Shariah-compliant auto leasing (Ijarah) getting popular in Pakistan

Shariah-compliant auto leasing getting popular

In recent years the State Bank of Pakistan has been allowing new Islamic banks to come in and establish their branches in Pakistan and has issued licences to various banks to promote Islamic banking in the country.

Islamic Banking is already popular in many other parts of the world such as Malaysia, Saudi Arabia, the UAE, Qatar, Kuwait and in many other Middle Eastern countries. It is taking roots in Pakistan as well.

Islamic banking is a matter of faith. Everyone has his/her own interpretation and views what Islamic banking is, but ever since the entrance of fully-fledged Islamic banks in the country consumers have developed a taste for Islamic banking and Shariah compatibility. Now more and more people are getting attracted to Shariah-compliant banking system.

In a country of 160 million people, now the share of Islamic banking is just 2.5, so there is a huge market to capture. With the entrance of various Islamic banks, a wide range of Shariah-compliant products, which are Riba (interest) free, are now available.

There are various Shariah-compliant products available in the market. One of them is auto leasing through Islamic mode of financing. Now various banks are offering auto Ijarah (leasing) to more and more people who prefer Islamic financing for home and car financing to conventional banking system.

Sohail Akram, manager at the Car Ijarah Department at Bank Al-Falah, said that consumers are now more interested in car Ijarah product than conventional products of auto loan. Under Islamic car financing, it is a car rental agreement, under which a bank purchases the car and rents it out to the customer for a minimum three years and maximum seven years. The variation in time period depends upon a company’s policy, agreed at the time of the contract. Upon completion of the lease period, the customer gets ownership of the car against his/her initial security deposit, he explained.

Banks are facing difficulty in recovery because initially conventional banks financed auto loans with little inquiry and keeping in view the payment capacity of consumers and with minimum documentation requirement to capture the market. This was one of the reasons of more and more defaulters.

Under Islamic financing, the vehicle is not transferred in the name of the lessee (Mustaj’ir) but he is given only using rights.

Akram explained that Ijarah (leasing) is a form of borrowing intended to finance specific assets (plant & machinery, vehicles, or office equipment), the ownership of which remains with the lessor (Muaj’ir). Ijarah finance is intended for the financing of mainly long-term borrowing requirements between three and seven years.

Under Ijarah, the lessor (Muaj’ir) is the owner of the financed asset, and the lessee (Mustaj’ir) is given only usage rights.

He further said that the most attractive part of car Ijarah is that under it no rent is charged when the vehicle is not in use, damaged or it’s in garage for repair. The bank will not charge any rent for this time period. On the contrary, under conventional financing, the bank takes installments even when the vehicle has gone for repair, or is damaged.

The News has learnt that now many banks have stopped giving auto loans due to the poor recovery rate.

Standard Chartered Bank is among such banks which have stopped giving auto loans. When contacted, Ali Habib, head of the Corporate Affairs at Standard Chartered Bank, said that it’s not that they have stopped dealing in auto loans, but it is true that†they are reviewing this side of the business and are dealing with their existing customers, but are not taking any new bookings. The bank is doing a critical review of the business in order to come up with a new strategic planning.

It all depends on customers’ preference and it’s completely their choice to go for anything which they think is appropriate for them; banks just offer various products and Islamic auto finance is one of them.

As far as the recovery rate is concerned, whether Ijarah or conventional, it again depends upon a consumer who wants to pay regularly, and those who are defaulters are defaulters no matter which auto finance product they have availed of.

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9 responses to “Shariah-compliant auto leasing (Ijarah) getting popular in Pakistan

  1. Assalamualikum,
    I am about to enter into Islamic Auto Lease Ijarah agreement with an auto dealer via a bank in Saudi Arabia. The bank has sent me a sheet to llok at. The sheet shows that the price of the car is 82,000 (example), the Finance amount is 82,000 as well. Then the Tenor is mentioned as 60 months. Then there is column called Rate of Interest (6%). What is this in an Ijarah agreement? It looks like the bank is looking at it as giving an amount not the car. I am not happy with this. The bank will say that the amount is their service charge or something like that. Can you please throw some light into this?

    • Walaikum assalam wa rahmatullah,

      It is difficult to comment unless one is aware of all the details of the contract. I would recommend you ask your local scholars and religious Muslims about Islamic auto leasing options in your city and follow their advice.

  2. ok, insha Alah will do that. Jazakallah Khair. The bank says that it is fully SHARIAH COMPLIANT CERTIFIED.

  3. Написано конечно всё правильно, хотя и только поверхностно. В любом случае спасибо

  4. Unquestionably believe that which you said. Your favorite reason appeared to be on the internet the easiest thing to be aware of.
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  5. Ateeq ur Rehman

    The Group Head.
    Bank Alflahl,(Islamic Banking)
    lahore.
    Subject: Correction of Installments amount.
    Respected Sir,
    Humbly bringing into your Notice that I got a car from Bank Alfalah Bosan Road Multan at 45%down payment which was Rs. 305000/=and, Rs. 6000/= for processing charges. I paid Rs. 311000/= via cheque No 105546 Dated: 18-12-2014
    Ac.No 55785000027927
    Now the following issues have been raised which are so mind teasing and shows institutional robbery with the poor customer.
    INSURANCE POLICY + REGISTRATION CHARGES
    BEFORE LEASING THE VEHICLE I HAVE BEEN TOLD THAT INSURANCE , REGISTRATION CHARGES AND TAX WILL BE PAID BY THE BANK THAT;S WHY OUR MARK UP @IS 17.5%
    BUT LATER ON I HAVE BEEN INFORMED THAT ABOVE MENTIONED CHARGES WILL BE PAID BY ME IN SUCH WAY WHICH SHOWS BANKS FEBAIN TACTICS .
    @ INVOICE AMOUNT AMOUNT FOR A YEAR AMOUNT FOR 5 YEARS
    4.75% RS=678000/= RS=32205/= RS=131886/=
    REGISTRATION CHARGES
    @ REGISTARION
    CHARGES AMOUNT FOR A YEAR AMOUNT FOR 5 YEARS TOTAL
    AMOUNT
    17.5% RS=28780/= RS=28780/= RS=25095+28680/= RS=48000/=
    OH MY GOD. NOW MORE CRUELTY THE BANK FINANCED PAYMENT WHICH WAS RS=372900/= IS NOW RAISED LIKE THAT.
    FINANCED PAYMENT INSURANCE REGISTRATION TOTAL MARK UP
    RS=372900/= RS= 131886/= RS=48000/- RS=784380/=? 17.5%
    QUESTIONS?
    1. WHEN 45% AMOUNT OF INVOICE I HAVE PAID THE WHY I PAY INSURANCE ON THE TOTAL AMOUNT RS=678000/= EVEN I AM PAYING MARK UP ON MY OWN AMOUNT (DOWN PAYMENY 45%) @OF 4.75% ONCE TO INSURANCE COMPANY LATER TO THE ISLAMIC BANKING ALFALAH @17.5% BECAUSE THIS INSURANCE AMOUNT IS ADDED IN THA BANK FINANCED AMOUNT WHY?
    2.THE SAME ABOVE MENTIONED ISSUE IS ALSO REPEATED IN THE REGISTRATION CHARGES .MARK UP 17.50% FOR ONE YEAR THEN TO 5 YEARS AND AMOUNT IS ADDED IN THE BANFINANCED AMOUNT AND AGAIN CHARGED 17.5% ON THE TOTAL AMOUNT.
    3.WHY AM I NOT BE TOLD FOR SUCH POLICY EVEN AFTER 45 DAYS BESIDES LOTS OF MY WRITTEN AND TELEPHONIC REQUESTS I HAVE NOT BEEN GIVEN THE AMMORTIZATION SCHEDULE OF MY POLICY.
    4. ITS ABSOLUTELY :HARAM: (AMOUNT TO AMOUNT)
    5.WHY REGISTRATION AND INSURANCE CHARGES ARE NOT TAKEN FROM ME AT THE TIME OF VEHICLE DELIVERY?

    THE ANSWER IS THAT I HAVE BEEN TEMPTED THAT BOTH OF THE AMOUNTS WILL BE PAID BY THE BANK THAT;S WHY THE MARK UP @ IS 17.5% . 4% MORE THAN OTHER SCHEDULED BANKS AND I EASILY BECAME FOOLISH. NO DOUBT ; GREED IS A CURSE;
    ME SURE THAT BANKING MOHTASIB WOULD SURELY LISTEN TO ME. AND ALSO MEDIA &ANCHOR PERSON WOULD HELP ME TO RESOLVE THIS ISSUE
    REQUEST
    1.PLEASE THE INSURANCE AND REGISTRATION CHARGES WILL BE PAID BY THE BANK AS I HAVE BEEN TOLD.
    2.IF NOT THEN ME READY TO PAY BOTH OF THE AMOUNTS BUT THE MARK UP(17.5%) WOULD BE DECRESED@ 4.5%
    3. IF THE BANK DO NOT AGREE ON BOTH ABOVE MENTIONED TERMS. DEDUCT ONE YEAR INSURANCE AND NET REGISTRATION CHARGES( WITHOUT MARK UP) FROM MY DOWN PAYMENT AND AFTER A YEAR I SHALL TERMINATE THE POLICY BY PAYING THE REMAINING FINANCED AMOUNT FROM RS = 372900/= ME READY TO GIVE THE CHECK OF REMAINING AMOUNT.
    4. IF THE BANK DO NOT AGREE ON ALL THE ABOVE MENTIONED TERMS THEN TAKE THE VEHICLE BACK AND PAY BACK ME MY AMOUNT RS= 305000/= (DOWN PAYMENT)
    RS=6000/=PROCESSING CHARGES, RS 3000/= INCOME EVALUATION CHARGES AND RS =5000/= DELIVERY CHARGES (TOTAL RS 319000/=)
    5. HUMBLY REQUEST YOU PLEASE SPARE TIME, DO HAVE A MEETING WITH ME & FIND OUT THE SOLUTION OF MY TENSION.
    NOTE IN CASE OF NO RESPONSE I HAVE NO MORE OPTION TO REGISTER MY CASE IN THE BANKING MOHTASIB
    DIFFERENCE BETWEEN THE BANK AND ME
    BANK FINACED AMOUNT CLAIMED AMOUNT INSURANCE INSURANCE
    CLAIMED REGISTRATION
    AMOUNT CLAIMED AMOUNT BANK MARK UP @17.50 BANK CLAIMED

    RS=372900/= RS=420900/= RS=32205/= RS=131886/= RS=28780/= RS=48000/ RS=105000/ RS=213540/=
    PLEASE MAKE THE CORRECTION AND DO INFORM ME FOR THE SMOOTH FUNCTIONING OF BUSINESS WITH THE BANK.
    HOPE SO THAT YOU WILL CONSIDER MY REQUEST
    TRUELY YOURS
    ATEEQ UR REHMAN
    PRINCIPAL LORD EDUCATIONAL COMPLEX
    ALSYED HOUSE FAISAL COLONY KOT ADDU
    SUZUKI MEHRAN MN-15 /307 AC.NO 55785000027927 PH 03336002655
    c.c to
    1.THE GROUP HEAD .(ISLAMIC BANKING GULBERG BRANCH LAHORE)
    2. THE REGIONAL MENAGER BANK ALFLAH MULTAN

  6. Ateeq ur Rehman

    absolute lie, in the shade of islam the bank is robbing the poor customers. inshallah all ullmas will be answerable on the judgment day. inshallah.
    i wrote all the concerned authorities and told them how is it anti islam. but the pay deaf ear to me. you all readers plz beware.

  7. Nicе blog here! Also your website loads up very fast!

    What host are you using? Can I get your аffiliate link to your
    host? I wish my web site loaded up as fast as yours lol

  8. Dear
    what will the bank do when the car gone total loss
    Plzz guide me
    Thanx

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