ISLAMIC FINANCE
CAR
IJARA
SUBMITTED TO:
DR. IMRAN USMANI
MR. MOHAMMAD
IMRAN
SUBMITTED
BY:
AYESHA
A. SATTAR
KANWAL
HASAN
NADIA
KHAN
SHEHLA
AHSAN
SOBIA
MAQBOOL
MBA
3 (DPO)
DATE:
ACKNOWLEDGEMENTS
At
the completion of this report, we are very thankful to Mr. Ahmed Ali of Meezan
bank for his sharing of valuable information, time and providing us with useful
insight into the subject of Islamic car financing.. We are thankful to Mr.
Farid Khan, of Meezan Bank for sharing his knowledge of car financing with us.
We are also thankful to Mr. Mansoor Ali of Citibank for providing us with
information on conventional car financing. Without their co-operation, the
completion of this report would have been a difficult task.
We are also
thankful to our course instructors Dr. Muhammad Imran Usmani and Mr. Imran for
their valuable guidance. They were able to direct us throughout the course of
this report. Apart from this, the text available on this subject by Dr.
Muhammad Imran Usmani was also very helpful.
This report
was a real experience towards becoming Business Executives. We hope that all
those who refer to this report find it as beneficial as we intended it to be.
CONVENTIONAL CAR
FINANCING SCENARIO IN
CITIBANK-THE
PIONEER IN CONVENTIONAL CAR FINANCING
BACKGROUND
AND OPERATIONS
CITIBANK’S CAR
FINANCING
FEATURES
OF CITICAR FINANCING
BENEFITS
ELGIIBILITY
CITICAR
FINANCING SCHEMES
NEW CAR PROGRAM (10TH ANNIVERSARY
SPECIAL OFFER)
0% PROGRAM
USED CAR
PROGRAM
THE PREVALENCE
OF RIBA IN CONVENTIONAL BANKING
WHAT IS RIBA?
CONVENTIONAL
FINANCING FORBIDDEN IN ISLAM
ISLAMIC BANKING
ALTERNATIVES TO
CONVENTIONAL CAR FINANCING
ISLAMIC CAR
FINANCING: THE ULTIMATE SOLUTION
FAYSAL BANK
MEEZAN BANK: THE PREMIER ISLAMIC BANK
MEEZAN BANK’S CAR IJARAH SCHEME
CAR
IJARAH’S UNIQUE FEATURES
BENEFITS OF
CAR IJARAH
COMPLIANCE
WITH SHARIAH
FINANCING
PAYMENT
INSURANCE ARRANGEMENT
LEASE PROCESSING TIME
RENTAL CALCULATIONS
ELIGIBILITY CRITERIA
DOCUMENTATION REQUIRED FOR CAR IJARAH
PROBLEMS
FACED IN DEVELOPING AND IMPLEMENTING CAR IJARAH
CONSUMER ATTITUDE
PROBLEMS DURING DESIGNING OF THE
PRODUCT
LACK OF EXPEREINCE
UNPREDICTABILITY REGARDING CONSUMER
REACTION
CAR INSURANCE (TAKAFUL)
FIERCE COMPETITION IN THE MARKET
CHANGES IN THE DOCUMENTATION
REQUIREMENTS
ELIGIBILITY
ENTERANCE OF FORM IN THE SYSTEM.
GENERATION OF PROPOSAL.
PROMISE TO LEASE AGREEMENT.
PAYMENT COLLECTION.
PLACING OF ORDER AND PAYMENT TO DEALER.
DIFFERNCE
BETWEEN CONVENTIONAL AND ISLAMIC CAR FINANCING
LEASING V/S FINANCING
RENTALS V/S INSTALLMENTS
OWNERSHIP
RISK/LOSS
DOWN PAYMENT
V/S SECURITY DEPOSIT
RETURN
TERMINATION
SEQUENCE/PROCESS
INFRASTRUCTURE
INSURANCE ACT 1938
INVESTMENTS
Re INSURANCE
NEED FOR CAR FINANCING
With the
increasing demands of everyday life, vehicle ownership has shifted from a mere
luxury to a vital necessity. Purchasing a car is often the second most
expensive yet important purchase, after buying a home. While doing so, an
individual has two options available: either to make a hand on hand (cash)
purchase or to go for car financing. However, due to the exorbitant car prices
and lack of the funds available, many individuals prefer the latter option and
approach the various financial institutions, which provide this facility at
different rates.
In
|
Company |
Claimed rate |
3 years IRR |
5 year IRR |
Avg. IRR |
Tenor (years) |
Down pmt. |
Commercial banks
|
|
|
|
|
|
|
|
Soneri bank |
15% |
14% |
13.5% |
14% |
3-5 |
15% |
|
MCB |
16% |
16% |
16% |
14-16% |
1-5 |
20% |
|
Bank Al
Falah |
14% |
14% |
14% |
14% |
1-5 |
20% |
|
Union bank |
15% |
17.7% |
17.7% |
18% |
1-5 |
20% |
|
SCB (no
docs) |
|
21.3% |
20.8% |
|
1-5 |
20% |
|
Citicar (pre
approved/docs) |
|
21.8% |
21.9% |
22% |
1-7 |
10% |
|
Citicar (no
docs) |
|
22.4% |
21.9% |
|
1-7 |
15% |
|
Habib bank |
13% |
19.9% |
18.6% |
19% |
3-5 |
10% |
Leasing companies
|
|
|
|
|
|
|
|
Orix |
|
|
|
16-21% |
3-5 |
20% |
|
|
17% |
17% |
17% |
|
3-4 |
10% |
|
Cres lease |
|
19% |
20% |
|
3-5 |
10% |
|
Askari lease |
|
22% |
21% |
21% |
3-5 |
10% |
CITIBANK-THE
PIONEER IN CONVENTIONAL CAR FINANCING
BACKGROUND AND
OPERATIONS[1]
Citibank is at
present the largest and most important multinational bank in
The nineties
were a decade of domination and leadership for Citibank in the Pakistani
marketplace and the trend continues into the new millennium. Some of the major
milestones in the bank’s history showing not only the bank’s aim to develop
customer tailored products specifically for the convenience of its corporate
and individual customers but also its commitment to social responsibility in
the form of grants and aids include:
|
1990 |
Consumer
Bank was established. |
|
1992 |
Consumer
Asset Business is launched. Auto
Financing is introduced. Citigold Priority Banking is established. Citiphone
Banking launched. |
|
1994 |
Citibank
Visa Card (Gold and Silver) is launched. |
|
1995 |
Self-Service
Banking launched. |
|
1996 |
Citibank,
N.A. launches its Intranet System in April. First bank
to launch a Photo Credit Card. |
|
1997 |
Citibank
wins over 35 awards under the Euromoney Excellence Awards. These awards
included "Best Bank" and "Best Emerging Market Bank" for
two successive years. Citibank
Credit Cards acquire 100,000 members in less than 3 years. This milestone was
achieved faster than any other Citibank business in the Asia Pacific Region. Citibank and
IBA develop an MBA program focused on Marketing of Financial Services (MFS). Citibank,
N.A. undertakes a three year support program for fund raising for the Citibank,
N.A. pledges a donation to LUMS for their "Students Aid Program". Citibank,
N.A. in November holds its first ever Auto Dealer conference in Bhurban. Citibank,
N.A. opens its sixth branch on Shahra-e-Faisal in |
|
1998 |
Citibank
launched |
|
1999 |
First
foreign bank to launch MasterCard in Citibank
Home Loans is launched. Auto Product
Feature enhancement (25% Down Payment, Free Pre-approved Credit Card with
each car). 0% Down
Payment product for your second car. Complaint
Tracking System (CTS) launched. |
|
2000 |
Citibank,
N.A. is the first Financial Institution to launch Personal Loans in The cards
business launches the first ever Co-brand Credit Card in Dewan Farooq
Motors Limited manufacturers of KIA and Hyundai cars in Suzuki Car Financing
private label auto loan financing program. Citibank
Home Loans introduces Adjustable and Fixed Rate Home Loans. The
Paktel-Citibank Credit Card is launched in June. LG-Citibank
Installment Plan is launched in June. The
liabilities business launches the "Karobar Account". Citiphone
Banking introduces Self Service Banking. |
CITIBANK’S
CAR FINANCING
Citibank is
the market leader in the Car Financing market. Though it has the widest range
of car loan packages, the average rate charged by it is relatively higher as
compared to other players in the market.
FEATURES OF CITICAR FINANCING
¨
Loan Processing Charges are Rs. 4,000.
¨
The Total Monthly Installment (TMP)
consists of the Equal Monthly Installment plus 1/12th of the annual insurance
premium of the following year.
¨
First year insurance is taken up-front
with the down payment.
BENEFITS
¨
Pre-approved Credit Card with every
car.
¨
Citibank Financing Counters offer the
convenience of sales officers trained in providing with the best financing option.
¨
Largest network of authorized
dealerships ensures that you get the car of your choice in the color of your
choice.
¨
Round the clock Citiphone Banking
Service, to help and assist you regarding any customer queries.
¨
Comprehensive insurance at reduced
premium rates from AIG,
¨
Special pricing breaks for selected
Credit Card members.
ELGIIBILITY
NORMAL PROGRAM
¨
You are at least 21 years of age at the
time of financing and will be less than 65 years before full payment.
¨
You are a resident of
¨
Your existing car is locally
manufactured.
¨
If it is less than 1000 cc - it should
be 3 years old or less.
¨
If it is 1000 cc or more-it should be 5
year old or less.
¨
Your existing car is in your name and
is comprehensively insured.
¨
Loan size can be a maximum of twice the
value of your existing car as determined by Citibank.
FOR USED CAR FINANCING
¨
One should be at least 21 years of age
at the time of financing and will be less than 65 years or (retirement age)
before full repayment.
¨
Should be a Pakistani national residing
in
¨
Maximum age of the car at loan maturity
should not exceed 8 years.
¨
Other terms and conditions apply.
¨
Processing Charges: Rs 4,000.
¨
Vehicle Evaluation Charges: Rs 1,000 (if applicable).
CITICAR
FINANCING SCHEMES
The following
are Citibank’s car financing schemes:
1.
NEW
CAR PROGRAM (10TH ANNIVERSARY SPECIAL OFFER)
¨
No Documents Required
¨
All you need is your NIC
¨
Low Down Payment
¨
15% Down payment for customers who
apply on no doc's criteria
¨
Up to 10 Installments waived
¨
1 to 7 year financing period
|
Period (months) |
Pricing factor |
No. of installments waived |
|
1 YR |
0.09168 |
0 |
|
2 YRS |
0.04992 |
0 |
|
3 YRS |
0.03768 |
2 |
|
4 YRS |
0.03097 |
4 |
|
5 YRS |
0.02705 |
5 |
|
6 YRS |
0.02483 |
8 |
|
7 YRS |
0.02312 |
10 |
For example ,if you want to take a loan of Rs. 300,000 for 5
years Simply multiply the 5-years factor(0.02705) with Rs. 300,000 to get
Rs.8,115 as your equal monthly installment.
For total
monthly installments waived multiply the EMI (8,115) by number of installments
waived (5) that would amount to Rs. 40,575 for 5 years.
Installments
waiver benefit is for the last applicable installment.
Incase of
pre-payment installment, waiver benefit does not apply.
Different
factor may apply for different segments.
The Total
Monthly Payment (TMP) will consist of the equal Monthly Installment (EMI) plus
1/12th of the annual insurance premium for the following year.
SPECIAL INSURANCE OPTION*
¨
Affordable to suit your pocket
¨
No more first year insurance to be paid
up front, Citibank Car Financing offers you first year's insurance as a part of
the loan.
¨
For customer who pay minimum 15% down
payment
ADDITIONAL BENEFITS
¨
24-hours access to CitiPhone Banking.
¨
Wide range of dealership network.
¨
Value added comprehensive insurance at
competitive rates.
¨
Pre-approved Credit Card.
¨
Processing Charges: Rs 4,000
2.
0%
PROGRAM
The financing
period that one can avail is from 1-5 years. He/she can be an existing customer
of Citibank or a non-customer.
|
Financing Periods |
1Yr |
2Yrs |
3Yrs |
4Yrs |
5Yrs |
|
Pricing Factor |
0.09311 |
0.05139 |
0.03768 |
0.03151 |
0.02762 |
For example. If you want to take the loan of Rs. 300,000 for
5 years simply multiply the 5 year factor (0.02762) with Rs. 300,000 to get Rs.
8,286 as your equal monthly installment.
3.
USED
CAR PROGRAM
The financing
period is up to 5 years. There are two options available under this scheme:
a) DIRECT BUYER/SELLER PROGRAM
Offers the
facility to buy and sell used car in the most efficient and convenient manner.
One can get
financing on the car of his own choice (through classified section of the
newspapers).
b) PRE-AUTHORIZED CUSTOMER PROGRAM
Under this
scheme, the customer can get a loan even before he chooses the car.
|
Period (months) |
Pricing factor
|
|
12 |
0.09408 |
|
24 |
0.05237 |
|
36 |
0.03871 |
|
48 |
0.03260 |
|
60 |
0.02877 |
For example, if you want to take a loan of Rs. 300,000 for 5
years simply multiply is it 5year or 60 months factor (0.02819) with Rs.
300,000 to get Rs.8,631 as your equal monthly installment.
BENEFITS OF THE USED CAR FINANCING:
¨
24-hours access to CitiPhone Banking
¨
Wide range of dealership network
¨
Value added comprehensive insurance at
competitive rates
¨
Pre-approved Caltex-Citibank Credit
Card
THE
PREVALENCE OF RIBA IN CONVENTIONAL BANKING
The setup of a
conventional bank is interest based. On either sides of its’ balance sheet it
carries assets that are driven by the whims of interest. Only current accounts
are devoid of this curse, the rest of the accounts - savings and fixed accounts
are interest driven.
The depositors
deposit their money in the hope of earning an interest on their surplus.
Although the bank plays its role of a guarantor yet, the primary motive of depositors
is to earn interest on their surplus. The bank invests in different ventures to
generate profit over the deposits and gives to the depositors a fixed rate of
return on the invested amount regardless of what it actually generates
profits/losses. This is injustice to both the depositors and the bank because
if the profit rate is too high the depositors loos out and when the bank incurs
losses, the bank is victimized to carry all the burden of the loss and to yet
provide the fixed rate of return.
On the asset
side, the bank gives out interest-based loans, both short term and long term.
It indulges in interest based financing activities such as leasing, which is
far too different from the Ijarah under Islamic banking and is just a long term
interest based loan where interest is termed as rent and mortgage is called the
leased asset. The real differences as recognized under the Islamic system are
ignored here.
WHAT
IS RIBA?
The
word Riba means excess increase or addition. Interpreted in Shariah, it means
any excess compensation without any due consideration (consideration does not
include time value of money).
The definition
is derived from Quran and is accepted by all Islamic scholars. There are two
types of Riba namely “Riba An-Nasiyah and Riba Al Fadl”.
Riba
An-Nasiyah is defined as excess, which results from predetermined interest,
which a lender receives over and above the principle.
Riba Al-Fadl
is defined as excess compensation without any consideration resulting from sale
of goods.
During the
dark ages only Riba Al-Nasiyah was considered to be Riba. However Holy Prophet
(P.B.U.H) has classified second form Riba Al-Fadl as also Riba.
The meaning of
Riba has been clarified in the following verses of the Quran:
‘ O those who believe, fear Allah and give up what remains
of Riba if you are believers. But if you do not do so then be warned of war
from Allah and his messenger. If you repent even now, you have the right of the
return of your capital neither will you wrong nor will you be wronged.’
Al-Baqarah
2:278-9
These verses
clearly indicated that the tern Riba means any excess compensation over and
above the principal which is without due consideration. However the Quran has
not altogether forbidden all types of excess as it is present in trade as well
and is permissible. The excess rendered Haram is named Riba. In the dark ages
the Arabs used to accept Riba as a type of sale, which is unfortunately still
misunderstood as one. Islam has categorically made a clear distinction between
the excess arising out of trade and that from interest. The first type is
allowed while the latter is Haram.
“Seized in this sate they say: ‘ Buying and selling is but a
kind of interest’, even though Allah has rendered buying and selling lawful and
interest unlawful”
Al-Baqrah
2:275
1.
The first and primary type is called
Riba an Nasiyah
2.
The second type is called Riba al Fadl
Since the
first type was classified in the Quranic verses before the saying of Holy
Prophet, this type was termed as Riba al Quran. However the prophet did explain
the second type and hence it was called Riba al Hadees.
RIBA AN-NASIYAH
This is the
real and primary form of Riba. Since the verses of Quran have directly rendered
this type Haram, it is called Riba al Quran. Similarly since the type was
considered Riba in the dark ages it has earned the name of Riba al jahiliya.
“ That kind of loan where specified repayment period and an
amount in excess of capital is predetermined.”
Imam Abu Bakr
Hassas Razi.
“Every loan that draws interest is Riba”
Ali ibn Talib
(RAA)
Riba an
Nasiyah refers to the addition of the premium, which is paid to the lender in
return of his waiting as a condition for the loan and is technically the same
as interest. The prohibition of this form of Riba is one of those issues, which
have been confirmed in the revelation of all prophets. Some of the old
testaments have rendered Riba as Haram. The Quran has also stated the
prohibition of Riba in various verses, has warned those who persist in practicing
of a war which is certain to be declared on them by Allah Himself and His
messenger and has seriously threatened those engaged as writer, witness and
dealer in Riba transactions.
The giving and
taking of any excess amount in exchange of a loan at an agreed rate is included
in interest irrespective of a high or a low rate. It has been proven through
Ahadith that that the holy prophet paid excess at the loan repayment time but
since this excess was not paid through an agreed rate, it cannot be called interest.
This clarifies the word draws in the ahadith”The loan that draws interest is
Riba>’has been used to highlight the giving and taking of excess amount
through an agreed rate in the loan contract.
The fact that
this form of Riba is Haram has never been disputed in the Muslim community.
Although
everything has its own goodness and utility yet things that have more benefits
and less harms are beneficial and useful. Thus the curse of sins generated by
this form of Riba outweighs the benefits and hence it is rendered haram. The
curser of such transitory profits is carried to the world Hereafter and is
punished for. The spiritual and moral loss incurred by injuring the community’s
peace and security is too great a costs for such monetary profits. On these
grounds, this Riba is forbidden in Islam.
CONVENTIONAL
FINANCING FORBIDDEN IN ISLAM
Conventional
financing is forbidden in Islam due to its direct involvement with interest. 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.
For millions
of Muslims, banks are institutions to be avoided. Islam is a religion that
keeps Believers from the teller's window. Their Islamic beliefs prevent them
from dealings that involve usury or interest (Riba). Yet Muslims need banking
services as much as anyone and for many purposes: to finance new business
ventures, to buy a house, to buy a car, to facilitate capital investment, to
undertake trading activities, and to offer a safe place for savings. For
Muslims are not averse to legitimate profit as Islam encourages people to use
money in Islamically legitimate ventures, not just to keep their funds idle.
However, in
this fast moving world, more than 1400 years after the Prophet (P.B.U.H.), can
Muslims find room for the principles of their religion? The answer comes with
the fact that a global network of Islamic banks, investment houses and other
financial institutions has started to take shape based on the principles of
Islamic finance laid down in the Qur'an and the Prophet's traditions 14
centuries ago. Islamic banking, based on the Qur'anic prohibition of charging
interest, has moved from a theoretical concept to embrace more than 100 banks
operating in 40 countries with multi-billion dollar deposits world-wide.
Islamic banking is widely regarded as the fastest growing sector in the Middle
Eastern financial services market. Exploding onto the financial scene barely
thirty years ago, an estimated $US 70 billion worth of funds are now managed
according to Shari'ah. Deposit assets held by Islamic banks were approximately
$US5 billion in 1985 but grew over $60 billion in 1994.
The best known
feature of Islamic banking is the prohibition on interest. The Qur'an forbids
the charging of Riba on money lent. It is important to understand certain
principles of Islam that underpin Islamic finance. The Shari'ah consists of the
Qur'anic commands as laid down in the Holy Qur'an and the words and deeds of
the Prophet Muhammad (P.B.U.H.). The Shari'ah disallows Riba and there is now a
general consensus among Muslim economists that Riba is not restricted to usury
but encompasses interest as well. The Qur'an is clear about the prohibition of
Riba, which is sometimes defined as excessive interest. "O You who
believe! Fear Allah and give up that remains of your demand for usury, if you
are indeed believers." Muslim scholars have accepted the word Riba to mean
any fixed or guaranteed interest payment on cash advances or on deposits.
Several Qur'anic passages expressly admonish the faithful to shun interest.
ISLAMIC
BANKING
The basic
concept of Islamic banking which is also known as 'INTEREST-FREE BANKING' is based on basic ethical standards with
just one main difference- Muslims are not allowed paying or receiving interest.
This does not mean that business activities or making a profit are not
encouraged, they are but as long as they don’t involve interest in any form. To
fulfil this purpose, financial instruments have been introduced by the Islamic
financial institutions to satisfy these requirements. An example that can be
seen is that equity financing is used instead of debt financing. Furthermore,
instead of giving a fixed interest rate on the savings account, Islamic banks
offer a share of the bank's profit, as a return on deposits and this is around 5%
annually.
HISTORY
The modern
banking system was introduced into the Muslim countries in the late 19th
century when most of these countries were performing that well economically as
well as politically. These banks founded branches in the capital cities of
major Muslim countries to cater their business needs. However, the branches
were limited to the capital cities and the other surrounding cities were
totally ignored by the banking system. Nevertheless, most local businesses
still refrained from engaging with these “commercial” banks, mainly for
religious reasons. The reason behind this is that banks operate on the basis of
charging interest, a concept totally forbidden by Islam. As time went by
however, it became challenging to avoid commercial banks. They were more
efficient in certain banking aspects such as money transfers and current
accounts, but borrowing loans and opening saving deposits were still avoided
due to the prohibited interest issue. As the second half of the 20th century
has witnessed, any business-related transaction almost always involves a bank
and hence, avoiding the modern banking system has become virtually impossible.
Banks extended into local communities and thus, forced themselves into almost
every kind of business and their related transactions. This is when many Muslim
intellectuals recognized the need for an Islamic banking system that will serve
the needs of Muslims from the business point of view and at the same time
respecting the codes of Islam. Islamic banking as an institution has been
around for 25 years but interest-free banks have also been tried before. There
was one such bank in
ISLAMIC BANKING IN
ALTERNATIVES
TO CONVENTIONAL CAR FINANCING
Conventional
financing is forbidden in Islam due to its direct involvement with interest. 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.
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 Musharakah
·
Ijarah wa iqtina
·
Leasing Ijarah
DIMINISHING MUSHARAKAH
According to
the Diminishing Musharakah the financier and the client take part in a contract
in which the share of the financier is further divided into a number of units
and it is understood that the client will purchase the units of the share of
the financier one by one periodically, thus increasing his own share until all
the units of the financier are purchased so as to make him the sole owner of
the property or the car.
the financing
done through diminishing Musharakah is most commonly done for the following
three purposes:
·
House financing
·
For carrying business of services such
as diminishing Musharakah for the purchase of the taxi.
·
Diminishing Musharakah may also be done
for trade.
IJARA WA
IQTINA
Ijara wa
Iqtina is an alternative available to the lessor. It is an arrangement signed
by the lessor in which he promises to gift the leased asset to the lessee at
the end of the leased period. But this promise to gift is subject to the lessee
paying all payments of rent on timely basis.
The validity
of Ijara wa Iqtina depends upon:
The
asset can be sub-leased by the lessee with prior permission by the lessor. All
schools of Islamic jurisprudence are unanimous on the permissibility of the sub
lease if the rentals received from the sub lease are less than or equal to the
rent payable to the original lessor. It is however a preferred view in the
Shafite and Hanbali school of thought that the lessee is allowed to earn
rentals in excess of the rentals he pays to the original lessor and this
surplus can be enjoyed by the lessee. This view is though not acceptable to the
Hanafi school of thought, according to which the excess belongs to charity,
exceptions being:
The lessee can
also sell the leased asset to a third party and a new relationship will be
established between the lessee and the new lessor. However this cannot be done
for monetary consideration because sale of money for sale can only take place
at par value and if on excess will be taken as riba.
Ijara is
preferred and more common in use than Ijara wa Iqtina which is an alternative
form of leasing and includes a promise to gift.
IJARAH - LEASING
An 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.
Lease is not
originally a mode of financing. It is simply a transaction meant to transfer
the usufruct of a property from one person to another for an agreed period and
an agreed upon consideration. Leasing can be used as a mode of financing in the
Islamic banks as an alternative to the conventional car financing. However the
consideration of leasing as a mode of financing should be based on certain
conditions. It should be understood by all, using it as a mode of financing
that it is not sufficient to substitute the name of interest by the name of
rent and the term mortgage instead of the leased asset. There must be a
significant difference between leasing and an interest-bearing loan.
This form of
lease is an alternative to car Ijarah because it deals with the problem of
interest by charging rent only after the car has been delivered to the client
or the lessee.
Where as in
the conventional car financing the payment of the rent (interest) starts before
the delivery of the car to the lessee which is nothing but pure interest.
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.
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.
Leasing is a
contract whereby usufruct rights to an asset are transferred by the
owner, known as the lessor, to another person, known as the lessee, at an
agreed-upon price called the rent, and for an agreed-upon period of time called
the term of lease.
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, as evidenced by the verses (translation of
meaning by Yusuf Ali (1991)):
Said one of them: 'O father, hire him on wages, for truly
the best to employ is a strong and trustworthy man'. He said: `I intend to wed
one of my daughters to you, on condition that you work for me for eight years,
and if you complete ten full years, that will be a grace from you'. [28:26 27]
It is also
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.
There are a
number of conditions for lease financing to be permissable. The most important
financial difference between Islamically permitted leasing and conventional
financial leasing is that the leasing agency must own the leased object for the
duration of the lease. Therefore, while leasing an automobile from a car
manufacturer or dealership may in principle be permitted (if the contract
satisfies the other conditions), Muslims should be careful. In many cases, the
dealership will in fact use a bank or other financial intermediary to provide a
loan for the present value of lease payments, and charge the customer an
interest on this loan. This would constitute the forbidden Riba. Careful Islamic, financial institutions ensure that the
contract abides by all the restrictions set in the
Recently,
Muslim jurists have also provided an Islamic alternative to conventional lease
purchase agreements (called in Arabic 'Ijarah wa 'Iqtina'). In this contract,
a lease is written as discussed above, with an additional promise by the lessor
that he will agree to sell the leased object at the end of the lease at a pre
determined residual value. This promise is binding on the lessor only, and the
lessee has the option of purchasing the item at the end of the lease, or
returning it to the owner lessor (c.f. ibid. (pp.l75 6)).
A common model
for equipment, auto and home financing in
It is no
secret (at least it should not be a. secret) that the Islamic bank or financial
institution will take into consideration the same factors when determining the
rental payments and residual value that a regular bank would consider: the
value of the financed item, its depreciation value, inflation, the credit
worthiness of the lessee, the opportunity cost value of the money (as reflected
by market interest rates) etc. of course, an implicit '`interest rate" can
trivially be calculated from the price, residual value, term of the lease and
the lease payment. There is no need to hide this fact, and indeed, the intelligent
Muslim customer (as Muslim customers should always be) must be encouraged to
"shop around" and ensure that the Islamic financial institution is
not implicitly charging an interest rate, which is not in line with the
conventional market. However, in the final analysis, the difference will be in
the form of the contract. If the lease is structured in accordance with the
various conditions detailed in books of jurisprudence, it will contain no Riba
and will ensure that it cannot contain such forbidden Riba in the future (e.g.
in terms of late payment fees, etc.).
The most
important financial difference between Islamic permitted leasing and
conventional financial leasing is that the leasing agency must own the leased
object for the duration of the lease. Therefore, while leasing an automobile
from a car manufacturer or dealership may in principle be permitted (if the
contract satisfies the other conditions), Muslims should be careful. In many
cases, the dealership will in fact use a bank or other financial intermediary
to provide a loan for the present value of lease payments, and charge the
customer an interest on this loan. This would constitute the forbidden Riba. Careful Islamic, financial
institutions ensure that the contract abides by all the restrictions set in the
Unlike
conventional financing, Islamic financing is not a loan provided with fixed or
non-fixed interest. Instead, it is the sale of named commodities for a deferred
price. This simply means that if a person is buying a car and an Islamic
financial institution has agreed to provide him with the funds needed to obtain
the vehicle that you desire, the institution will pay for the car, become the
car owner and will promptly sell him the car. Now, that person is responsible
to pay the amount over the course of a mutually agreed upon period of time. How
does the institution make its money if there is no interest involved? They add
an agreed upon profit to the total financial responsibility, which is highly
unlikely to meet or exceed the total interest one would pay with a conventional
loan, and furthermore, it is Shari'ah compliant.
FAYSAL BANK LIMITED
Faysal Bank Limited (FBL) is a
subsidiary of Shamil Bank of Bahrain E.C. (Islamic Bankers) which is controlled
and managed by the Dar Al-Maal Al-Islami Trust.(DMI).The bank has been serving
the
The Pakistani Operations of FBL covers:
BRANCH
BANKING
At FBL "full service" does
not merely mean offering a range of products and services. It also means that
providing an array of products and services accompanied by a high level of
personalized service. The bank believes in achieving an outstanding quality in
all its activities
CONSUMER
BANKING
The retail structure provides not only
high value in-branch service but also offers an easy and affordable way to
acquire motor vehicles and consumer durable items for personal use. The bank
purchases the items and its customers use these against payment of monthly
installments. This way the customers do not have to make large initial outlays
for expensive items.
CORPORATE
BANKING
FBL is fully geared to meet the ever
changing economic challenges present in
TRADE
FINANCE
Faysal Bank Limited has established its
strong presence globally in Trade Financing through its network, affiliates and
correspondents. It has conveniently maintained relationships with major banks
in the international markets and continues to develop new ones wherever needed.
The bank’s Trade Finance Services include a full range of import, export and
guarantee products, thus offering each customer tailor-made solutions to fit
their individual needs.
INVESTMENT
BANKING
With the changing business environment
in the country, one needs expert partners with a keen understanding of his
business to help him achieve the profit objectives. FBL offers businesses and
institutions corporate advisory services and a wide array of tools to help them
accomplish their goals. It advises and facilitates the arrangement of
commercial paper and modaraba floatation, syndications, mergers and
acquisitions, underwriting arrangements amongst many others.
FAYSAL
BANK’S CAR FINANCING
Faisal bank
was the pioneer in introducing Islamic car financing in our country. However
the procedure followed for the purpose of financing is not truly Islamic in
nature. In other words the bank charges a fixed mark up on the rentals, which
is tantamount to Riba and is not permissible under the jurisprudence of Islam.
Therefore even though the bank claims to provide riba free car financing, it
does not complies to the basic rulings of Shar’ia which is Meezan bank is the
only bank which providing a truly Islamic car financing at present.
MEEZAN BANK: THE PREMIER ISLAMIC BANK
Meezan Bank Limited (formerly Al-Meezan Investment Bank
Ltd.) is a publicly listed company incorporated on
VISION
Establish
Islamic banking as banking of first choice to facilitate the implementation of
an equitable economic system, providing a strong foundation for establishing a
fair and just society for mankind.
To be a
premier Islamic bank, offering a one-stop shop for innovative value added
products and services to our customers within the bounds of Shariah, while
optimizing the stakeholders' value through an organizational culture based on
learning, fairness, respect for individual enterprise and performance.
Meezan Bank
has recently acquired the banking operations of
Meezan Bank
operates strictly under the principles of Islamic Shariah. The Bank has an
in-house Shariah advisor, a Ph.D. in Islamic Finance, who monitors all
transactions to ensure conformity to Islamic Shariah. Meezan Bank has a paid-up
capital and equity of Rs.1.3 billion. The Bank is publicly listed and its
shares are traded on the Karachi Stock Exchange. Meezan bank is sponsored by
leading financial institutions based in
The sponsor shareholders of Meezan Bank are all leading financial institutions.
The main sponsors are:
¨
Pakistan Kuwait Investment Company
(Private) Limited(a joint venture between Government of Pakistan and the
Government of Kuwait) and
¨
Shamil Bank of Bahrain EC (the
commercial and investment banking arm of Dar Al Maal Islami Group, based in
Other
sponsors include:
¨
Islamic Development Bank, Jeddah
¨
¨
Saudi Pak Industrial and Agricultural
Investment Company (Private) Limited.
The
Bank strives to provide efficient commercial banking, services and products
that can also be tailor-made to suit customer needs. With a highly professional
team dedicated to the cause of Islamic finance, the Bank has established itself
as one of the leading Islamic banks in the country. We believe in adding value
to our customers businesses and at the same time endeavoring to deliver competitive
risk adjusted returns to our stakeholders.
MEEZAN BANK’S CAR IJARAH SCHEME:
As a step
towards their mission of providing a one-stop shop for innovative value added
Shariah compliant products to their customers, Meezan Bank introduced ‘Car
Ijarah’- a car-financing scheme that is based on the principles of Ijarah and
is free of the element of interest.
Car Ijarah is
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.
CAR IJARAH’S UNIQUE FEATURES
¨
First Islamic Car Financing Scheme
(Approved by Meezan Bank’s Shariah Board)
¨
Free from Interest/Riba
¨
It is not a Hire-Purchase agreement
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
COMPLIANCE WITH SHARIAH
Meezan bank’s
Shariah Advisor, Dr. Imran Usmani, a PhD in Islamic Finance is involved in
overseeing the activities of the bank on a day-to-day basis and works closely
with Meezan’s team of professionals in structuring and developing new products.
He ensures that all documentation which supports the products offered by Meezan
Bank Limited, are fully compliant with the rules of Shariah.
The Shariah Supervisory
Board periodically reviews the activities of the Bank and approves its new
products. They therefore ensure that all transactions, which are undertaken by
the Bank, comply with the tenets of Shariah. The Shariah Board comprises of the
following eminent scholars of Islamic finance:
Justice
Muhammad Taqi Usmani. (
Dr. Abdul
Sattar Abu Ghuddah (
Sheikh Essam
M. Ishaq (
Dr. Muhammad
Imran Ashraf Usmani (
Following are
the main features of Car Ijarah:
FINANCING
Meezan Bank’s
‘Car 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.
PAYMENT
The customer
can pay in flexible, easy rentals over a
period of 3, 4 or 5 years, with as low as 20% Security Deposit.
INSURANCE ARRANGEMENT
Meezan Bank
being the owner of the Car will be responsible for Insurance of the car and for
paying the insurance premium. Until the availability of Takaful (Islamic Insurance) in
LEASE PROCESSING TIME
Meezan Bank
being the owner of the Car will be responsible for Insurance of the car and for
paying the insurance premium. Until the availability of Takaful (Islamic
Insurance) in
RENTAL CALCULATIONS
To calculate
the monthly rentals simply multiply the cost of the car with the rental factors
given in the table below
RENTAL CALCULATION **
Security Deposit 3
years 4 years 5 years
20% 0.03144 0.02582 0.02246
25% 0.02971 0.02443 0.02127
30% 0.02797 0.02304 0.02008
35% 0.02624 0.02165 0.01889
40% 0.02451 0.02026 0.01770
45% 0.02277 0.01887 0.01651
50% 0.02104 0.01748 0.01533
* No separate Insurance will be charged
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)
ELIGIBILITY CRITERIA
You can enjoy
the benefits of Car Ijarah if you:
¨
Are a salaried individual/
self-employed professional/businessman
¨
Have a net take home income exceeding
three times your monthly
installment
¨
Have 3 years working/professional
/business experience
¨
Are working with your present employer
for at least 6 months (for salaried
individuals)
DOCUMENTATION REQUIRED FOR CAR IJARAH
It is very
easy to apply for Car Ijarah, just bring the following documents.
¨
Individuals/Self-Employed
Professionals/Businessmen
¨
Copy of NIC
¨
Two recent passport sized photographs
¨
Recent Utility Bill
(Electric/Gas/Water) received at the residential address
¨
Last Six Month Bank Statement
¨
Last Six Month Bank Statement of
Business (for Businessmen)
¨
Certified/Original copy of Recent Pay
slip (for Salaried Individuals)
¨
Copy of Rent Agreement (if applicable)
ENTRY INTO THE CONSUMER BANKING SEGMENT
Meezan bank
started its operations as an investment bank four years back in 1998. Its
mission statement is: “to make Islamic banking the first choice for consumers.”
Meezan bank
started consumer-financing activities on
¨
Citi bank
¨
Standard chartered.
¨
Bank Alfalah
¨
Cres bank
¨
Muslim commercial bank
¨
Orix leasing.
PROBLEMS
FACED IN DEVELOPING AND IMPLEMENTING CAR IJARAH
Meezan bank
had to face various problems in the development and launch of their car
financing project-Ijara. The problems faced are as follows:
CONSUMER ATTITUDE
The prominent
problem faced was the consumer’s attitude toward the product. It is very
difficult to educate people on the basic differences underlying between
conventional car financing and Ijara. They could not differentiate between the
conventional and Islamic modes of car financing and could not understand in
what ways is Ijara is Islamic. They therefore were not willing to pay a higher
rate charged by the Islamic mode of car financing. The consumers were reluctant
to go for car financing until they were completely satisfied with this mode and
were able to comprehend the concept of Ijara.
PROBLEMS DURING DESIGNING OF THE PRODUCT
A number of
problems were faced in the designing of the product as well. This was because
Meezan bank was the introducer of Ijara in
LACK OF EXPEREINCE
Another
problem was the inexperienced and the small size of the team responsible for
the development and launch of Ijara. They had no former experience in retail
banking and consumer financing and were in the initial stage of their learning
curve. Because of inexperience in the market and as a team, they faced problems
initially in communicating ideas to each other and in making a comprehensive,
combined effort toward the development of the product.
UNPREDICTABILITY REGARDING CONSUMER REACTION
How will
consumers behave and competitors react to Ijara? This was the key question in
everybody’s mind at Meezan bank. Since this was a new product introduced in the
Pakistani market, the team had no follow up on similar products launched in the
past and consumers and competitors reaction to it. They had to undergo a market
survey to identify consumer attitude towards Islamic banking and car financing.
But a lot of risk was involved as the results could not lead to the
identification and measurement of competitors and consumer’s attitude towards
the product.
CAR INSURANCE (TAKAFUL)
A major
problem faced was the issues related to insurance. Takaful (the term for
insurance in Islam) is available in
FIERCE COMPETITION IN THE MARKET
Meezan bank
had to face stiff competition from conventional banks and leasing companies
involved in the activities of car financing. These banks and leasing companies
have strong long term relationships built with dealers and operate on a larger
scale as compared to Meezan bank in the area of car financing. These have
direct sales agents aiding in the process of car financing and have proper
infrastructure built with an area in the bank or the leasing company devoted to
car financing.
CHANGES IN THE DOCUMENTATION REQUIREMENTS
The
documentation requirements were very severs at Meezan bank for applicant of car
financing. These documentation requirements are revised recently and are
relaxed. The major changes are as follows:
The tax
assessment required earlier is removed now.
When financing
a car for businessmen, a management account was required before. The auditors
placed this requirement. Now the requirement is placed on cars financed with a
market value of greater than 5 lack rupees.
An ownership
document was required earlier but now the requirement has been waived. This is
in view of the inconvenience faced by the customers and their reluctance to
provide the ownership document.
The approval
document is being fine-tuned. It is a part of Meezan bank’s policy not to
finance cars for people related to show business, policemen, politicians,
estate agents, lawyers and for negative areas as Landhi and Malir where repossession
of the car in an undesirable situation is difficult.
1.
ELIGIBILITY
Meezan bank
has set criterions for eligibility to car financing - Ijara. Individuals who
can fulfill these criterions and requirements are eligible to car financing at
the Meezan bank. The eligibility requirements are as follows:
A three years
working experience with at least six months stay at the last job.
The net income
earned by the applicant to be three times more than the rental charged by the
bank.
2. ENTERANCE OF FORM IN THE SYSTEM.
After the
collection of the information on the applicant, this form is then entered into
the system developed at the Meezan bank .the information provided in the form
by the applicant is cross-checked and referred in an attempt to uncover any
false information provided.
3. GENERATION OF PROPOSAL.
The proposal
is then generated for approval. There are basically four kinds of approvals.
These are basically approval by the:
¨
Head of leasing department.
¨
Head of business development
department.
¨
Chief operating officer.
¨
Chief executive officer.
4. PROMISE TO LEASE AGREEMENT.
After the
generation of proposal and the acceptance through approval by the heads, an
agreement to lease is signed by the customer which is basically an understanding
between the seller and the buyer that the buyer promises to buy and the seller
promises to see that is lease.
5. PAYMENT COLLECTION.
After the
signing of the agreement to lease, the bank collects the following payment from
the customer:
¨
Processing fee.
¨
Security deposit. The minimum amount
for security deposit is 20% and the maximum 50%.
¨
Documentation charges.
6. PLACING OF ORDER AND PAYMENT TO DEALER.
After
collection of the payments mentioned above by the bank from the customer, the
bank places the order to the dealer. The payment to the dealer is made in the
name of the customer. Meezan bank basically deals with Indus Motors, Pak
Suzuki, Honda and Deewan Motors, directly.
DIFFERNCE
BETWEEN CONVENTIONAL AND ISLAMIC CAR FINANCING
Meezan Bank’s
‘Car 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. These
differences are described in detail below:
¨
LEASING
V/S FINANCING:
The traditional
schemes provide financing for purchasing car, i.e. in essence they are giving
loan and earning interest. The Islamic car financing is entirely different. It
is not a financing scheme rather it is a lease contract. The word financing
here has been used as a generic term.
The Islamic
car financing -- Ijarah is based on a lease contract. It is not a hybrid
contract. IJARAH is an Arabic term with origins in Islamic Fiqah,
meaning to give something to rent.
Leasing is a
contract whereby usufruct rights to an asset are transferred by the
owner, known as the lessor, to another person, known as the lessee, at an
agreed-upon price called the rent, and for an agreed-upon period of time called
the term of lease.
¨
RENTALS
V/S INSTALLMENTS
Islamic car
financing is based on pure rentals. 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.
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.
¨
OWNERSHIP
In case of the
conventional mode of car financing, the car is purchased in the name of the
buyer from the dealer. This is not the case in Ijarah, where the ownership
remains with the bank, that is the car is purchased from the dealer in the name
of the primarily. This is because it is the foremost condition of Islamic mode
of leasing that an objet cannot be leased out unless it is in the possession of
the lessor.
¨
RISK/LOSS
Since the car
is bought in the name of the buyer in the traditional mode of car financing,
the risk is immediately transferred to the buyer whereas in the case of Islamic
financing, this is not so. The car is purchased in the name of the bank from
the dealer and so the risk remains entirely with the bank. As the corpus of the
leased property remains in the ownership of the lessor, all the liabilities and
risks emerging from the ownership shall be borne by the lessor. The lessee is
responsible for any loss caused to the asset by his misuse or negligence. He
can also be made liable to the wear and tear, which normally occur during its
use. But he cannot be made liable to a loss caused by factors beyond his
control. The agreements of the traditional car financing generally don’t
differentiate between the two situations. In a lease based on the Islamic
principles, both the situations should be dealt with separately.
¨
DOWN
PAYMENT V/S SECURITY DEPOSIT
In Ijarah the
buyer is required to keep a security deposit at the bank. The minimum
requirement for security deposit is 20% of the car value and the maximum is
50%. The requirement is different in the case of conventional car financing. In
the traditional mode there is a down payment made by the buyer of the car. The
amount required for the down payment is 20% of the price plus the installment
for the first year.
Both the down
payment and the security deposit mentioned above are one-time payments. The
major difference occurs because the buyer can buyback the car against the
security deposit in case of Ijarah, where as in case of conventional banking
the down payment is entirely of the bank, and no buy back of the car occurs
against the down payment.
¨
RETURN
In the Islamic
mode of financing, the buyer has the right to return the car anytime during or
at the end of the lease period. Since this is a lease agreement and the lessee
has been paying rentals, he can return the car to the bank and take back the
security deposit any time he wishes to. On the other hand in a traditional car
financing scheme the customer takes a loan to purchase the car and which h
cannot return in any case what so ever.
¨
TERMINATION
The buyer of
the car has the option and right to terminate the contract and return the car
before the contract reaches its maturity in both the conventional and Islamic
mode of car financing. The difference lies in post termination phase. In the
conventional car-financing scheme if the customer wants to terminate the
contact the only option he has is to buy the car by paying the rest of the
installments. Whereas in the Islamic car financing scheme the customer has two
options; either he can return the car and get back the security deposit or he
can buy the car from the bank at the market value plus a certain percentage of
spread for the bank.
¨
SEQUENCE/PROCESS
Islam
considers the procedure as a significant factor in case of all modes of
financing. The underlying difference between the Islamic and the conventional
mode of financing is that of the process. It is not only the end result it is
also the means to it that are important. If the result is correct and the steps
are wrong or vice versa, the entire process is wrong. According to Islamic
principles, lawful steps to lawful results are very important. The most
important financial difference between Islamic permitted leasing and
conventional financial leasing is that the leasing agency must own the leased
object for the duration of the lease. Ownership of the asset is the prerequisite
for leasing out its usufruct and therefore Islam emphasizes on the sequence.
¨
INFRASTRUCTURE
The
conventional banks and leasing companies have strong long-term relationships
built with dealers and operate on a larger scale as compared to Meezan bank in
the area of car financing. These have direct sales agents aiding in the process
of car financing and have proper infrastructure built with an area in the bank
or the leasing company devoted to car financing.
Despite the
inefficient legal system and policies of the Central Bank of
The Federal
Shari'ah Bench of the Supreme Court, Pakistan, had, in a landmark judgement
late last year declared the present financial system repugnant to the
principles of Islam and ordered the government to abolish the 'interest-based
system' and establish an alternative Shari'ah-based system. Although the
judgement frees the Insurance Act 1938 from the payment of interest (amendments
in clauses S.29 (8) b, c iii, S.47 B (1), (2) and S.81 (2)(d) that relate to
the calculation and payment of interest), the Supreme Court is silent as to the
permissibility of insurance practiced in the country since it was not part of
the case filed with the apex court.
Now, if the
country were to transform its entire financial system to a Shari'ah-based
system, it has to extensively inspect all the obstacles involved and must
altogether resolve the loopholes found in the system. It is no doubt a daunting
task but the government is confident that the objective will be met.
PROBLEMS
IN DEVELOPING TAKUFUL
Here is a
brief detail of some of the foreseen problems in the establishment and working
of a Takaful company in
INSURANCE ACT 1938
The Insurance
Act 1938, a legacy of the former British rulers, is the law governing the
insurance operations in
A new
Insurance Act, the draft of which has been prepared to replace the old one,
does not even have the provision for the operation of a mutual insurance
company.
INVESTMENTS
The law requires all insurance companies to invest a minimum amount in
government securities, which are Riba-based, and thus is unacceptable for an
Islamic insurance company. Besides the legal requirements, the avenues for
halal investments are currently limited. Investment in the country's volatile
stock markets is also unsuitable for a Muslim and is considered un-Islamic due
to the risk and interest involved.
Re INSURANCE
According to
the Insurance Act, insurance companies are required to have a minimum of 20
percent reinsurance from the Pakistan Insurance Corporation, which provides
reinsurance based on the conventional set-up and does not offer the facility of
Re-Takaful.
A number of
local businessmen and investors have initiated steps to establish a Takaful
company in
Following the
judgement of the Supreme Court against riba,
Islamic
banking, though a relatively new concept, compared to the centuries old
conventional banking, has developed at a very fast pace. The introduction of
various Islamic financial products around the world, is itself a success story.
Meezan Bank,
the pioneer in Islamic banking in
The acceptance
of the product can be seen by the large number of consumers applying for the
scheme. The teams employed by various banks and leasing companies managing
their operations according to the Islamic mode of financing to carry out Ijarah
are able to fulfil their job quite successfully. This is due to the fact that
they have become well trained and they have gained experience. The lack of
experience was deterrent to their performance initially but they have been able
to cope up with this deficiency and have come up with amazing results.
It still has a
problem with regard to insurance that is the Islamic insurance—Takaful is yet
not introduced and the scheme of car Ijarah has to carry out its operations
with the help of conventional insurance available to all. The significant
factor in Islamic car financing is that of corpus of ownership of the asset
remains with the lessor and only the usufruct of the asset is transferred to
the lessee.