - purchase & sale
Shariah Advisory Council of contract
Bank Negara Malaysia 4) No stipulated condition in the contract to repurchase the asset.
resolved that bay’ al-'inah
is still necessary in 5) Both contracts are concluded at different times.
Malaysian context. 6) The sequence of each contract is correct.

However market player 7) There is a transfer of ownership of the asset and a valid possession
are required to strengthen of the asset in accordance with Shari'ah & current business practice.
and enhance their
operational process and
documentation to comply
with the features of bay’
al-'inah permitted.

8SECTION

Opinions of Scholars

OPINIONS OF SCHOLARS

Scholars are divided into two groups:

1) THOSE THAT PROHIBIT 2) THOSE THAT PERMIT

Majority of the scholar Includes Imam Shafie and
including Hanafi, Maliki and supported by Ibn Hazm and
Hanbali prohibit al-’inah Shariah Advisory Council of
transaction. Bank Negara Malaysia

The same result adopted by
the Shariah council of
AAOIFI and majority of
Shariah Advisory Council in
Malaysia and Brunei

Justifications of Those That Prohibit

However, if hilah is regarded as a 5 It is hilah to riba
mode to solve problems
(makhraj) that is much needed by 1
the people, bay’ al-'inah
transaction may be acceptable.

As far as hilah is deemed as 4 The underlying issue on bay’ al-'inah is
demeaning the religion, bay’ al- 3 the difference between the muqtada
'inah will not be acceptable. 2 al-’aqd and the actual motive of the
contracting parties, whether to have a
real contract of sale or as hilah for
liquidity or monetary purposes.

The polemic in the issue of
permissibility of bay’ al-'inah is the
status of hilah.

Justifications of Those That Permit

Al-’Inah which is concluded on an Shafi'e approved bay’ al-'inah as financing mode
asset which has changed in
certain aspect. 1

5

Al-’Inah which is concluded on an 4 A sale which is followed by a
asset with a gap of time between 3 subsequent sale but without any
the two contracts, the purchase 2 intention to have al-''inah arrangement.
and
sale contracts.

Al-’Inah that involves two contracts
of sale in which the price of each
contract (either cash or deferred) is
similar to the other.

9SECTION

Modern Applications
in Islamic Finance

MODERN APPLICATIONS IN ISLAMIC FINANCE

Bay’ al-'inah has been used to construct numerous
financing product offered by the bank in Malaysia:

Personal financing

Islamic Overdraft Working Capital
Financing

Sukuk Murabahah Asset financing

Islamic credit card Education financing
Home financing

Bay' al-'Inah Structure (Personal Financing)

Source: Md. Sawari, 2018

Example situation of the above structure:
i. In the first contract, the customer applies for personal financing of RM10,000.00 from the Islamic bank. Then the bank
will offer Islamic financing product based on bai’ al-‘inah contracts. The bank will sell a bank asset (as an underlying
asset) to the customer with the price of RM12,000.00, comprising of cost and profit on a deferred payment basis.
ii. In the second contract, customer then sells that asset back to the bank (to obtain the cash).
iii. The bank will pay RM10,000.00 in cash to the customer.
iv. Finally the customer will pay a monthly installment to the bank of RM500.00 for 24 months as per agreed between the
bank and customer.

Bay' al-'Inah Structure (Home Financing - Floating Rate)

Source: Md. Sawari, 2018

Example situation of the above structure:
i. The customer identifies the house that he wants to purchase (usually with a 10% deposit to the developer). Then, the customer applies
for Islamic home financing with the Islamic Bank. The bank will offer an Islamic home financing product to the customer based on bai’
al-‘inah concept. The bank then purchases that house (as an underlying asset) from the customer.
ii. The bank then pays out cash to the customer.
iii. Afterwards, the bank sells the same house back to the same customer. The payment is on a deferred payment basis with monthly
installments, as per agreed earlier in the contract between the bank and customer.
iv. The bank can grant Ibra’ or rebate (if any) to the customer in certain circumstances e.g. upon early settlement by the customer.

10SECTION

Conclusion

CONCLUSION

The fact that bay' al-'inah involves two contracts, which
are the sale and the buy back of the same commodity,
and that one contract is conditional to another as
practised by some in contemporary Islamic finance,
raises by Shari'ah concerns.
The issue raised in this case is that, though al-Shafi'e
and Ibn Hazm did not prohibit 'inah, they did prohibit
two sales in one contract, and they also prohibited the
specification of additional conditions to a contract.
In this case, the sale and purchase agreements must not
stipulate any terms and conditions that create a
contractual obligation for both transacting parties to
repurchase or resell the subject matter of sale.
In conclusion, it is observed that the bai’ al-‘inah
contract is a controversial contract. To avoid from any
Shariah noncompliance event, certain requirements,
terms and conditions according to the Shafie school of
thought need to be observed properly.

11SECTION

References

REFERENCES

ISRA., (2020). Islamic Financial System: Principles & Operations (2nd
Ed.), Kuala Lumpur: International Shari’ah Research Academy for
Islamic Finance.
Khalid, M. M., (2012). Bay' al-'Inah,
https://www.scribd.com/doc/97553110/Bay-al-Inah (PowerPoint
Slides)
Md. Sawari, M. F., Abdullah, N. A. N., Jubri, M. M., & Aziz, S. A. A.
(2018). Issues Of Bai’al-‘Inah In The Contemporary Islamic Financial
Products And Its Solutions According To The Shariah Principles. South
East Asia Journal of Contemporary Business, Economics and Law,
15(5), 95-103.

Q&A

Type any questions you
may have in the chat.

Thank you!

Feel free to approach us if
you have any questions.

[email protected]