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Malaysia’s Bank Muamalat seeks bai bithaman replacement

The move is considered a sign of growing uniformity in sharia interpretation.

August 3, 2010 10:48 by

Islamic lender Bank Muamalat Malaysia Bhd is studying alternative financing structures such as ijara and musharaka mutanaqisa to reduce its dependence on bai bithaman ajil, its chief executive said on Tuesday.

Once a staple of Malaysia’s Islamic market, bai bithaman ajil is falling out of favour as the $1 trillion industry tries to discard contentious contracts in favour of more globally accepted concepts such as ijara.

This is viewed as a sign of growing uniformity in sharia interpretation as Islamic financial institutions try to reach wider markets.

“We are looking at other products to replace it, alternatives to the bai bithaman ajil,” Bank Muamalat Malaysia CEO Mohd Redza Shah Abdul Wahid told Reuters on the sidelines of an Islamic finance conference.

“There is certainly a concerted effort in terms of diversifying from bai bithaman ajil.”

Bai bithaman ajil makes up about 90 percent of the bank’s financing portfolio, Redza said.

Bai bithaman ajil is based on the controversial bai inah concept, which has drawn comparisons to a conventional loan.

Most local banks structure bai bithaman ajil home financing contracts as a two-party transaction where a customer who has paid a deposit for a property transfers his rights to the asset to the bank. The bank then charges him a sum that includes the cost price plus a profit, payable in instalments.

It is also widely used to structure Islamic bonds, as in offerings by issuers including national mortgage firm Cagamas and top power producer Tenaga Nasional.

Malayan Banking had earlier estimated that bai bithaman ajil contracts, along with bai inah and bai al dayn (debt trading contract) account for over 80 percent of the Islamic banking portfolio in Malaysia.

“I don’t think it is a last resort instrument,” Redza said. “There are other products which also have certain challenges as well. At least this one has been tried and tested.”

Musharaka mutanaqisa is a partnership where one partner promises to buy the equity share of the other partner gradually until the title is fully transferred to him.

Redza said Bank Muamalat would grow its business in Malaysia for the next two years before exploring foreign markets.

Bahrain-based Islamic lender Al Baraka said in January it was in talks to buy a stake in Bank Muamalat as Gulf lenders look for new growth markets.

Malaysian conglomerate DRB-Hicom holds a 70 percent stake in Bank Muamalat and state investment agency Khazanah Nasional owns the rest.

Bank Muamalat’s assets totalled about $4.3 billion at the end of September, according to a newspaper report.

(Reporting by Liau Y-Sing; Editing by Kim Coghil)

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