Contract structure
Bai' al-Inah
The bank sells you an asset on credit at a high price and immediately buys the same asset back from you for a lower cash price, so you walk away with cash and a bigger debt.
How it works
Bai' al-inah is tawarruq with the third party removed. The bank sells you an asset for a deferred price, then buys the same asset back from you at once for a lower price paid in cash. You now hold the cash and owe the bank the higher deferred figure. Nobody else was involved and the asset ends up exactly where it started. On a card, the cash from the buy-back is parked in an account and becomes your spending limit. The mechanism is efficient and easy to document, which is why it was used, and it is also the reason most scholars outside Malaysia treat it as a formality wrapped around a loan at interest.
What it looks like in numbers
Illustrative figures, not a real product. The bank sells you an asset for RM 11,700 payable over 12 months. Seconds later it buys the same asset back from you for RM 10,000 in cash, which is credited to a wadi'ah (safekeeping) account linked to your card. You can spend RM 10,000. You owe RM 11,700. The asset never moved and no third party ever existed. Whether you regard the RM 1,700 as a trading profit or as interest wearing a costume is precisely the dispute.
The argument
Scholars do not all agree about this structure. Both positions are set out here because you are entitled to see the disagreement rather than one side of it.
Why it is accepted
Bank Negara Malaysia's Shariah Advisory Council accepted a credit card built on bai' al-inah plus wadi'ah at its 18th meeting on 12 April 2001, including its use to buy gold, silver and other halal goods. The SAC's stated basis is that two sales concluded separately and independently, each with a proper offer and acceptance, are two valid sales; that some Shafi'i scholars and a few Hanafis such as Abu Yusuf permitted it; and that al-Shafi'i wrote in al-Umm that if a person sells an asset for a term and the buyer takes possession of it, 'there is nothing wrong if he buys back the asset from the one who bought the asset from him at a lower price'. The SAC also set validity conditions at its 16th meeting on 11 November 2000 and 82nd meeting on 17 February 2009: two clear and separate contracts, no stipulated condition to repurchase, contracts concluded at different times, correct sequence, and a real transfer of ownership with valid possession.
Why it is challenged
The majority position outside Malaysia is that bai' al-inah is a legal trick for riba. AAOIFI states it plainly in Shariah Standard No. 30, Appendix B: inah 'is a trick for practicing Riba', it 'takes place between two parties who are in fact a borrower and a lender', and 'the majority of the Fuqaha subscribe to prohibition of Inah'. AAOIFI's clause 4/5 requires the commodity in a tawarruq to be sold to a third party 'so as to avoid Inah which is strictly prohibited'. Malaysia's own SAC then narrowed its position considerably: at the 82nd meeting on 17 February 2009 it resolved that a stipulation to repurchase the asset 'will render the contract as void', including where that stipulation appears in the recital of an agreement, in marketing brochures, in supplementary documents or in appendices. Since the practical convenience of an inah card lay exactly in that pre-arrangement, that resolution removed much of the reason to use it.
Where AAOIFI stands
Rejected. AAOIFI defines inah in Shariah Standard No. 30 clause 2 and calls it 'strictly prohibited' in clause 4/5, and 'a trick for practicing Riba' in Appendix B. AAOIFI Shariah Standards are mandatory regulatory requirements in the UAE, Bahrain, Qatar, Oman, Jordan, Sudan, Syria, Pakistan, Nigeria, Yemen, Mauritius, the Kyrgyz Republic and the QIFC, per AAOIFI's own adoption page, so a bai' al-inah card is not available to a consumer in those markets.
The rulings that govern it
Bank Negara Malaysia Shariah Advisory Council · Shariah Resolutions in Islamic Finance, 2nd edition, item 89 (18th meeting, 12 April 2001)
A credit card structured on bai' al-inah plus wadi'ah is permissible, including for buying gold, silver and other halal goods.
Read the sourceBank Negara Malaysia Shariah Advisory Council · Shariah Resolutions in Islamic Finance, 2nd edition, items 72 and 73 (16th meeting 11 November 2000; 82nd meeting 17 February 2009)
A valid bai' al-inah needs two separate contracts, no stipulated condition to repurchase, different times, correct sequence, and real transfer of ownership. A stipulation to repurchase renders the contract void.
Read the sourceAAOIFI · Shariah Standard No. (30), clauses 2 and 4/5, and Appendix B
Inah is distinguished from tawarruq and described as strictly prohibited and a trick for practising riba, on the view of the majority of jurists.
Read the source
What to watch for
- If you hold a bai' al-inah card and later move to a country that applies AAOIFI standards, the same structure will not be on sale there. That is a genuine scholarly split, not a marketing difference.
- Ask whether the sale and the buy-back are documented as two separate contracts at different times, and whether anything in the paperwork, brochures or appendices obliges the bank to buy the asset back. If it does, Malaysia's own SAC says the contract is void.
- The asset in the transaction is usually one you will never see or use. That is the point of the structure and also the heart of the objection to it.
- Do not assume 'approved by our Shariah committee' settles the question. On inah, committees in different countries reach opposite answers on the same facts.
Sources
- Bank Negara Malaysia, Shariah Resolutions in Islamic Finance, 2nd edition (2010), English, items 69, 70, 71, 72, 73, 89.
- AAOIFI, Shariah Standards, 2015 English edition, Shariah Standard No. (30).
- AAOIFI adoption page, list of jurisdictions applying AAOIFI Shariah Standards as mandatory regulatory requirements.
This explains the mechanism, not the ruling