Contracts and Deals in Islamic Finance: A User s Guide to Cash Flows, Balance Sheets, and Capital Structures

Chapter 2Bai al Inah

We do not attempt to overwhelm the reader with a plethora of Arabic words and we translate every relevant word in English for ease of understanding. Bear in mind that in a study of Islamic laws, sciences would have previously been impossible without a knowledge of Arabic and we thank all those scholars who have made efforts to translate works into language of everyday use or the language of trade, which is English today.

This chapter focuses on the controversial contract of bai al inah, a construct of a sale and buyback between two parties that creates cash flows that resemble a loan structure.

Definitions of Bai al Inah

Bai means sale, tijarat means trade, and ribbh means profit on a sale. Bai al inah or inah is a sale contract that existed in the time of the Prophet (saw).

Bank Negara Malaysia defines bai al inah in the following manner: “Bai' 'inah refers to an arrangement that involves sale of an asset to the purchaser on a deferred basis and subsequent purchase of the asset at a cash price lower than the deferred sale price or vice versa, and which complies with the specific requirements of bai al'inah.”¹

The International Financial Services Board, a standard-setting body for Islamic banks, defines bai al inah as follows: “A contract involving the sale and buy-back transaction of assets by a seller. A seller sells an asset to a buyer on a cash basis and later buys it back on a deferred payment basis where the price is higher than the cash price. It ...