Car financing in Islamic banks methodology and ways of financing

Car financing in Islamic banks methodology and ways of financingNaveed Ahmed(5376).ASIF RAZAREHANM.UMAIR.SHOBYAMMAR

ISLAMIC CAR FINANCING

An Islamic alternative to conventional car financing is Islamic CAR IJARAH, which meets the principals of Islamic Shari'ah.

IJARAH is an Arabic term with origins in Islamic Fiqah, meaning to give something to rent. Legally, the lease contract is not a, sale of the object, but rather a sale of the usufruct (the right to use the object) for a specified period of time. The sale of usufruct is permissible in Islam,

It is established by the following Hadith narrated by ' Ahmad, 'Abu Dawud, and Al Nasa.'i on the authority of Sa'd (mAbpwh):

The farmers during the time of the Prophet (PBUH) used to pay rent for the land in water and seeds. He (PBUH) forbade them from doing that, and ordered them to use gold and silver (money) to pay the rent.

Also, 'Ahmad, Al Bukhari and Muslim narrated on the authority of 'Ibn 'Abbas that the Prophet (PBUH) hired a man to cup [water] for him, and paid him his wages.DIFFERNCE BETWEEN CONVENTIONAL AND ISLAMIC CAR FINANCINGCar Ijarah has been designed according to the principles of Islam and is completely interest-free. Moreover the Ijarah contract and other documentation also comply with Shariah requirements.

On the other hand, a conventional car-financing scheme is actually an Interest based loan given by the financial institution and interest is charged on that loan. Also, in conventional car-leasing schemes, the lease contract is not in compliance with Islamic Shariah and has Riba and other un-Islamic elements in it.

In Car Ijarah the asset remains in the ownership and risk of bank and the customers only pay the rentals for use of the asset; just like house rent.

Mode of financing used In market.Regarding the problems encountered with the conventional mode of car financing and regarding the fact that such a form of financing is strictly prohibited in Islam the following alternatives have been considered while deciding on the option or the ultimate solution for the car financing:

Diminishing MusharakahIjarah wa iqtinaLeasing Ijarah

Diminishing MusharakaBased on Shirkat-ul-Milk

Means joint ownership in a property

Three components

Joint ownership of the Bank and customerCustomer as a lessee uses the share of the bank Redemption of the share of the Bank by the customer

Common purposes

Diminishing Musharakah is commonly used for the purpose of financing of fixed assets by various Islamic banks.

House financingCar FinancingPlant and machinery financingFactory/Building financingAgriculture land financingAll other fixed Assets. Ijarah Wa IqtinaThe lessor may sign a separate promise to gift/Sale the leased asset to the lessee at the end of the lease period, subject to his payment of all amounts of rent. The validity of this arrangement is subject to two basic conditions:Firstly, the agreement of Ijarah itself should not be subjected to signing this promise of sale or gift.Secondly, the promise should be unilateral and binding on the promisor only.

IJARAH - LEASINGAn Islamic alternative to conventional car financing is Islamic Car Ijarah, which meets the principals of Islamic Shari'ah. This is the ultimate solution or the best alternative being considered.

Leasing should not be interest-based loan or replacing interest with rent, rather it should comply with all of the following conditions of Islamic leasing

Moreover in the leasing or Car Ijarah the risk is not entirely of the lessee as in the case of conventional car financing. The lessee only has the risk of the damage to the property done due to his negligence otherwise the bank bears all the liability of the ownership of the car. Thus car Ijarah is the best alternative chosen foe the Islamic mode which is permissible by Fiqh and Shariah.

BANKS CAR IJARAH SCHEME:Car Ijarah is Pakistan's first "Interest Free" car-financing scheme based on Islamic financing mode of Ijarah or Islamic leasing. This product is ideal for interest averse individuals, looking for a car financing scheme that provides the convenience of a well designed product while avoiding an interest based transaction.

Car Ijarah is simply a rental agreement under which the car will be given to the customer on rent for a period, agreed at the time of the contract. Meezan Bank purchases the car and rents it out to the customer for a period of 3, 4 or 5 years.

BENEFITS OF CAR IJARAH

No applying fee Ease of acquiring any new locally assembled car No up-front Insurance Payment No advance Rental Available in tenures of 3, 4 and 5 years As little as 20% security deposit

RENTAL CALCULATIONS

Security Deposit3 years4 years5 years

20%0.031440.025820.0224625%0.029710.024430.0212730%0.027970.023040.02008

35%0.026240.021650.0188940%0.024510.020260.01770

45%0.022770.018870.0165150%0.021040.017480.01533

Meezan Bank purchases the car and rents it out to the customer for a period of 3, 4 or 5 years.example:For example: If you are interested in a car costing Rs. 300,000 for a tenure of 5 years and are willing to pay a 40% Security Deposit, your monthly rental would be,

Rs. 300,000 X 0.01770 = Rs. 5,310/- per month for 5 years

(All other costs will be charged at actual).

Thanks for your attention !