Malaysia's RHB Islamic drops controversial contract

KUALA LUMPUR, Dec 9 (Reuters) - Malaysian sharia lender RHB Islamic Bank Bhd will no longer use a contract rejected as un-Islamic by Middle Eastern scholars, in a bid to adopt globally accepted sharia standards, a newspaper said on Tuesday.

RHB Islamic, the sharia banking arm of Malaysia's fourth-largest lender RHB (RHBC.KL), has dropped the use of the bai bithaman ajil structure, the Malaysian Reserve said, quoting RHB Islamic's head of sharia division Ahmad Suhaimi Yahya.

"RHB Islamic has taken a stance of phasing out products and services based on BBA (bai bithaman ajil) or bai al-ina with effect Oct 1," Suhaimi was quoted as saying.

"This is based on (its) sharia committee's advice to adopt globally accepted sharia principles."

The bai bithaman ajil contract is where a bank purchases an asset for its customer and sells it to him at a profit, with the sum to be repaid in instalments. Middle Eastern sharia scholars say the structure too closely resembles interest-based financing.

The newspaper said RHB Islamic would use the musharaka mutanaqisah contract instead, which is where a partner gives the right to his equity partner to acquire the invested asset through a one time payment or periodical instalments.

Differences on the acceptability of the bai bithaman ajil contract arise due to varying interpretations of the sharia, or Islamic law. The bai bithaman ajil structure is heavily used in Malaysian home loan contracts.

The Southeast Asian country, which is home to the world's largest Islamic bond market, is trying to move towards globally accepted sharia standards to woo more cash-rich Gulf investors.

(For more Reuters coverage of Islamic finance, click on [ID:nISLAMIC])

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