Bai Muajjal

Bai Muajjal may be defined as sale under which the price of the item involved is payable on a deferred basis either in lump sum or in instalments. This system could be of considerable use in financing current input requirements of industry and agriculture as well as in the financing of domestic and import trade. For instance, if the current cost of a bag of fertilizer to the bank is Rs. 50, the bank may sell it through its agent to farmers needing bank finance at Rs. 55 subject to actual payment of this price after an agreed period. The bank would, however, pay Rs. 50 to its agent prior to or immediately after the supply of the fertilizer by the agent under its instructions. The possible mechanism in the case of domestic and import trade may be on the following pattern: A business firm needs finance from a bank to pur- chase/import an item from a domestic seller/manufacturer or foreign exporter. Instead of discounting a bill or making an advance, the bank under an agreement with the firm concerned may purchase/import the commodity on its own account and sell it to the firm at a price, to be settled in advance, which includes a mark-up over the cost price for a reasonable profit margin for the bank. Payment from the firm would be receivable by the bank after the agreed period.

Although to be in conformity with the Shari'ah, it is necessary that the sale item should come in the possession of the bank before being handed over to the other party, however, that would be sufficient for this purpose if the supplier from whom the bank has purchased the item sets it aside for the bank and hands it over to any person authorised by the bank in this behalf, including the person who has purchased the item in question2.

This system commends itself for its relative simplicity as well as the possibility of some profit for the banks without the risk of having to share in the possible losses, except in the case of bankruptcy or default on the part of the buyer. However, although this mode of financing is understood to be permissible under the Shari'ah, it would not be advisable to use it widely or indiscriminately in view of the danger attached to it of opening a back-door for dealing on the basis of interest. Safeguards would, therefore, need to be devised so as to restrict its use only to inescapable cases. In addition, the range of mark-up on purchase prices would also need to be regulated strictly so as to avoid arbitrariness and the possibility of recrudescence of interest in a different garb. The State Bank may, therefore, specify and from time to time review and vary the sub-sectors/items for which banks may provide the needed finance under Bai Muajjal arrangements. It may also lay dojyn the range of the profit margin in general or separately for each sub-sector or item and may impose such other restrictions as may be deemed to be necessary with a view to avoiding the emergence of unhealthy practices.

Source: Money and Banking in Islam, Ziauddin Ahmed; Munawar Iqabal; M. Fahim Khan. Republished with permission.