Study on Islamic Banking and Leasing Finance Essay

Modern Islamic-finance is a rapidly increasing subsector of global finance markets. To appropriately comprehend it, we firstly understand the rules of trade and finance are part of religion on which Muslims demeanour their lives and order their finances and business. Even though no convincing data are yet on hand, a fact reflective of the industry's adolescence many observers guess the international industry has up to $500 billion in managed assets and a growth rate of 15 percent to 20 percent per year. Some also argue that between two to three hundred institutions at present contributes towards industry internationally. (Umar F. Moghul, Esq, 2006) In banking system, Islamic banking is a system which is steady with Islamic Shari'ah Law bases and guided by Islamic economics. In general, Islamic law forbids the gathering and payment of interest (Riba in Islam). Generally, it also forbids dealing in fiscal risk like in gambling. It also forbids investment in businesses considered "Haram" like investing in pork, tobacco, alcohol. Islam has prohibited interest based financing and has really strict regulations against. There are so many Hadith's are to restrict Riba and ask muslims not to invest or get involve where interest is involved. Holy Prophet Muhammad (SAW) prohibit Riba, "The Prophet Muhammad (SAW), said: A dirham of riba which a man receives knowingly is worse than committing adultery thirty-six times". Bayhaqi has also reported the above hadith in Shu'ab al-iman with the addition that "Hell befits him whose flesh has been nourished by the unlawful." (Mishkat al-Masabih, Kitab al-Buyu', Bab al-riba, on the authority of Ahmad and Daraqutni). Islam banking system has introduced different contract to avoid the illegal interest and all of them has their importance according to the type of the business. In the current age leasing is every common in the banking system it is beneficial for the people as they pay the large amount in small but against this facilities bank charge extra interest which makes it totally illegal on the bases of Islam.

What is the meaning of Ijarah (LEASING)?

In general leasing means a contract or an agreement between two parties where one party rent his property to another on a rental bases. In Islam this type is known as Ijarah which is commonly been adopted buy most of the banks to offer their muslims client the benefit of Riba free financing. Ijarah is a term of Islamic Fiqh. Literally, it means "To give something on rent"

The term "Ijarah" is used in two situations:

It means 'To employ the services of a person on wages' Another type of Ijarah relates to paying rent for use of an asset or property.

Types of leasing:

There are two common types

Operating Lease:

An operating lease is based on a rental agreement with three distinguishing description The price of an asset is not fully amortized over the rented timeframe. The Owner provides maintenance of the Asset. The asset is usually returned to the Owner. Therefore, the renter has the benefit of securing an asset, consuming it for his advantage and returning the same when it has served its purpose.

Financial Lease:

A Finance Lease is in core alike to a loan because significantly all risks and rewards connected to the leased assets pass on to the lessee. It is primarily distinguished by The asset being fully amortized over the lease period. The lessee is responsible for maintenance costs. The owner-ship is generally transferred to the renter at the end of the lease contract. In this respect, the association of the proprietor is restricted to financier. The main objective is to launch a product on the bases of Islamic Finance for the car distributors to sell their existing stock on the interest free car financing, after an extensive survey we have come to know that Islamic financing is growing in the world.

Al-Noor Car Ijarah product:

Al-Noor Car Ijarah is to provide a one step shop for innovative value added Shariah Compliant car leasing for the muslims as well as the non Muslims customers. Al-Noor Car Ijarah will be a car financing Product based on the principle of the Ijarah and it is interest free. This product will be ideal for the distributors who want to sell their existing Car stock on the Islamic bases and keep their profit Halal and it is ideal for those customers who are looking for an Auto-financing while evading an interest-based dealings. Al-Noor Car Ijarah will be a leasing agreement under which the car distributor rents it cars to the customers for the timeframe of 2 to 5 years, decided at the time of a contract. The customer will gets the owner-ship of the car at the end of the agreement period against it initial deposit.

General Mechanism of Al-Noor Car Ijarah

Ijarah is an Islamic Contract based on assets in which owner should have ownership of the asset throughout the timeframe of an agreement. According to the Islamic Shari'ah Law, owner has the ownership rights and its liabilities and all the user related rights and the liabilities remain with the user of the asset. A normal lease agreement does not differentiate the natures of such liabilities and put all types of liabilities on the renter, conflicting to Islamic Shari'ah. According to Ijarah contract all ownership related risks remains with the car distributor and all using related risks remain with the user of an asset, by making the leasing party the proper owner of the asset till the end of the contract and income coming from this contract became Halal (Permissible) for the car distributors.

Key Features of Al-Noor Car Ijarah for New Cars:

Ease of acquiring any new car available with the distributor No upfront Insurance Payment Required. No advance Rental Need. Available in tenures of 3, 4 and 5 years Plan. Minimum security deposit as low as 10% - 15%. Maximum security deposits are 50%. Rentals are Monthly is Arrears after delivery. Agreement can be based on new and used cars.

Key Features of Al-Noor Car Ijarah for Used Cars:

The second hand car selected should be from its first owner. The vehicle should not be older than 4 years. The minimum security deposit for a vehicle up to 2.5 years of age is 10%, while minimum security deposit for a vehicle over 2 years of age is 20%. On termination of the Ijarah contract, the car should not be more than 7 years old. This means that if a car is 5 years old, the Car Ijarah tenure is not more than 3 years and if its 4 years old, the tenure may be set for a maximum 4 year term.

Al-Noor Car Ijarah VS Conventional Leasing Features:

In Al-Noor Car Ijarah asset remain in the ownership of the bank throughout transaction tenor. Risk and rewards of ownership lie with the owner i.e any loss to the asset beyond the control of the lessee should be borne by the lessee. Although ownership remains with the lessor, but all risks of ownership are parked with the lessee as well. This is not permissible as per rules of the Ijarah.

Rentals

The rental amount decided at the time of the agreement cannot fluctuate unilaterally at the sole discretion of the bank. The bank can on its sole discretion increase transaction rates and rentals.

Expenses

All expenses related to the ownership of the asset i.e insurance, accidental damage, will be borne by the lessor.

Lessor

All actual operating/ overhead expenses related to running the asset will be borne by the lessor. All expenses relating to the corpus (ownership) of the asset i.e insurance, accidental repairs, actual operating / overhead charges are borne by the lessee.

Late Payment Charges

In Al-Noor car Ijarah, lessee may be asked to promise that if he fails to pay rent on its due date, he will pay certain amount to a charity account. This amount cannot be taken in Bank's income and its nature is of charity not of Riba. Charity is charged only to discipline the customers. An extra monetary amount is charged if rent payment is not paid on time and is taken in the income of the institute. This extra amount is Riba and is haram.

Asset Theft/ Damage

In case of asset theft / or severe damage (that it becomes unusable) rentals are stopped because rentals are obtained only for the use of the asset. Monthly payments are not stopped in any case of theft or severe damage to the asset.

Rentals / Monthly Payments

Rentals start after one month delivery of an asset. Monthly payments start from the booking of an asset irrespective of the condition that the asset is delivered to the customer or not.

Upfront Payments

Customer is only required to pay a Security deposit in a range of 15-50% along with actual documentation and processing cost. There are no other upfront payments. Upfront payments generally consist of: Down payment ranging from 10 - 15% min. Registration charges 1st year insurance premium 1st monthly rental 1st instalment of 2nd year insurance

At the end

Upon completion of the ijarah tenor, the customer can purchase the car from Car distributor via separate Sale deed or can return the car to the bank and take back his security deposit. The vehicle is automatically transferred in the name of the customer as per part of the contract.

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