The Bai Al Inah — from Malaysia to Cameroon

IFN Correspondent Report: Central Africa by Marvin Cole

In a region such as Central Africa (CEMAC Zone) you have to know which structure levers to pull to balance nuance, with practicality, and policy versus legal to form an effective finance mechanism. The Malaysian model of the Bai Al Inah is a classic case of this.

Investors seeking yield and alignment in the region may wish to incorporate understanding of how Civil Law and Islamic Law co-reside in the region. There are some surprising upsides to this type of contract. The Malaysian version of the ‘Sales & Repurchase’ was first put into practice in 2015 and proved to fit well within the scope of legality. The Bai Al Inah is slowly gaining popularity with foreign investors and Islamic finance professionals.

To begin with, the legal system (French Civil Law) does not consistently uphold penalties and judgements at the local level when enforcing breach of contract. Those tasked with overseeing tribunals at “convocations” and even judges have been known to make arbitrary and unforeseen judgements that do not support the fair and clear interpretation of contracts, especially when primary residences are at the center of the contract. This is one of the reasons why unsecured financing is risky and why investors are turning to experienced Islamic professionals who have used the Malaysian Bai Al Inah successfully.

Because real estate law in the region is respected as a strong, versatile tool for ‘wrapping’ transactions, the Bai Al Inah becomes a powerful tool for the way it protects “the spirit” of the transaction — a sale and future repurchase. The Bai Al Inah is taken before a notary for finalization by both parties. The seller sells the property to the buyer, and the title to the asset is transferred to the buyer. There is no lien here. The seller has completely sold the property to the buyer.

In the case of a failed transaction, there is no day in court, lengthy, expensive, drawn out procedures or amendment to the contract after the fact. The buyer owns the asset/property. The Bai Al Inah is clear, effective and specific. It is much harder to “pervert” than a traditional lien. When the transaction and all conditions are satisfied, the seller repurchases the asset. Ownership has changed twice.

The most surprising upside to the Bai Al Inah is the tax impact. The restorative nature of the Bai Al Inah means effectively, the sale has been canceled. Tax on ‘zero’ revenue is not levied and is not accrued — except in some cases where revenue from fees or mark-up has been built into the contract. In a country like Cameroon which has few reciprocal tax treaties, except with France and Canada, this can be a helpful strategy for reducing the impact of dual taxation to investor portfolios.

Any public opinion or media appearance is the author’s independent personal opinion and should not be construed to represent any institution with whom the author is affiliated.

Marvin RR Cole is CEO of Ovamba Solutions.