Under this contract, the customer selects the capital equipment or property (assets) to be nuanced by the bank and the bank then purchases these assets from the manufacturer or supplier and then leases them to the customer for an agreed period. In conformity with the Shari’s, the owner of the assets (in this case the bank) must be paid rent (fixed or variable, as agreed by the lesson and lessee) and must exercise all the rights and obligations that are incidental to ownership such as maintaining, insuring and repairing the assets.
The lessee, on the other hand, obtains the use of the asset for the period of the lease subject to paying the rent. The lessee may assume the obligations, such as maintaining, insuring and repairing the asset, in return for a reduced rent. 1 . 3. 2 What is Car Ajar? As mentioned above ‘Jar is basically the transfer of suffuses (defined below) of a fixed asset to another person for an agreed period, for an agreed consideration. Under a Car ‘Jar agreement the car will be rented to the customer for the period agreed at the time of contract.
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Upon completion of the lease period the customer in the Means case discussed below, gets ownership of the car against his initial security deposit. Car ‘Jar is a Shari’s-compliant car-leasing scheme. It is based on the principles of Jar and is completely free from the element of interest. This product is designed for interpretative individuals, looking for a car-financing scheme that helps in avoiding interest-based transactions. So Car ‘Jar is simply a rental agreement under which the car will be given to the customer in exchange for rent for a period, agreed at the time of the contract.
Means Bank, based in Pakistan and a pioneer in this area, purchases the car and rents it out to the customer for a period of three, four or five years. Upon completion of the lease period the customer gets ownership of the car against his initial security deposit. Somewhat confusingly, the Means Car ‘Jar scheme has elements of ‘Jar WA Satin within it. In this case study I propose to follow the Means assumption in using ‘Jar in the sense that it involves car ownership at the end of the maturity of the deal. This is in line with Shari’s methodology and terminology. . 3. 2. 1 What is Suffuses? Suffuses is the right of enjoying a thing, the property of which is vested in another, and to draw from the same all the profit, utility and advantage that it may produce, provided it be without altering the substance of the thing. Items without suffuses cannot be leased. It is necessary for a valid lease contract that the corpus of the leased asset remains in the ownership of the seller, and only its suffuses is transferred to the lessee. 1 . 3. 3 In what Sense is Car ‘Jar Interest Free?
In Car Ajar, the asset remains under the ownership and at the risk of the bank and the customer only pays the rental for the use of the asset, Just like the rent of a house. 3 Under leasing or lease purchase, the Islamic financial institution buys the financed asset and retains the title through the life of the contract. The customer makes a series of lease payments over a specified period of time, and may have the option at the end to buy the item from the lesson (and owner) at a pre specified residual value. Leasing was not originally a mode of financing.
It was simply a transaction meant to transfer the suffuses 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 Islamic banks, as an alternative to conventional car financing. However, the consideration of leasing as a mode of financing should be based on certain notations. It should be understood, by all using it as a mode of financing, that it is not sufficient to substitute the term ‘interest’ with the term ‘rent’, and use the term ‘mortgage’ instead of the term ‘leased asset’.
There must be a significant difference between leasing and an interest-bearing loan. It is no secret that an Islamic bank or financial institution will take into consideration the same factors as a conventional bank when determining the rental payments and residual value. These would include the rate of inflation, the creditworthiness of the Jesse, the opportunity cost value of the money (as reflected by market interest rates) and so on. An implicit ‘interest rate’ can trivially be calculated from the price, residual value, term of the lease and the lease payment.
This fact is not hidden. Indeed Muslim customers are encouraged to ‘shop around’ and ensure that the Islamic financial institution is not implicitly charging an interest rate, which is in line with the conventional market. In the final analysis, however, the difference is in the form of the contract. If the lease is structured in accordance with the various conditions within Islamic Jurisprudence, t will contract no rib and ensure that it cannot contain such forbidden rib in the future (e. G. In terms of late payment fees, etc. ). 1 . 3. 4 What is the Difference between a Conventional Lease and an Islamic Lease? The most important financial difference between Islamic leasing and conventional leasing is that, with Islamic leasing, the leasing agency must own the leased object for the duration of the lease. Therefore, although leasing a car from a car manufacturer or car dealership may in principle be permitted for Muslims (if the contract satisfies the other conditions), Muslims should investigate further.
In many cases, the car dealership may in fact use a bank or other financial intermediary to provide a loan for the present value of lease payments, and charge the customer interest on this loan. This would constitute the forbidden rib. Scrupulous Islamic financial institutions ensure that the contract abides by all the restrictions set out in the Shari’s (e. G. , subleasing requires the permission of the lesson; late payment penalties must be handled very carefully to avoid rib, etc. ). The differences between conventional and Islamic financing schemes are described in he sections below. 1. 3. 4. Leasing versus Conventional Financing Conventional Financing The conventional financing schemes provide financing for purchasing a car; that is, in essence the financier is giving a loan and charging interest. 4 Islamic Financing The Islamic car financing – ‘Jar – is based on a lease contract. It is not a financing scheme; rather it is a lease contract. As mentioned earlier leasing is a contract whereby suffuses rights to an asset are transferred by the owner, known as the lesson, to another person, known as the lessee, at an agreed-upon price, called the .NET, and for an agreed-upon period of time, called the term of lease. . 3. 4. 2 Rentals versus Installments A conventional car financing scheme is actually an interest-based loan given by the financial institution, with interest being charged on the loan. Islamic car financing is based on pure rentals. In Car ‘Jar the asset remains at the ownership and risk of the bank and the customer only pays the rental for use of the asset, Just like the rent for a house. 1. 3. 4. 3 Ownership In conventional car financing, the car is purchased in the name of the buyer from the dealer. Islamic Financing
Under ‘Jar the ownership remains with the bank; that is, the car is purchased from the dealer in the name of the bank. This is because it is one of the foremost conditions of the Islamic mode of leasing that an object cannot be leased out unless it is in the possession of the lesson. 1. 3. 4. 4 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 mains entirely with the bank.
As the corpus of the leased property remains in the ownership of the lesson, all the liabilities and risks emerging from the ownership are borne by the lesson. The lessee is responsible for any loss caused to the asset by misuse or negligence. The lessee can also be made liable for the wear and tear, which normally occurs during its use. But the lessee cannot be made liable for a loss caused by factors beyond his control. (The agreements CIO 5 with traditional car financing generally do not differentiate between these two situations.
In a lease based on Islamic principles, both situations should be dealt with separately. 1. 3. 4. 5 Down-payment versus Security Deposit Both the down-payment and the security deposit are one-time payments. The major difference occurs because the buyer can buy back the car against the security deposit in the case of Ajar, whereas in conventional banking the down-payment remains with the bank, and no buy-back of the car can occur against the down- payment. With ‘Jar the buyer is required to keep a security deposit at the bank.
There is a minimum and a maximum requirement for the security deposit. The requirement is efferent in the case of conventional car financing, where a down-payment is made by the buyer of the car. 1. 3. 4. 6 Return of the Car In a traditional car financing scheme, the customer takes out a loan to purchase the car, which he cannot return under any circumstances whatsoever, unless he pays off the loan. Islamic Financing 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. . 3. 4. 7 Termination of Contract 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 the post-termination phase. In the conventional car financing scheme, if the customer wants to terminate the contract the only option he has is to buy the car by paying the rest of the installments.
In the Islamic car financing scheme, the customer has two options: either return the car and get back the security deposit or buy the car from the bank at the market alee plus a certain percentage of spread for the bank. 6 1. 3. 4. 8 Documentation Differences Sequence/process Islam considers the procedure in which any transaction takes place as a significant factor in all modes of financing. The underlying difference between the Islamic and conventional modes of financing is that of the process. To Muslims, not only the end result but also the means to it are important.
If the result is correct and the steps are wrong, or vice versa, the entire process is deemed invalid, from a Shari’s perspective. According to Shari’s 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 suffuses. As mentioned, Islam places great emphasis on the sequencing. 1 . 3. The Means Bank Car ‘Jar Scheme Means Banks Car ‘Jar has been designed according to the principles of Islam and is completely interest-free. Moreover the ‘Jar contract and other documentation also comply with Shari’s requirements. In contrast, a conventional car-financing scheme s actually an interest-based loan given by the financial institution with interest being charged on the loan. Also, in conventional car-leasing schemes, the lease contract is not in compliance with Shari’s law and has rib and other UN-lilacs elements in it. 1. 3. 5. What Makes Car ‘Jar Unique? Some of the key characteristics of the Means Car ‘Jar are described in the following sections. Rights and Liabilities of Owner Versus User ‘Jar is an asset-based contract, that is, the lesson should have ownership of the asset during the life of the contract. Under Shari’s law all ownership-related rights and abilities should lie with the owners while all usage-related rights and liabilities should lie with the user. A conventional lease contract does not distinguish between the nature of these liabilities and dumps all liabilities on the user.
This is not permitted under the Shari’s. Under ‘Jar all ownership-related risks lie with the bank and all usage related links lie with the user, thus making the lesson the true owner of the asset and making the income generated through the contract permissible (hall) for the Islamic bank. Continuation of Lease Rentals in the Case of Total Loss or Theft of Vehicle If the eased vehicle is stolen or completely destroyed the conventional leasing company would continue charging the lease holder rent until the settlement of the insurance claim.
Under the Islamic system, however, rent is consideration for usage of the leased asset and, if the asset has been stolen or destroyed, the concept of rental becomes void. As such, in the above-mentioned eventualities, Means Bank does not charge the lease rental. Is there a Penalty for Late Payment of Rent? If so How is This Permissible Under the Shari’s? In most conventional financial leases an extra monetary amount is charged if rent is to paid on time. This extra amount is considered as rib under the Shari’s and is distinctly forbidden 7 (harm).
The lessee may be asked to undertake that if he fails to pay rent on its due date, he will pay a certain amount to a charity that will be administered through the bank. For this purpose Means Bank maintains a charity fund where such amounts may be credited and disbursed for charitable purposes. What is the Insurance Arrangement under Car Ajar? Being the owner of the car, the bank will be responsible for insurance of the car and for paying the insurance premium. If Tactful (Islamic insurance) is not available, the insurance is done under the conventional system.
Can the User Buy the Car Prior to the Termination of Rental Agreement? Yes. The rental agreement contains the purchase price schedule. Is the Product Approved by Means Banks Shari’s Board Yes. Car ‘Jar is designed under the supervision of Means Banks Shari’s Supervisory Board and is approved by the Board. In order for any Islamic financing technique to be acceptable to the Islamic community it has to be endorsed by the appropriate Shari’s Board who will provide a Fatwa (a religious ruling). The appendix to this case illustrates the Fatwa applicable to the Means Bank Car ‘Jar agreement.