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.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s