ijarah car financing
Content
1) INTRODUCTION
Malaysia is indeed a leader of the Islamic banking and being one of the first countries to promote Islamic finance. Malaysia has experienced a dual banking system whereby a fullfledged Islamic banking system operates on a parallel basis with a sophisticated conventional banking system, which has been practicing Islamic banking form 1983 with the adoption of Islamic Banking Act 1983. In Malaysia, Islamic banking is competing with the Conventional banking and it survives through those challenges comes from the competition since the conventional banking system was developed earlier for the centuries. As compared to operating in a single Islamic banking system, operating within a dual banking system provides a relative advantage to Islamic banks. AITAB is Al-ijarahthumma al-bay, which Islamic jurists (fuqaha) today have introduced an Islamic version of hire purchase as a substitute of conventional hire purchase. AlIjarahThumma Al-Bay‟ (AITAB) is one of the latest innovations in the development of the Islamic hire-purchase instrument, which had been designed especially for individual or corporate customers particularly not only to finance a wide range of assets but also to meet the customers public demand and at the same time securing long-term competitiveness in the financial market. Besides, the establishment of Al-IjarahThumma Al-Bay‟ was developed in stage by stage not in simultaneously. In the first ten years of the operation of Islamic Banking in Malaysia (1983-1994), ijarah or also known as leasing was utilized at that time since the inexistence of AITAB. Nevertheless, through the consideration of scholars by using the Ijtihad, the Ijarah facility was later developed into Al-IjarahThumma al Bai‟ (AITAB) facility and until today it greatly being practiced for buying of motor vehicles as whole. Indeed, the contract of Al-ijarahThumma Al-Bai' (AITAB) runs separately from the contract of al-bay. Since both contracts are executed in succession, AITAB can be used to describe the process of converting an al-ijarah contract into a sale contract. In other words, it refers to a combination of two different contracts undertaken separately and subsequent as 1
follows. First stage is executing the contract of lease (Al-Ijarah). Secondly, it followed by a contract of sale (Al-Bai‟) which is based on the Islamic Law prescribed. Under the first contract, the customer hires the goods from the Bank at an agreed rental amount over a specified period of time. Upon expiry of the hiring period, the customer enters into a second contract to purchase the goods from the Bank at an agreed price. Moreover, Al-IjarahThumma al-Bai‟ as adopted in Malaysia is where the sale of asset to the lessee is executed at the completion of the lease period or in other words as a form of IjarahMuntahia bi al-Tamleek. In fact, IjarahThumma al Bai‟ (AITAB) is such a recent and unique product of Islamic banking which was incepted more than ten years ago. Thus, unique rules on leasing and sale contract needed to be ruled at different stages of the transaction. All those rules were not developed simultaneously and the law applied to AITAB today is the conventional Hire Purchase Act 1967 (HPA). The discovery of Al-IjarahThumma al Bai‟ (AITAB) shows the novel part of Islamic banking. This is because AITAB is the alternative for conventional hire-purchase that frequently burdens the people with their particular charges. In Malaysia, AITAB was first adopted by Bank Islam and which later was extended to the conventional banks operating under Islamic Banking Scheme. The popularity of AITAB is growing up day by day and it continuously spread out among all the customers. However, in order to incise the Islamic values in the product there are still certain legal constrains needs to be highlighted and take into consideration. From that, Islamic banking will be more given priority than conventional banking by the customers.
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2) APPLICATION OF AITAB IN VEHICLE FINANCING
Ijarah refers to a lease or commission contract that involves an exchange of usufruct or benefits of an asset or a service for rent or commission for an agreed period. In the context of Islamic finance, the ijarah concept is usually applicable in financing contracts such as in real property financing, vehicle financing, project financing and personal financing. There are also financing products that enable customers to lease assets from Islamic financial institutions with an option to acquire the leased assets at the end of the lease tenure based on the concept of ijarahmuntahia bi al-tamlik or al-ijarahthumma al-bai`. There has been a proposal by an Islamic financial institution to introduce vehicle financing based on al-ijarahthumma al-bai` (AITAB) concept. The financing based on AITAB involves two types of contracts, namely leasing contract (ijarah), followed by sale contract (albai`). At the initial stage, the Islamic financial institution will conclude an ijarah agreement with the customer. Under this agreement, the Islamic financial institution will appoint the customer as an agent to purchase the vehicle identified by the customer. Subsequently, the Islamic financial institution will lease the vehicle to the customer for a specified period. Upon expiry of the lease period, the customer has the option to purchase the vehicle from the Islamic financial institution. If the customer opts to purchase the vehicle, the Islamic financial institution and the customer will conclude a sale contract and the ownership of the vehicle will be transferred from the Islamic financial institution to the customer. Most vehicle financing facilities offered by Islamic financial institutions are based on alijarahthumma al-bai` (AITAB) concept. However, there are circumstances whereby the lessee decides to discontinue the lease and seeks to find another person as a replacement who will continue the lease and will ultimately purchase the asset from the Islamic financial institution. This arrangement is in line with the provision of the Hire Purchase Act 1967 that allows a lessee to transfer his rights and liabilities under a hire purchase agreement to another person.
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The assignment of rights or liabilities does not contradict the Shariah as Islam recognizes transfer of rights and liabilities based on mutual agreement by the parties. In the context of vehicle financing based on AITAB, if a lessee decides to discontinue the lease, he may transfer his rights and liabilities to another party who will continue the lease and will ultimately purchase the asset from the Islamic financial institution. In an ijarah contract, the lessor is the owner of the ijarah asset whereas the lessee is only entitled to the usufruct of the asset. Since in the current practice the lessor‟s name is not registered in the asset‟s title, the SAC was referred to on the issue as to whether the lessor possesses the ownership of the leased asset. The aforesaid SAC‟s resolution is based on the Shariah recognition of both legal ownership and beneficial ownership. In the context of ijarah, the lessor has the beneficial ownership although the asset is not registered under his name. Such beneficial ownership may be proven through the documentation of the ijarah agreement concluded between the lessor and the lessee. Termination of a contract is allowed in Shariah whenever the contracting parties decide to discontinue the mutually agreed contract. Termination of a contract may occur due to various reasons, which include among others, to avoid injustice, losses or any other harm to the contracting parties. In this regard, the SAC was referred to on the basis for termination of an ijarah contract. The aforesaid SAC‟s resolution has considered the following: i. The subject matter of an ijarah contract is the usufruct of the leased asset and if the asset loses its usufruct, the ijarah contract may be terminated. ii. Based on the principle of freedom to contract, both contracting parties are free to stipulate any mutually agreed contractual terms and conditions. Therefore, the ijarah contract may be terminated if any of the contracting parties does not satisfy the agreed terms and conditions. This is in line with the following hadith of Rasulullah SAW: 4
“Verily, the contract of sale is based on mutual consent.” “The Muslims are bound by their (agreed) conditions except the condition that permits what is forbidden or forbids what is permissible.” iii. The ijarah contract is a binding contract that requires mutual agreement of both parties for its termination.
3) HOW TRANSACTION ACTUALLY WORKS
AITAB is the result of hybrid combination of lease and sale contract in one business document. Under the contract of lease, which is the first contract to be entered; the hirer lease goods from owner at an agreed rental over a specified period. When the agreed period expires, and lease ends, the hirer enters into a second contract to purchase the goods from the owner at an agreed price. In an AITAB transaction, normally three parties are involved; i.e. the customer, bank and the seller. On the request of the customer, the bank would buy the requested goods or commodity from the seller/shop and then would rent that commodity to the customer for an agreed period of time over a fixed price paid by installment. Once, the agreed period is over and the pre-agreed price is paid by installment, the Bank would enter into a sale agreement with the customer and would, then sell the commodity to the customer for a nominal price. This would definitely relieve the bank from the operational cost of looking after the commodity rented and save the bank from the price risk, if the bank were to sell the commodity to another party. In practical sense, if the AITAB is used for buying a vehicle, the customer would first identify the vehicle (asset) he wants to buy and then order the bank. The bank would then buy that vehicle from the seller and rents the vehicle to the customer at a rate agreed upon for a specified period of time. The customer (hirer) would then agree to pay for road tax and coverage and would agree to be responsible for the maintenance of the vehicle. Then at the end of the period the bank and the customer would sign the sale and purchase agreement. In AITAB, the 5
bank has the authority to the leased asset. If the customer defaults, the bank would repossess the asset and is free to take an action against him. The gist of AITAB is that if the customer continuously pays and satisfies all the legal requirements, at the end of the lease period the bank would transfer the ownership of the asset to the customer.
4) TYPES OF AGREEMENT INVOLVED
As for the AITAB facility, basically three main agreements are of supreme importance. These are: A. Sale and Purchase Agreement It is not part of the documentation for the facility applied by the client. It is however, among the most important agreements in obtaining such a facility from banks. To facilitate a better understanding, an example might help. Say, for instance, Miss Fariha intends to buy a car from a seller. She then chooses the dealer to buy the car. But she needs the financing to buy a car. After that, she enters into AITAB contract which is based on ijarah (rental) financing with Maybank Islamic. Based on Second Schedule of the Hire Purchase Act 1967, Section 4 (1) (a) and 4 (1) (b) (i), the Sale and Purchase Agreement (Principal Agreement) will be signed between the two parties which is dealer and the bank. Accordingly, Miss Fariha would have to pay 10 per cent of the price of the car as the deposit for rental payment. The signing of this agreement is compulsory between the dealer and the bank because the car will be rent by Miss Fariha on the specified date and rental installment will be paid. As AITAB concerns, the transfer of ownership will take place after all the rental payments has been paid. Therefore, the sale and purchase agreement will be sign by Miss Fariha and the bank at the end of the rental period settlement.
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B. Islamic Hire Purchase Agreement/ AITAB Agreement This is an agreement made between the client and the bank. Under the first contract, the hirer leases goods from the owner at an agreed rental over a specified period. Upon expiry of the leasing or rental period, the hirer enters into a second contract to purchase the goods from the owner at an agreed price. In the current practice, AITAB involves three main parties: the customer, financing company, and vendor. Using, for the sake of illustration, the common example of car financing, AITAB operates as follows: a. The finance company buys the vehicle from the vendor or car dealer based on the order of the customer. b. The finance company rents the vehicle to the customer at a rate agreed upon for a specified period of time. The customer (hirer) agrees to pay for road tax and insurance coverage. He also will be responsible for its maintenance. c. At the end of the period the finance company and the customer will sign the sale and purchase agreement.
Example of AITAB financial instrument is as follow; We (bank) referring to the discussion between our officer and the client with regard to client‟s intention to hire from us and then in one time agreed to buy that rental vehicle at the end of the rental period. Because car agreed to be hired contained in first schedule Hire purchase act 1967, so act of this provisions is used in her transaction. To matchlaw Shariah with hire-purchase transaction that shall be made between the banks with customer, so it is necessary for both sides to comply transaction policies as follows:
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1. Mr. / Mrs. would be requesting us to buy from the car dealer that will be rent out to Mr. / Mrs. According to the Hire Purchase Act 1967, master party should pay deposit as much as not less from 10% from selling price from seller. The amount that customer pays to sellers is advance payment that must pay on behalf of the Bank and because customer have been contributed deposit money on behalf of the bank , the said amount would be considered already repaid by the bank to customer when we consider the said amount in first monthly rental calculation that will be imposed. If monthly rental fullypaid during tenancy period agreed, vehicle rented would be sold in rental price that customer paid in to the bank. All remittance cost payment through post, stamp duty and administrative cost need to be borne and are paid by customer. As the owner, we (subject to Hire Purchase Act 1967) deserve to repossess again the car that rented out.
2. According
to
Second
Schedule
(Part
1)
Hire
Purchase
Act
1967
that used in transaction that the bank will make, Term Charge‟s is profit rate used by the bank to calculate rent that will be imposed. Therefore, car rental rate rented out will be determined according total advances paid and the vehicle period will be rented out.
3. If customer default any monthly rental payment such stated ,customer will asked to pay to ta'widh bank (compensation) in rate fixed by Central bank as follows:a) Ta‟widh for monthly late payment Failure to pay any monthly rental payment from financing commencement date until maturity period, bank shall put on ta'widh in value 1% a year. b) Ta‟widh to the balance of financing for late payment 8
For the failure to settle the balance of financing for the late payment the bank will impose ta‟widh based on Islamic Money Market – IIMM or „r‟ (Gross Dividend Rate for General Investment Account for 12 months period) for the balance of financing starts from the maturity date of financing until the payment is made.
4. If Mr. /Mrs. fails to pay monthly rental installment which has been stated until the car being repossess, and if we found that the car is not being keep safely that can cause loss to us, then we have the right to take court action to claim such losses based on market value during disposal of the car take place.
5. On the Hire Purchase Act 1967 and Hire Purchase Agreement which not contradict with Shariah rules are acceptable, agreeable and will be acceptable by both parties.
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Example of AITAB Agreement I, ………………………........................................……… (IC No: ………………………) On behalf of the bank agreed to rent the car as the details follow: Description of the car: ……………………………………………….. Registration No: …………………………………………… Registration Date:………………………………………….. Model Made: ………………………………………………. Year of manufacturing: …………………………………… Ability: ………………………………………………….. Engine No.: …………………………………………….. Chassis No.: …………………………………………… Original color: ………………………………………… To Mr. /Mrs. …………………………………………………………. (IC No: ……………………………..) For a period of ………………………………. months with the first rental installment of RM …………………………….. (Deposit + Rental installment) and for the next month amounting RM ……………………… (Monthly installment) and the last month payment of RM ……………………….. month.
…………………………………………. Signature of Maybank‟s Representative I, ………………………………………………………………………………………… (IC No: ………………………………………………) agree to accept the rental according to the agreed conditions by both parties.
…………………………………………… Signature of Hirer 10
5) DIFFERENCES BETWEEN CONVENTIONAL AND ISLAMIC HIRE PURCHASE FROM SHARIAH POINT OF VIEW
Item Conventional Hire Purchase Islamic Hire Purchase
Terms
Loan Interest rate Hiring Charges Late payment interest
Financing Profit rate Mark-up Late payment charges Not involved in immoral activities against Shariah
Eligible Customer
Good credit rating
Contract
One standard contract
Two aqad in sequential contract
Purchase Price/ Installments
cost price x interest rate/month
Cost price + profit/number of payments
Profit Margin/ Interest Rate
Floating based on the annual rate, decided up front
Determined based on market value
Responsibility
Hirer/customer bears all costs of maintenance
Owner bears basic and structural maintenance
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6) SHARIAH ISSUES
The Islamic scholar had provided guidelines that fulfill the requirement of Shariah compliance in order to facilitate people in term of the practical and the implementation of AITAB. Although a lot of effort had been done in order to achieve the objective of Shariah, yet there are still having several issues during the practical of AITAB. A competitive environment within the dual system in Malaysia creates a special advantage for the promotion of innovative products like AITAB product. However, it demands close scrutiny from a Shariah perspective to ensure the legitimacy of AITAB (Irwani and El-Din, 2007). Thus, the Shariah issues that will be discussed are regarding the ownership, transfer of ownership, maintenance responsibility, insurance responsibility, deposit payment, penalty in the case of default and legal treatment.
Ownership In AITAB, the bank is required to have ownership of the asset before it will be transfer to the customer. According to El-Din and Irwani (2007), ownership is vital as it represents the extent of rights and liabilities of the parties involved. In order to an owner of the asset, the bank must purchase the asset first which required the bank in maintaining and bearing all the costs associated with the asset. According to Malaysian practice, the bank will hold the ownership of the asset, while the customer having his name in the document of title, becomes the legal owner. The bank will usually have to register its ownership claim over the title of the asset and endorsed on the registration card (Davies, 1995). This means that the bank will hold the document of title as security for the contract. Upon satisfying all due payments, the bank will remove its claim and customer become the absolute owner. According to El-Din and Irwani (2007), there are only two different aspects involved. First, the parties‟ intention and understanding when executing AITAB is to have the asset leased and then sold in which the bank will have a beneficial right over the asset throughout the 12
transaction, until complete transfer ownership takes effect. Second, the bank‟s beneficial ownership is released by executing a sale/transfer of ownership contract. Thus, as bank has the beneficial ownership and also a legal owner, the bank has right on the asset unless the asset being transfer to the customer.
Transfer of Ownership In AITAB, there are two transaction involved separately which are a contract of leasing from the beginning of the transaction and a contract of completing the transfer of ownership from the owner to hirer. According to Accounting and Auditing organization for Islamic Financial Institutions (AAOFII) Shariah rules for Ijarah and IjarahMuntahiaBittamleek (2000), the method of transferring the title of the leased asset must be evidenced in a document separate from the Ijarah contract. In the Malaysian practice, there are two separate contracts, one is leasing contract and another one is purchase contract which is executed either upon early settlement or at the maturity of the AITAB agreement. For practical purposes, the contracts are signed up front by the parties, except for the second contract, which the bank will only sign after the first one has elapsed. However, the signing of the second contract does not make the contract automatically effective. There is a stipulation in the contract stating the manner on which the transfer of ownership must take place (El-Din and Irwani, 2007). In this case, paying the last installment by the customer will consider as exercising the option to purchase the asset. But under this condition, the customer and the bank must aware and understand that they are exercising option to purchase the asset once the last payment of the installment was being made by the customer. Thus, both parties must agree to the terms and conditions on how the transfer of ownership takes place.
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Maintenance The issue of maintenance in AITAB is important, as it signifies the extent of the owner‟s responsibilities toward the leased asset. The owner hold the owner ship of the assets, while the customer is granted full possession of the asset, so that he can ultimately use it according to the purpose specified in the contract within the agreed-upon period of time (El-Din and Irwani, 2007). During the Ijarah contract, the owner is responsible to ensure the leased asset is always fit to hirer and the hirer shall be accountable for its proper and continuous use on the regular basis. According to El-Din and Irwani (2007), the responsibilities can be categorized into two types: a) Basic or structural maintenance The owner shall bear all costs of major breakdown and basic liabilities attached to the leased asset. b) Routine or operational maintenance The hirer will bear all costs of routine maintenance of the leased property. This includes keeping the property in a good condition for a proper use, for example, in renting a car, he must keep it clean and tidy. In addition, he shall bear the cost of car petrol, engine oil, and other ordinary car maintenance in order to keep the car functioning well. In the current practice of Malaysia, maintenance responsibility is undertaken solely by customer, while bank acts as a financier. In fact, the customer is acknowledged in the document of title as a legal owner of the asset. The bank only acts as a beneficial owner that has an ownership claim over the asset until full payment has been made. Therefore, it requires the hirer to maintain the asset since he is the one who uses and utilizes it. If, the hirer found that the asset is defective which result failure to benefit him, he has the right to sue the bank. If the hirer himself repairs the defective asset, he has the right to claim from the bank. In the case of
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defective is caused by the hirer‟s negligence, he is the one who will bear the cost of repairing the asset. Those practices seem to be not Shariah compliant because in Shariah, the owner will responsible for maintaining the leased asset. In practice, all responsibilities are passed to the hirer. Because of that, Shariah advisor and Scholars in Malaysia have ruled that the duty to maintain the leased property must be made clear to the contracting parties and put in clear terms in agreement (El-Din and Irwani, 2007).
Insurance responsibility The general principle speaks that insurance coverage (takaful) of an asset is responsibility to the owner. But, Shariah Legal Opinions of Kuwait Finance House affirm that it is lawful to make hirer is responsible for insurance, if the amount is known, because it may then become a part of the lease payment. According to current Malaysian practice, the insurance coverage will be borne by the owner during the first year of the transaction, where the cost is included in the rental payments. In the subsequent years, the hirer will undertake to pay the cost of insurance. This rule has been agreed upon by most jurists in Malaysia. Their arguments are the purpose of taking insurance is to protect oneself from any risk related to being the user of the asset. Thus any damages to the asset or injury to the third parties caused by one‟s own negligence shall necessarily be his responsibility (El-Din and Irwani, 2007).
Deposit Payment It has been a common commercial practice to pay a deposit before starting to use any newly acquired asset. The deposit serves as security against future loss or misconduct caused by the hirer. In Malaysia, the amount of deposit payment of 10% is required for an AITAB transaction, which is the same requirement as in conventional practice. As provided under the 15
Hire Purchase Act 1967, the owner of the leased asset is required to take at least 10% of the cash value of the asset as a minimum deposit. However, between the bank (owner) and vendor (seller), the deposit is considered as a part of the purchase price of the asset paid by the bank to the vendor. Whereby, between the customer (hirer) and the bank, the deposit is regarded as the first rental payment and will be accounted in determining the monthly rental payment. The Shariah Advisory Council, in its 69th meeting dated 27 July 2007, has resolved that the best approaches for the payment of deposit in Islamic hire purchase are as follows: i. The customer pays the rental deposit (for example 10%) to the Islamic financial institution. The Islamic financial institution then purchases the asset or vehicle from the dealer by paying its total price (10% customer‟s deposit + balance of 90%). The Islamic financial institution later leases the asset or vehicle to the customer. ii. However, if the customer has paid a certain amount (10%) to the dealer, the following two approaches are acceptable: a. The deposit payment may be considered as a security deposit (Hamish jiddiyyah). In this situation, the customer may have an arrangement with the Islamic financial institution to offset the security deposit with the asset‟s selling price or rent; or b. The deposit payment may be considered as a rental deposit (`urbun for ijarah) to the dealer. When the asset is sold to the Islamic financial institution, the dealer will surrender the ownership of the asset and the lease agreement to the Islamic financial institution. In this situation, the dealer may have an arrangement with the Islamic financial institution to offset the rental deposit with the selling price paid by the Islamic financial institution. In the case of AITAB in Malaysia, the deposit paid by customers is considered as a rental deposit (urbun for ijarah). Hence, in an Islamic transaction the intention and purpose of the payment must be made clearer, especially to the customer. This is to ensure that he fully understands the purpose of deposit payment and the function it serves.
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Penalty on default payment There is a possibility that the lessee may default in settling the rental payment of the ijarah asset. As the financier and owner of the asset, the Islamic financial institution may suffer losses due to such default. A minimal late payment (compensation) charge of 1% p.a. (non compounding) of the installment due will be imposed for defaulted customer while conventional HP will charge a fee of 8% p.a. (compounding). According to Shariah, if a client is defaulting in payment due to poverty, then he must be given time until he is in a position to pay. Or else, the creditor may forgive him and it is the best way. Allah S.W.T says in Surah al-Baqarah verses 280: “If the debtor is in a difficulty, grant him time till it is easy for him to repay. But if ye remit it by way of charity, that is best for you, if ye only knew?” Also, if the debtor is defaulting without any valid excuse, then charging him an extra amount as a penalty is not a solution because this will constitute as riba. However, the contemporary scholars have mentioned with regards to Islamic Banks that if a client undertakes that in case he defaults in payment at the due date, he will pay a specified amount to a charitable fund maintained by the bank, it will be permissible. This is regarded as a self-imposed penalty and a sort of vow, in order to put pressure on the debtor to pay promptly. Normally, such vows create a moral obligation and are not enforceable through courts. It should also be insured here that no part of this amount shall form part of the income of the creditor, as that will constitute riba. (Muhammad Taqi Usmani, 2002). In other words, late penalty charges cannot be taken as income by the bank. Besides, the legal maxim rules that “Matters are determined according to intentions” suggest that all human acts must be valued in accordance with the intention. An example of the application of this maxim is the imposition of ta‟widh. Ta‟widh is the compensation paid by the bank‟s defaulting customers who intentionally or negligently refused to pay their obligations towards the bank (ISRA, 2011). 17
Thus, penalty on default payment was allowed in order to prevent the intentional defaults by customers but cannot be taken as income to the bank.
Lack of Shariah Framework According to Irwani (2007) in Ismail (1999), the current practice of Islamic hire purchase in Malaysia is based on conventional hire-purchase regulations. Despite being one of the most demanding facilities of an Islamic bank, Islamic hire purchase is unfortunately lacking in an explicit Shariah regulatory framework. Any dispute arising from the transaction of Islamic hire purchase will be referred to the conventional regulations. In the context of Malaysia, there is no specific regulation governing this Islamic hire purchase. The main reference to this practice is still Hire Purchase Act 1967. It is permitted to refer to the conventional hire-purchase as long as such practices are not against the Shariah principles. As claimed by Irwani (2007), there some provisions of the Hire Purchase Act are in fact in harmony with the spirit of Shariah: a. the preparation and service of the Part I (Preliminary) and Part II (Formation and Contents of Hire-Purchase Agreements) statements; b. the preparation and execution of a written hire-purchase agreement;
c. conditions and warranties; d. protection of hirers and guarantors in Part III, IV, and V; e. rules for repossession; f. insurance liability on the owner in Part VI;
g. the formula and limitation on term charges; h. the avoidance of the agreement if any of the above-mentioned requirements are not met; i. The imposition of penalties for violation of the above requirements. However, still the conventional hire purchase is lacking some basic Shariah principles in Islamic transaction. For instance, the financing for AITAB is sourced only from “halal” funds 18
while the conventional HP has no limitation of its sources of funds. Thus, there is an effort undertaken by the Bank Negara to add some provisions of Islamic hire-purchase transactions into the existing Hire-Purchase Act 1967 in order to promote harmonization between conventional and Islamic principles. Yet, the matter is still pending either to include or not the provisions of Islamic hire-purchase into Hire-Purchase Act. Whatever it is, the implementation of Islamic hire purchase should be done properly according to Shariah principles.
7) CONCLUSION
In conclusion, the practice of AITAB in Malaysia inherits some other issues such as the issue of ownership, insurance, maintenance, default payment and shariah framework. Moreover, AITAB is operated on the basis of conventional concepts because presently, there is no written Shari„ah law which specifically regulates the operation of AITAB. However, BNM has taken the lead to insert some provisions of Islamic hire purchase into the conventional hire purchase. Shariah should be viewed as a potential tool for innovation and creativity, rather than a limiting constraint. There is a need for greater collaboration among the Shariah scholars, academicians, and researchers to undertake thoroughly studies and research in relation to the Islamic hirepurchase product. This will certainly enhance the product competitiveness and capability in the Islamic financial markets. In addition, BNM and banking industries should move forward in formulating a better developed Islamic hire-purchase facility. Therefore, efforts must be undertaken not only scholars but by all individuals and should involve the government, banking industries, legal experts, and the public at large. Most important, the irregularities and uncertainties in the means of implementing Islamic hire purchase regulations must be quickly resolved by the government.
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8) REFERENCES
Abdullah, N.I. Dusuki, A,W. N/A, “A Critical Appraisal of Al-IjarahThumma al-Bay‟ (AITAB): operation: Issues and Prospects.”, Paper presented at 4th International Islamic Banking and Finance Conference, Monash University of Malaysia. Kuala Lumpur.
Abdullah, N.I. Dusuki, A.W. (2006). Customers‟ Perceptions of Islamic Hire-Purchase Facility in Malaysia: An Empirical Analysis”, IIUM Journal of Economics and Management 14(2), 177-204.
Bank Negara Malaysia. (2010). Shariah Resolutions in Islamic Finance, Second Edition
INCEIF CIFP Module on Applied Shariah In Financial Transactions.
Ismail, S. (1999). Conventional hire purchase and Islamic hire purchase
Rusni Hassan, AishathMuneeza, Adnan Yusoff. N/A, “Legal stains in the Malaysian Islamic banking practices of al IjarahThumma Al Bai‟ (AITAB)” Centre for Islamic Studies and Civilisation Unit, UniversitiTenagaNasionalPutrajaya Campus, Selangor.
Usmani, M. T. (2002). An Introduction to Islamic Finance. The Hague: Kluwer Law International.
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Malaysia is indeed a leader of the Islamic banking and being one of the first countries to promote Islamic finance. Malaysia has experienced a dual banking system whereby a fullfledged Islamic banking system operates on a parallel basis with a sophisticated conventional banking system, which has been practicing Islamic banking form 1983 with the adoption of Islamic Banking Act 1983. In Malaysia, Islamic banking is competing with the Conventional banking and it survives through those challenges comes from the competition since the conventional banking system was developed earlier for the centuries. As compared to operating in a single Islamic banking system, operating within a dual banking system provides a relative advantage to Islamic banks. AITAB is Al-ijarahthumma al-bay, which Islamic jurists (fuqaha) today have introduced an Islamic version of hire purchase as a substitute of conventional hire purchase. AlIjarahThumma Al-Bay‟ (AITAB) is one of the latest innovations in the development of the Islamic hire-purchase instrument, which had been designed especially for individual or corporate customers particularly not only to finance a wide range of assets but also to meet the customers public demand and at the same time securing long-term competitiveness in the financial market. Besides, the establishment of Al-IjarahThumma Al-Bay‟ was developed in stage by stage not in simultaneously. In the first ten years of the operation of Islamic Banking in Malaysia (1983-1994), ijarah or also known as leasing was utilized at that time since the inexistence of AITAB. Nevertheless, through the consideration of scholars by using the Ijtihad, the Ijarah facility was later developed into Al-IjarahThumma al Bai‟ (AITAB) facility and until today it greatly being practiced for buying of motor vehicles as whole. Indeed, the contract of Al-ijarahThumma Al-Bai' (AITAB) runs separately from the contract of al-bay. Since both contracts are executed in succession, AITAB can be used to describe the process of converting an al-ijarah contract into a sale contract. In other words, it refers to a combination of two different contracts undertaken separately and subsequent as 1
follows. First stage is executing the contract of lease (Al-Ijarah). Secondly, it followed by a contract of sale (Al-Bai‟) which is based on the Islamic Law prescribed. Under the first contract, the customer hires the goods from the Bank at an agreed rental amount over a specified period of time. Upon expiry of the hiring period, the customer enters into a second contract to purchase the goods from the Bank at an agreed price. Moreover, Al-IjarahThumma al-Bai‟ as adopted in Malaysia is where the sale of asset to the lessee is executed at the completion of the lease period or in other words as a form of IjarahMuntahia bi al-Tamleek. In fact, IjarahThumma al Bai‟ (AITAB) is such a recent and unique product of Islamic banking which was incepted more than ten years ago. Thus, unique rules on leasing and sale contract needed to be ruled at different stages of the transaction. All those rules were not developed simultaneously and the law applied to AITAB today is the conventional Hire Purchase Act 1967 (HPA). The discovery of Al-IjarahThumma al Bai‟ (AITAB) shows the novel part of Islamic banking. This is because AITAB is the alternative for conventional hire-purchase that frequently burdens the people with their particular charges. In Malaysia, AITAB was first adopted by Bank Islam and which later was extended to the conventional banks operating under Islamic Banking Scheme. The popularity of AITAB is growing up day by day and it continuously spread out among all the customers. However, in order to incise the Islamic values in the product there are still certain legal constrains needs to be highlighted and take into consideration. From that, Islamic banking will be more given priority than conventional banking by the customers.
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2) APPLICATION OF AITAB IN VEHICLE FINANCING
Ijarah refers to a lease or commission contract that involves an exchange of usufruct or benefits of an asset or a service for rent or commission for an agreed period. In the context of Islamic finance, the ijarah concept is usually applicable in financing contracts such as in real property financing, vehicle financing, project financing and personal financing. There are also financing products that enable customers to lease assets from Islamic financial institutions with an option to acquire the leased assets at the end of the lease tenure based on the concept of ijarahmuntahia bi al-tamlik or al-ijarahthumma al-bai`. There has been a proposal by an Islamic financial institution to introduce vehicle financing based on al-ijarahthumma al-bai` (AITAB) concept. The financing based on AITAB involves two types of contracts, namely leasing contract (ijarah), followed by sale contract (albai`). At the initial stage, the Islamic financial institution will conclude an ijarah agreement with the customer. Under this agreement, the Islamic financial institution will appoint the customer as an agent to purchase the vehicle identified by the customer. Subsequently, the Islamic financial institution will lease the vehicle to the customer for a specified period. Upon expiry of the lease period, the customer has the option to purchase the vehicle from the Islamic financial institution. If the customer opts to purchase the vehicle, the Islamic financial institution and the customer will conclude a sale contract and the ownership of the vehicle will be transferred from the Islamic financial institution to the customer. Most vehicle financing facilities offered by Islamic financial institutions are based on alijarahthumma al-bai` (AITAB) concept. However, there are circumstances whereby the lessee decides to discontinue the lease and seeks to find another person as a replacement who will continue the lease and will ultimately purchase the asset from the Islamic financial institution. This arrangement is in line with the provision of the Hire Purchase Act 1967 that allows a lessee to transfer his rights and liabilities under a hire purchase agreement to another person.
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The assignment of rights or liabilities does not contradict the Shariah as Islam recognizes transfer of rights and liabilities based on mutual agreement by the parties. In the context of vehicle financing based on AITAB, if a lessee decides to discontinue the lease, he may transfer his rights and liabilities to another party who will continue the lease and will ultimately purchase the asset from the Islamic financial institution. In an ijarah contract, the lessor is the owner of the ijarah asset whereas the lessee is only entitled to the usufruct of the asset. Since in the current practice the lessor‟s name is not registered in the asset‟s title, the SAC was referred to on the issue as to whether the lessor possesses the ownership of the leased asset. The aforesaid SAC‟s resolution is based on the Shariah recognition of both legal ownership and beneficial ownership. In the context of ijarah, the lessor has the beneficial ownership although the asset is not registered under his name. Such beneficial ownership may be proven through the documentation of the ijarah agreement concluded between the lessor and the lessee. Termination of a contract is allowed in Shariah whenever the contracting parties decide to discontinue the mutually agreed contract. Termination of a contract may occur due to various reasons, which include among others, to avoid injustice, losses or any other harm to the contracting parties. In this regard, the SAC was referred to on the basis for termination of an ijarah contract. The aforesaid SAC‟s resolution has considered the following: i. The subject matter of an ijarah contract is the usufruct of the leased asset and if the asset loses its usufruct, the ijarah contract may be terminated. ii. Based on the principle of freedom to contract, both contracting parties are free to stipulate any mutually agreed contractual terms and conditions. Therefore, the ijarah contract may be terminated if any of the contracting parties does not satisfy the agreed terms and conditions. This is in line with the following hadith of Rasulullah SAW: 4
“Verily, the contract of sale is based on mutual consent.” “The Muslims are bound by their (agreed) conditions except the condition that permits what is forbidden or forbids what is permissible.” iii. The ijarah contract is a binding contract that requires mutual agreement of both parties for its termination.
3) HOW TRANSACTION ACTUALLY WORKS
AITAB is the result of hybrid combination of lease and sale contract in one business document. Under the contract of lease, which is the first contract to be entered; the hirer lease goods from owner at an agreed rental over a specified period. When the agreed period expires, and lease ends, the hirer enters into a second contract to purchase the goods from the owner at an agreed price. In an AITAB transaction, normally three parties are involved; i.e. the customer, bank and the seller. On the request of the customer, the bank would buy the requested goods or commodity from the seller/shop and then would rent that commodity to the customer for an agreed period of time over a fixed price paid by installment. Once, the agreed period is over and the pre-agreed price is paid by installment, the Bank would enter into a sale agreement with the customer and would, then sell the commodity to the customer for a nominal price. This would definitely relieve the bank from the operational cost of looking after the commodity rented and save the bank from the price risk, if the bank were to sell the commodity to another party. In practical sense, if the AITAB is used for buying a vehicle, the customer would first identify the vehicle (asset) he wants to buy and then order the bank. The bank would then buy that vehicle from the seller and rents the vehicle to the customer at a rate agreed upon for a specified period of time. The customer (hirer) would then agree to pay for road tax and coverage and would agree to be responsible for the maintenance of the vehicle. Then at the end of the period the bank and the customer would sign the sale and purchase agreement. In AITAB, the 5
bank has the authority to the leased asset. If the customer defaults, the bank would repossess the asset and is free to take an action against him. The gist of AITAB is that if the customer continuously pays and satisfies all the legal requirements, at the end of the lease period the bank would transfer the ownership of the asset to the customer.
4) TYPES OF AGREEMENT INVOLVED
As for the AITAB facility, basically three main agreements are of supreme importance. These are: A. Sale and Purchase Agreement It is not part of the documentation for the facility applied by the client. It is however, among the most important agreements in obtaining such a facility from banks. To facilitate a better understanding, an example might help. Say, for instance, Miss Fariha intends to buy a car from a seller. She then chooses the dealer to buy the car. But she needs the financing to buy a car. After that, she enters into AITAB contract which is based on ijarah (rental) financing with Maybank Islamic. Based on Second Schedule of the Hire Purchase Act 1967, Section 4 (1) (a) and 4 (1) (b) (i), the Sale and Purchase Agreement (Principal Agreement) will be signed between the two parties which is dealer and the bank. Accordingly, Miss Fariha would have to pay 10 per cent of the price of the car as the deposit for rental payment. The signing of this agreement is compulsory between the dealer and the bank because the car will be rent by Miss Fariha on the specified date and rental installment will be paid. As AITAB concerns, the transfer of ownership will take place after all the rental payments has been paid. Therefore, the sale and purchase agreement will be sign by Miss Fariha and the bank at the end of the rental period settlement.
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B. Islamic Hire Purchase Agreement/ AITAB Agreement This is an agreement made between the client and the bank. Under the first contract, the hirer leases goods from the owner at an agreed rental over a specified period. Upon expiry of the leasing or rental period, the hirer enters into a second contract to purchase the goods from the owner at an agreed price. In the current practice, AITAB involves three main parties: the customer, financing company, and vendor. Using, for the sake of illustration, the common example of car financing, AITAB operates as follows: a. The finance company buys the vehicle from the vendor or car dealer based on the order of the customer. b. The finance company rents the vehicle to the customer at a rate agreed upon for a specified period of time. The customer (hirer) agrees to pay for road tax and insurance coverage. He also will be responsible for its maintenance. c. At the end of the period the finance company and the customer will sign the sale and purchase agreement.
Example of AITAB financial instrument is as follow; We (bank) referring to the discussion between our officer and the client with regard to client‟s intention to hire from us and then in one time agreed to buy that rental vehicle at the end of the rental period. Because car agreed to be hired contained in first schedule Hire purchase act 1967, so act of this provisions is used in her transaction. To matchlaw Shariah with hire-purchase transaction that shall be made between the banks with customer, so it is necessary for both sides to comply transaction policies as follows:
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1. Mr. / Mrs. would be requesting us to buy from the car dealer that will be rent out to Mr. / Mrs. According to the Hire Purchase Act 1967, master party should pay deposit as much as not less from 10% from selling price from seller. The amount that customer pays to sellers is advance payment that must pay on behalf of the Bank and because customer have been contributed deposit money on behalf of the bank , the said amount would be considered already repaid by the bank to customer when we consider the said amount in first monthly rental calculation that will be imposed. If monthly rental fullypaid during tenancy period agreed, vehicle rented would be sold in rental price that customer paid in to the bank. All remittance cost payment through post, stamp duty and administrative cost need to be borne and are paid by customer. As the owner, we (subject to Hire Purchase Act 1967) deserve to repossess again the car that rented out.
2. According
to
Second
Schedule
(Part
1)
Hire
Purchase
Act
1967
that used in transaction that the bank will make, Term Charge‟s is profit rate used by the bank to calculate rent that will be imposed. Therefore, car rental rate rented out will be determined according total advances paid and the vehicle period will be rented out.
3. If customer default any monthly rental payment such stated ,customer will asked to pay to ta'widh bank (compensation) in rate fixed by Central bank as follows:a) Ta‟widh for monthly late payment Failure to pay any monthly rental payment from financing commencement date until maturity period, bank shall put on ta'widh in value 1% a year. b) Ta‟widh to the balance of financing for late payment 8
For the failure to settle the balance of financing for the late payment the bank will impose ta‟widh based on Islamic Money Market – IIMM or „r‟ (Gross Dividend Rate for General Investment Account for 12 months period) for the balance of financing starts from the maturity date of financing until the payment is made.
4. If Mr. /Mrs. fails to pay monthly rental installment which has been stated until the car being repossess, and if we found that the car is not being keep safely that can cause loss to us, then we have the right to take court action to claim such losses based on market value during disposal of the car take place.
5. On the Hire Purchase Act 1967 and Hire Purchase Agreement which not contradict with Shariah rules are acceptable, agreeable and will be acceptable by both parties.
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Example of AITAB Agreement I, ………………………........................................……… (IC No: ………………………) On behalf of the bank agreed to rent the car as the details follow: Description of the car: ……………………………………………….. Registration No: …………………………………………… Registration Date:………………………………………….. Model Made: ………………………………………………. Year of manufacturing: …………………………………… Ability: ………………………………………………….. Engine No.: …………………………………………….. Chassis No.: …………………………………………… Original color: ………………………………………… To Mr. /Mrs. …………………………………………………………. (IC No: ……………………………..) For a period of ………………………………. months with the first rental installment of RM …………………………….. (Deposit + Rental installment) and for the next month amounting RM ……………………… (Monthly installment) and the last month payment of RM ……………………….. month.
…………………………………………. Signature of Maybank‟s Representative I, ………………………………………………………………………………………… (IC No: ………………………………………………) agree to accept the rental according to the agreed conditions by both parties.
…………………………………………… Signature of Hirer 10
5) DIFFERENCES BETWEEN CONVENTIONAL AND ISLAMIC HIRE PURCHASE FROM SHARIAH POINT OF VIEW
Item Conventional Hire Purchase Islamic Hire Purchase
Terms
Loan Interest rate Hiring Charges Late payment interest
Financing Profit rate Mark-up Late payment charges Not involved in immoral activities against Shariah
Eligible Customer
Good credit rating
Contract
One standard contract
Two aqad in sequential contract
Purchase Price/ Installments
cost price x interest rate/month
Cost price + profit/number of payments
Profit Margin/ Interest Rate
Floating based on the annual rate, decided up front
Determined based on market value
Responsibility
Hirer/customer bears all costs of maintenance
Owner bears basic and structural maintenance
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6) SHARIAH ISSUES
The Islamic scholar had provided guidelines that fulfill the requirement of Shariah compliance in order to facilitate people in term of the practical and the implementation of AITAB. Although a lot of effort had been done in order to achieve the objective of Shariah, yet there are still having several issues during the practical of AITAB. A competitive environment within the dual system in Malaysia creates a special advantage for the promotion of innovative products like AITAB product. However, it demands close scrutiny from a Shariah perspective to ensure the legitimacy of AITAB (Irwani and El-Din, 2007). Thus, the Shariah issues that will be discussed are regarding the ownership, transfer of ownership, maintenance responsibility, insurance responsibility, deposit payment, penalty in the case of default and legal treatment.
Ownership In AITAB, the bank is required to have ownership of the asset before it will be transfer to the customer. According to El-Din and Irwani (2007), ownership is vital as it represents the extent of rights and liabilities of the parties involved. In order to an owner of the asset, the bank must purchase the asset first which required the bank in maintaining and bearing all the costs associated with the asset. According to Malaysian practice, the bank will hold the ownership of the asset, while the customer having his name in the document of title, becomes the legal owner. The bank will usually have to register its ownership claim over the title of the asset and endorsed on the registration card (Davies, 1995). This means that the bank will hold the document of title as security for the contract. Upon satisfying all due payments, the bank will remove its claim and customer become the absolute owner. According to El-Din and Irwani (2007), there are only two different aspects involved. First, the parties‟ intention and understanding when executing AITAB is to have the asset leased and then sold in which the bank will have a beneficial right over the asset throughout the 12
transaction, until complete transfer ownership takes effect. Second, the bank‟s beneficial ownership is released by executing a sale/transfer of ownership contract. Thus, as bank has the beneficial ownership and also a legal owner, the bank has right on the asset unless the asset being transfer to the customer.
Transfer of Ownership In AITAB, there are two transaction involved separately which are a contract of leasing from the beginning of the transaction and a contract of completing the transfer of ownership from the owner to hirer. According to Accounting and Auditing organization for Islamic Financial Institutions (AAOFII) Shariah rules for Ijarah and IjarahMuntahiaBittamleek (2000), the method of transferring the title of the leased asset must be evidenced in a document separate from the Ijarah contract. In the Malaysian practice, there are two separate contracts, one is leasing contract and another one is purchase contract which is executed either upon early settlement or at the maturity of the AITAB agreement. For practical purposes, the contracts are signed up front by the parties, except for the second contract, which the bank will only sign after the first one has elapsed. However, the signing of the second contract does not make the contract automatically effective. There is a stipulation in the contract stating the manner on which the transfer of ownership must take place (El-Din and Irwani, 2007). In this case, paying the last installment by the customer will consider as exercising the option to purchase the asset. But under this condition, the customer and the bank must aware and understand that they are exercising option to purchase the asset once the last payment of the installment was being made by the customer. Thus, both parties must agree to the terms and conditions on how the transfer of ownership takes place.
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Maintenance The issue of maintenance in AITAB is important, as it signifies the extent of the owner‟s responsibilities toward the leased asset. The owner hold the owner ship of the assets, while the customer is granted full possession of the asset, so that he can ultimately use it according to the purpose specified in the contract within the agreed-upon period of time (El-Din and Irwani, 2007). During the Ijarah contract, the owner is responsible to ensure the leased asset is always fit to hirer and the hirer shall be accountable for its proper and continuous use on the regular basis. According to El-Din and Irwani (2007), the responsibilities can be categorized into two types: a) Basic or structural maintenance The owner shall bear all costs of major breakdown and basic liabilities attached to the leased asset. b) Routine or operational maintenance The hirer will bear all costs of routine maintenance of the leased property. This includes keeping the property in a good condition for a proper use, for example, in renting a car, he must keep it clean and tidy. In addition, he shall bear the cost of car petrol, engine oil, and other ordinary car maintenance in order to keep the car functioning well. In the current practice of Malaysia, maintenance responsibility is undertaken solely by customer, while bank acts as a financier. In fact, the customer is acknowledged in the document of title as a legal owner of the asset. The bank only acts as a beneficial owner that has an ownership claim over the asset until full payment has been made. Therefore, it requires the hirer to maintain the asset since he is the one who uses and utilizes it. If, the hirer found that the asset is defective which result failure to benefit him, he has the right to sue the bank. If the hirer himself repairs the defective asset, he has the right to claim from the bank. In the case of
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defective is caused by the hirer‟s negligence, he is the one who will bear the cost of repairing the asset. Those practices seem to be not Shariah compliant because in Shariah, the owner will responsible for maintaining the leased asset. In practice, all responsibilities are passed to the hirer. Because of that, Shariah advisor and Scholars in Malaysia have ruled that the duty to maintain the leased property must be made clear to the contracting parties and put in clear terms in agreement (El-Din and Irwani, 2007).
Insurance responsibility The general principle speaks that insurance coverage (takaful) of an asset is responsibility to the owner. But, Shariah Legal Opinions of Kuwait Finance House affirm that it is lawful to make hirer is responsible for insurance, if the amount is known, because it may then become a part of the lease payment. According to current Malaysian practice, the insurance coverage will be borne by the owner during the first year of the transaction, where the cost is included in the rental payments. In the subsequent years, the hirer will undertake to pay the cost of insurance. This rule has been agreed upon by most jurists in Malaysia. Their arguments are the purpose of taking insurance is to protect oneself from any risk related to being the user of the asset. Thus any damages to the asset or injury to the third parties caused by one‟s own negligence shall necessarily be his responsibility (El-Din and Irwani, 2007).
Deposit Payment It has been a common commercial practice to pay a deposit before starting to use any newly acquired asset. The deposit serves as security against future loss or misconduct caused by the hirer. In Malaysia, the amount of deposit payment of 10% is required for an AITAB transaction, which is the same requirement as in conventional practice. As provided under the 15
Hire Purchase Act 1967, the owner of the leased asset is required to take at least 10% of the cash value of the asset as a minimum deposit. However, between the bank (owner) and vendor (seller), the deposit is considered as a part of the purchase price of the asset paid by the bank to the vendor. Whereby, between the customer (hirer) and the bank, the deposit is regarded as the first rental payment and will be accounted in determining the monthly rental payment. The Shariah Advisory Council, in its 69th meeting dated 27 July 2007, has resolved that the best approaches for the payment of deposit in Islamic hire purchase are as follows: i. The customer pays the rental deposit (for example 10%) to the Islamic financial institution. The Islamic financial institution then purchases the asset or vehicle from the dealer by paying its total price (10% customer‟s deposit + balance of 90%). The Islamic financial institution later leases the asset or vehicle to the customer. ii. However, if the customer has paid a certain amount (10%) to the dealer, the following two approaches are acceptable: a. The deposit payment may be considered as a security deposit (Hamish jiddiyyah). In this situation, the customer may have an arrangement with the Islamic financial institution to offset the security deposit with the asset‟s selling price or rent; or b. The deposit payment may be considered as a rental deposit (`urbun for ijarah) to the dealer. When the asset is sold to the Islamic financial institution, the dealer will surrender the ownership of the asset and the lease agreement to the Islamic financial institution. In this situation, the dealer may have an arrangement with the Islamic financial institution to offset the rental deposit with the selling price paid by the Islamic financial institution. In the case of AITAB in Malaysia, the deposit paid by customers is considered as a rental deposit (urbun for ijarah). Hence, in an Islamic transaction the intention and purpose of the payment must be made clearer, especially to the customer. This is to ensure that he fully understands the purpose of deposit payment and the function it serves.
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Penalty on default payment There is a possibility that the lessee may default in settling the rental payment of the ijarah asset. As the financier and owner of the asset, the Islamic financial institution may suffer losses due to such default. A minimal late payment (compensation) charge of 1% p.a. (non compounding) of the installment due will be imposed for defaulted customer while conventional HP will charge a fee of 8% p.a. (compounding). According to Shariah, if a client is defaulting in payment due to poverty, then he must be given time until he is in a position to pay. Or else, the creditor may forgive him and it is the best way. Allah S.W.T says in Surah al-Baqarah verses 280: “If the debtor is in a difficulty, grant him time till it is easy for him to repay. But if ye remit it by way of charity, that is best for you, if ye only knew?” Also, if the debtor is defaulting without any valid excuse, then charging him an extra amount as a penalty is not a solution because this will constitute as riba. However, the contemporary scholars have mentioned with regards to Islamic Banks that if a client undertakes that in case he defaults in payment at the due date, he will pay a specified amount to a charitable fund maintained by the bank, it will be permissible. This is regarded as a self-imposed penalty and a sort of vow, in order to put pressure on the debtor to pay promptly. Normally, such vows create a moral obligation and are not enforceable through courts. It should also be insured here that no part of this amount shall form part of the income of the creditor, as that will constitute riba. (Muhammad Taqi Usmani, 2002). In other words, late penalty charges cannot be taken as income by the bank. Besides, the legal maxim rules that “Matters are determined according to intentions” suggest that all human acts must be valued in accordance with the intention. An example of the application of this maxim is the imposition of ta‟widh. Ta‟widh is the compensation paid by the bank‟s defaulting customers who intentionally or negligently refused to pay their obligations towards the bank (ISRA, 2011). 17
Thus, penalty on default payment was allowed in order to prevent the intentional defaults by customers but cannot be taken as income to the bank.
Lack of Shariah Framework According to Irwani (2007) in Ismail (1999), the current practice of Islamic hire purchase in Malaysia is based on conventional hire-purchase regulations. Despite being one of the most demanding facilities of an Islamic bank, Islamic hire purchase is unfortunately lacking in an explicit Shariah regulatory framework. Any dispute arising from the transaction of Islamic hire purchase will be referred to the conventional regulations. In the context of Malaysia, there is no specific regulation governing this Islamic hire purchase. The main reference to this practice is still Hire Purchase Act 1967. It is permitted to refer to the conventional hire-purchase as long as such practices are not against the Shariah principles. As claimed by Irwani (2007), there some provisions of the Hire Purchase Act are in fact in harmony with the spirit of Shariah: a. the preparation and service of the Part I (Preliminary) and Part II (Formation and Contents of Hire-Purchase Agreements) statements; b. the preparation and execution of a written hire-purchase agreement;
c. conditions and warranties; d. protection of hirers and guarantors in Part III, IV, and V; e. rules for repossession; f. insurance liability on the owner in Part VI;
g. the formula and limitation on term charges; h. the avoidance of the agreement if any of the above-mentioned requirements are not met; i. The imposition of penalties for violation of the above requirements. However, still the conventional hire purchase is lacking some basic Shariah principles in Islamic transaction. For instance, the financing for AITAB is sourced only from “halal” funds 18
while the conventional HP has no limitation of its sources of funds. Thus, there is an effort undertaken by the Bank Negara to add some provisions of Islamic hire-purchase transactions into the existing Hire-Purchase Act 1967 in order to promote harmonization between conventional and Islamic principles. Yet, the matter is still pending either to include or not the provisions of Islamic hire-purchase into Hire-Purchase Act. Whatever it is, the implementation of Islamic hire purchase should be done properly according to Shariah principles.
7) CONCLUSION
In conclusion, the practice of AITAB in Malaysia inherits some other issues such as the issue of ownership, insurance, maintenance, default payment and shariah framework. Moreover, AITAB is operated on the basis of conventional concepts because presently, there is no written Shari„ah law which specifically regulates the operation of AITAB. However, BNM has taken the lead to insert some provisions of Islamic hire purchase into the conventional hire purchase. Shariah should be viewed as a potential tool for innovation and creativity, rather than a limiting constraint. There is a need for greater collaboration among the Shariah scholars, academicians, and researchers to undertake thoroughly studies and research in relation to the Islamic hirepurchase product. This will certainly enhance the product competitiveness and capability in the Islamic financial markets. In addition, BNM and banking industries should move forward in formulating a better developed Islamic hire-purchase facility. Therefore, efforts must be undertaken not only scholars but by all individuals and should involve the government, banking industries, legal experts, and the public at large. Most important, the irregularities and uncertainties in the means of implementing Islamic hire purchase regulations must be quickly resolved by the government.
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8) REFERENCES
Abdullah, N.I. Dusuki, A,W. N/A, “A Critical Appraisal of Al-IjarahThumma al-Bay‟ (AITAB): operation: Issues and Prospects.”, Paper presented at 4th International Islamic Banking and Finance Conference, Monash University of Malaysia. Kuala Lumpur.
Abdullah, N.I. Dusuki, A.W. (2006). Customers‟ Perceptions of Islamic Hire-Purchase Facility in Malaysia: An Empirical Analysis”, IIUM Journal of Economics and Management 14(2), 177-204.
Bank Negara Malaysia. (2010). Shariah Resolutions in Islamic Finance, Second Edition
INCEIF CIFP Module on Applied Shariah In Financial Transactions.
Ismail, S. (1999). Conventional hire purchase and Islamic hire purchase
Rusni Hassan, AishathMuneeza, Adnan Yusoff. N/A, “Legal stains in the Malaysian Islamic banking practices of al IjarahThumma Al Bai‟ (AITAB)” Centre for Islamic Studies and Civilisation Unit, UniversitiTenagaNasionalPutrajaya Campus, Selangor.
Usmani, M. T. (2002). An Introduction to Islamic Finance. The Hague: Kluwer Law International.
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