Friday, July 13, 2012

ISLAMIC BANKS AND HOUSES UNDER CONSTRUCTION

ISLAMIC BANKS AND THE SALE OF HOUSES UNDER CONSTRUCTION: WHERE IS THE FAULT?

Issues have been recently raised about the predicament faced by consumers who have to suffer due to houses they purchased using Islamic banking facilities provided by Islamic banks in Malaysia. According to one report by Islamic Consumer Association of Malaysia (PPIM) complaints received by the association from consumers about house financing   in the past couples of years run into thousands mostly related to non-delivery of the purchased houses due to abandoned housing projects. Many parties have voiced their displeasure at the way the relevant financing is done and called for an immediate review by competent Shariah authority to address injustice to the consumers. What is more damaging, it has been said, the good name of Islam has been compromised by such a banking practice resorted to by the so-called Islamic banks.

What happened was that normally it involved many customers who had purchased  houses under construction from developers where the same houses were subsequently sold to Islamic banks at the original buying cost minus deposit paid to the developers and the same were repurchased back from the bank by the customers/purchasers at a higher price normally to be paid in deffered payment term or installment as a form of facility granted by the banks. In the Malaysian practice such facilities are structured using the concept of BBA (bai bi thaman ajil-sale with price differed).

However given the fact that there are two immediate transactions (one after the other) entered into by the bank and the customers concerned, such a facility is in fact a form of what is known as Inah transaction i.e it is a form of BBA where there is an embedded element of Inah sale (sale and repurchase back) in it where the house is sold to the bank and repurchased back by the customer at much higher prices.

Notwithstanding this Inah issue, what is problematic here relates to the fact that the subject-matter of the sale is a house under construction or one that is to be constructed. This is the first mistake done by the parties to this form of financing which they name  as BBA (deffered payment sale), since  according to Shariah law in BBA/deffered payment sale, only the price is allowed to be paid in future ( deffered) and not the asset (subject-matter of the sale) also be deffered as well like  what happen in the context of the housing finance as described above where the house is yet to be in existence. The true Shariah concept of BBA dictates that in a Shariah compliant BBA ( setting aside the issue of Inah for a while), once agreed, the BBA must end up with the purchaser being delivered with the asset purchased (together with conveyance of full title to depict true ownership transfer from the seller) right after the sale contract.

But what happen in the financing done by the banks is that the bank purchases the so-called house from the customer (do not forget at that time the house is yet to be constructed by the developer) and immediately sells it back to the same customer for a deffered price to paid in installment the first of which is to be paid right after the contract is signed and after the bank had paid the proceed of the first sale ( sale by customer to the bank) to the developer (who had in the first instance sold the same “house under construction” to the customer in the first place) thereby releasing the customer from the debt owed to the developer and at the same time assuming new  debt toward the bank (the amount of which is higher) as a result of the BBA purchase from the bank in the second transaction.

As seen, such a procedure as described can be aptly termed as a form of conventional financing rather that an Islamic one given the absence of one of the most important element of validity from Shariah perspective where the BBA was affected for a non existent subject matter whereas a  valid BBA sale  requires the subject matter to be in existence and actually delivered to the relevant purchaser right after the conclusion of the contract.

What is more astonishing is that (as reported by consumers) irrespective of whether the house is completed and delivered or not they have to pay the installments to the bank for  houses that have never seen the day light. Worst still at the same time the same customer in some cases is forced to pay rent for a substitute housing during the relevant period such that it is more like he has been penalized twice for such an event of non- completion/delivery for which he also has to blame himself for entering into such an arrangement in the first place. But for the banks who hold out to be running their business as per the Shariah requirement, such an issue cannot be taken lightly and the society at large surely has an interest  at stake when issues are raised about such a practice that seems to be a blatant disregard of Shariah requirement.