Abdul Farhan FA16-BAF-026

Ijara financing facility of Islamic bank

Ijara:
Ijara is Arabic word which mean to “providing services and goods temporarily for a wage.”

Ijara is Islamic way of leasing in which a Islamic bank buy a property for its customer and give it
to him on rent and after the completion of rent period, Bank gift the car to customer without
any additional amount.

If take an interview from my internship supervisor Mr. Raheel that take car from Mezaan bank
on bases of ijara system for 4 years rent tenure for Suzuki swift. Mezaan bank provides leasing
totally based on Islamic sharia. Bank also provide motor bike financing for the period of up to 3
year so that everyone can afford at least his own conveyance easily. While on the other hand
the period of car financing is up to 7 years.

After summarize the interview I conclude the following:

Risk for owners:

Mr. Raheel told me that the ownership of car is under bank. He just paying rent for it and wait
for the end of rental period. All the ownership risk is belonging to bank mean that the bank is
liable to collect the rental amount from its customer. For this bank charge a penalty for late
payment (further discuss under). He also told me that just usage risk is belonging to him that
means he is liable for any damage or destruction of car. Under the period of rent he does not
sell the car. In conventions bank, All the risk are place to user of a car that is totally oppose of
sharia compliance. But in Islamic banking system in ijara the risk is distributed between Islamic
banks and its customers.

Lease rental in case of loss of asset/Car:

The other case that he describes to me that If the car was destroyed or stolen and prove that it
is in real scenario then bank does not charge further rent from their customers because the
ijara is based on renting service and if there is no asset that mean there is no rent. He told me a
case of his friend that suffers from this situation and bank did not take any further rental
amount from him. As describe above that the ownership right is under bank so bank will bear
the loss. Bank will get the loss amount through Takaful of that vehicle. In case of conventional
bank leasing system, the bank charge the lease amount in any case until the period of rent
ended. So Islamic way of ijara is quiet best for leasing cars. The were less risk as compared to
conventional bank.

Late payment penalty:

When I ask him about the process of Meezan bank when he delay the payment. He told me that
bank will fine him in case payment is late after due date. I visit the website of Mezaan bank and
read out their process to use the amount that is collected from customer as penalty. I found
that they donate the whole amount that is collected from penalty charge to customers. For this
purpose bank make a charity fund for donation purposes. The collect the amount from pantry
and give it to charity. On the other case in conventional banking system the conventional bank
also charge penalty for late payment but in case the bank consider as revenue for it. That is riba
and it is prohibited in Islam.

Leasing of assets:

In conventional banking the cars are leased with insurance as describe in the law of Pakistan
that requires all leasing assets are insured. Conventional banking system insured the leasing
assets on conventional insurance method that is not acceptable in Islam. While in Islamic bank
the assets are issued on basses of Takaful that is totally based on Islamic sharia.

On the breach of contract:

In case of breach of contract by a customer the reason may be due to he will leave the country
and settle on another country or he does on hsn’t want to drive this car. If the contract breach
by customer then according to law the car is placed under the ownership of bank and bank deal
it with its policies.

Start of rental amount:

In conventional banking system the rent is start before the delivery of car. For example if a
customer enter in the contract of car leasing the he must immediately starts the payment of
rent either Car receive him or not. Generally in Pakistan if a person places an order for a car
then he receives it after 4-6 months. In this period he gives the rental amount with having
assets that is prohibited in Islam. While on the other hand the rent in ijara starts after the
delivery of goods

Conclusion:
After observing the key difference between Islamic way of leasing (ijara) and conventional way
of leasing I conclude that Islamic way of leasing (ijara) is best for person who wants to take an
asset but not have enough resources. Ijara is less risky as compared to conventional leasing
system and it is totally allowed by Sharia scholars.

Reference:

Mr. Raheel Mahmood.

Contact number: 03491472392