“DUBAI ISLAMIC BANK CAR IJARAH”
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FINAL PROJECT REPORT
ISLAMIC ECONOMICS AND FINANCE
NAME: BANIYA KHAN
STUDENT ID: 60685
SUBMITTED TO: MUHAMMAD
WASIE FASIH
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TABLE OF CONTENT
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ACKNOWLEDGEMENT
I have taken efforts in this project. However, it would not have been
possible without the kind support and help of many individuals and
organizations. I would like to extend my sincere thanks to all of them.
I am highly indebted to (Name of your Organization Guide) for his
guidance and constant supervision as well as for providing necessary
information regarding the project & also for his support in completing
the project.
I would like to express my special gratitude and thanks to industry
persons for giving me such attention and time.
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EXECUTIVE SUMMARY
Car Finance is all about buying a car at low price and lending it on a specific interest rate
to other hand. That person has to pay every month a certain amount of money. There are
some kinds of documentation; both the parties have been through to get a car loan.
Car financing can also be called as car loan, the party is getting car loan must have a good
credibility of availing and paying back that loan in the time given by the intermediary
between both the parties.
Car Financing is widely used all over the world, it has opened the gates for the people
who cannot afford to have a car yet they are allowed to drive one for them before making
proper payment.
Before going in for Car loan / Car finance, you must have someone who can be every
experienced in car financing so that you can reduce the risk of being cheated.
Car financing, allowed in both Individual and business purpose.
The main reason of financing your car is it, that it spreads the total cost of a vehicle to a
bigger extent rather than accepting cash at once.
Most of the businesses apparently the banks emphasis the idea of Car financing in terms
to generate more money out of it.
Instead of waiting for people to deposit their money and banks wait for their money to
be used as further invest most of the economist suggest the idea of financing it at a rate
through which the feedback amount or the return amount will be profitable and can
result in recovering the principle amount and can make further investments in the
banking area.
Generally, when in back, you pay a certain amount of loan monthly installment lie 7 or 8
percentage of the total cost you have to give extra on each installment you made.
Which generally makes a great surplus for the person who lends it to you and trusts you
to pay the certain amount of money on each installment and one more thing is more
important that you need to be eligible for it and it need a high amount of investigation
and documentations involved in it.
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INTRODUCTION TO CAR FINANCING
Car Finance is all about buying a car at low price and lending it on a specific interest rate
to other hand. And that person has to pay every month a certain amount of money. There
are some kinds of documentation; both the parties have been through to get a car loan.
Car financing can also be called as car loan, the party is getting car loan must have a good
credibility (you must have a job though which you can give the certain money to the other
party) of availing and paying back that loan in the time given by the intermediary between
both the parties. It could be a dealer or a direct manufacturer of that vehicle. Car
Financing is widely used all over the world, it has opened the gates for the people who
cannot afford to have a car yet they are allowed to drive one for them before making
proper payment. But before going in for Car loan / Car finance, you must have someone
who can be every experienced in car financing so that you can reduce the risk of being
cheated. Car financing, allowed in both Individual and business purpose.
The main reason of financing your car is it, that it spreads the total cost of a vehicle to a
bigger extent rather than accepting cash at once. Moreover, let’s take an example that a
vehicle has a cost of (RS. 500,000) and you get it from manufacturer at (RS.450,000) and
you have to sell it at (RS. 500,000) then you only getting profit of (RS. 50,000). So, most
of the businesses apparently the banks emphasis the idea of Car financing in terms to
generate more money out of it. Instead of waiting for people to deposit their money and
banks wait for their money to be used as further invest most of the economist suggest
the idea of financing it at a rate through which the feedback amount or the return amount
will be profitable and can result in recovering the principle amount and can make further
investments in the banking area. Generally, when in back, you pay a certain amount of
loan monthly installment lie 7 or 8 percentage of the total cost you have to give extra on
each installment you made. Which generally makes a great surplus for the person who
lends it to you and trusts you to pay the certain amount of money on each installment
and one more thing is more important that you need to be eligible for it and it need a high
amount of investigation and documentations involved in it.
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INDIVIDUAL/PERSONAL CAR FINANCE
In Pakistan, there are many businesses are emerging and Car financing is one of them, in
car financing there are two ways of financing, Individual car financing (also known as
personal car financing), it refers to the Finance car on your own, like contacting an
intermediary who can search a person (who is in search to get car loan) to you and set a
commission between two parties (you and the person taking that car on loan) that sets a
percentage of commission between two of you, and you have to collect payment
afterwards from that person. This obviously includes a huge documentation with the
credibility of the person who is getting it (Like, how much is he earning? where he works?
how much he can pay back? how long it will take to repay the money? at what rate he
will give money?) these all the things include in it. While, you can also Finance your used
car through it, by adopting same procedure as it told above.
In individual car financing Basically, deals with an individual lending a Vehicle (Offering a
certain percentage of loan to be paid monthly to that person on the principle amount of
that vehicle) and the other person pays that amount but it’s not easy as it seems it needs
an agent which let you meet the person who is ready to agree to your terms and
percentage you set. On other hand that agent took a commission fee from both of the
parties.
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Eligibility and Quantum:
In eligibility and quantum banks and the person who is financing his or her vehicle
will see the income and deposit amount of the person who is going to get that
vehicle on loan and furthermore, only 21 to 60 years old person is allowed to take
a loan for a car which is based on his or her income or making sure that he or she
will repay the loan with interest on time.
Rate of Interest and Repayment:
The rate varies Bank to Bank, generally in Pakistan, only 36 to 61 months of loan
for a car is allowed which a borrower have to pay within time with interest. And if
you escape a repayment or installment so the bank has authority to make you
penalize for the act of escaping the repayment.
Security and Insurance:
Security of vehicle and loan both are most important. There are types of car loans
which is described below, moreover, the insurance deals with the misshape with
your vehicle like if you got any accident or you vehicle gets stolen so they have
insurance to make it claim for you during the payment tenure.
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MODES OF CAR FINANCING
1. Personal Car Financing/Loan
Normal car financing is widely used all over the world, Unlikely, Ijara car financing, Normal
car financing has various types of car loan which distinguish itself from Ijara car financing
and this is also been very widely used all over the world as compared to any other car
financing.
Types of Car Loans:
Secured Loan
Unsecured Loan
Specialized Loan
Secured Loan:
Some lenders offer secure loan, secure loans, and means that there will be a security in
that loan. For example you need to put that vehicle which has taken from that lender as
a security to him, if you will unable to pay your payments for the specific time then the
lender has the authority to take procession of your vehicle or item
Unsecured Loan:
In unsecured loan, some lenders offer unsecure loans and means that there will be no
security in that loan. This does not want you to provide an item to provide security, you
lender sets a rate according to your financial situation (Like, if he sets a rate according to
your current income and if somehow there will be an increment in your income then the
lender has the authority to make the rate he sat raise up) so, the repayment or interest
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payment percentage rate can be varies from low to high according to your financial
situation. In this the principle amount is same while the repayment money is sort of high.
Specialized Car Loan:
This is the special type of car loan which is pretty much suitable for students. If you are a
student and you need a car then specialized car loan is the best choice for them. It allows
you to postpone your repayments for a limited time (for example, you’re studying and
can’t pay the loan so you can pay after completing your studies). It specially needs you to
match to their criteria. But in this the lender set a high repayment percentage and could
double the rate than its principle amount. It’s basically not a good car loan which costs
you much but it’s suitable as your needs.
2. Ijara Car Financing/Loan
The word Ijara means Rent, Ijara financing means that you are giving something on rent.
And it is widely getting common in Pakistan. Or it’s also be defined as the transfer of
ownership to other person on agreed price and conditions or situations. But the thing is
this, that Ijara Financing is not allowed to do the thing that is prohibited (HARAAM) in
Islam.
Ijara Muntahiya Bit Tamleek – بالتمليك منتهية اجارة
Ijara MBT is a lease that includes a promise from the lessor to transfer the asset to
the lessee.
This can be done at the end of the lease term or by stages during the term of the
contract.
The transfer can be done through gift or sale for an agreed price.
Understanding Ijara Financing:
In Ijara finance, there is a lot more difference than normal car financing. In Ijara car
financing you replace interest based repayments to rent payment and there will be
some mutual agreements between the lender and the borrower about the agreement
they are making. According to the people, they find it more easy and flexible comparing
the normal car financing.
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Ijara and Murabaha Financing:
Murabaha financing, is taken placed when an intermediary buys a property to lend
further with a clear title to it under the shari’ah (Islamic law of business working). It is
about giving anything on rent to the other person (for example if you’re financing
anything which costs Rs.500,000 and you and your borrows agreed on a term on selling
it on Rs. 550,000 then it’s allowed and not Haraam). It’s also different from Normal car
financing/loan in terms of repayment rate, in normal; the rate varies or gets fixed
according to your income but in Ijara and Murabaha the cost is decided first which
cannot be changed by anyone.
And it’s important to note that it prevents from Riba. For example if you delay in
repayment then Bank doesn’t have any authority to penalize you for it but yes they will
ask you the circumstances of why you delayed the payment yet will not ask for any
penalty that you have to pay.
Difference Ijara and Murabaha Financing:
Murabaha is a fixed rate and also for short term, But Ijara can be for long term.
In Murabaha you have to submit anything worth the same as security. While in
Ijara, you don’t have to provide any security.
Similar to Murabaha, in Ijara you have to pay a certain amount of fair percentage
on return.
In Ijara the ownership does not transfer until the full payment while in
Murabaha, the ownership transfers to the other hand on the day that person
made his first payment.
Reasons for taking Ijara instead of Murabaha Financing:
To avoid the risk
To go for lease and long term profits instead of short term.
Ijara does not require credit evaluation. In Ijara the ownership is not easily
transferable.
Due to long term profit, In Ijara you can earn more as compare to Murahaba
financing.
The rate is a bit high which is easily to get more profits and in Pakistani people is
65% preferring Ijara financing.
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PILLARS OF IJARAH
Muajjir:
A person who give something for hire – Lessor, landlord, owner etc.
Musta’jir:
A person who takes on hires – Lessee, tenant, renter etc.
Ma’jur:
A thing given for rent.
Al-Manfaah:
The benefit from a thing – usufruct, services etc.
Ujrah:
Price or fee given for the payment of rent or lease.
Sighah:
Offer (Ijab) and Acceptance.
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TYPES OF IJARAH
Simple Ijara (Operating lease)
Ijara Thumma-Al bay (Financial Lease)
Simple Ijara (Operating Lease):
It is the simplest form of Ijara loan, in this the risk is much high because the lesser has to
pay the maintenance cost like the damages the borrower made lesser has to pay for it.
Ijara Thumma-Al bay (Financial Lease):
Normally used and offered by Islamic bank as financial intermediaries in:
Obtaining desired asset.
Obtaining cash money for various purposes.
BASIC RULES OF IJARA
Transferring of usufruct not ownership (To another person for an agreed price, at
an agreed consideration)
Subject of lease (Valuable, Identified and Quantified)
Consumable things cannot be leased out (Anything which cannot be used without
consuming cannot be leased out; e.g., money, wheat etc.)
Period of lease (Must be determined in clear terms at the time of contract)
Lessee as Ameen (The lessee is liable to compensate the lessor for every harm to
the leased asset caused by any misuse or negligence.)
The leased asset shall remain in the risk of the lessor throughout the lease period.
(All Liabilities of ownership are borne by lessor)
The lessor cannot increase the rent unilaterally, and any agreement to this effect
is void.
The rent or any part thereof may be payable in advance before the delivery of the
asset to the lessee, but the amount so collected by the lessor shall remain with him
as 'on account' payment and shall be adjusted towards the rent after its being due.
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“Purchase of Vehicle / Property through Shirkat-ul-Melk”
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SHARIKAT UL MILK CUM IJARA (HOME FINANCE & AUTOS)
It is a combination of two contracts namely Musharaka and Ijara.
As per this product, the Bank and the Customer form a Musharaka to
purchase an Asset (Home/Auto)
After this the Bank leases its share to the Customer for a pre-specified term
through an Ijara Agreement.
Once the lease agreement is signed between the partners, the Musharaka
becomes non-operative and the relationship between the two partners, in
principle, changes to a lessor and lessee with all its implications and
consequences.
The rental payments are calculated keeping in mind the following:
Fixed Rent: This is the portion of rent that is taken against the principle
amount.
Variable Rent: This is the portion of rent that represents the bank’s profit.
Advance/Supplementary Rent: This is a portion of rent that is charged to
recover any additional expense incurred by the bank such as takaful etc.
Premature Termination: Incase a customer wants to completely settle the
Sharikat ul Milk cum Ijara financing facility he must purchase the bank’s share
in the asset. From a Shari’a point of view the bank can quote any price for its
share in the asset. However, as per our practice we ask the customer to pay
the outstanding principle plus a certain percentage of profit. Please note that
the additional amount is profit and not a penalty.
Choosing the best car loan for you:
The best car loan is based on your income the more your income is the more easily you
can pay your repayments but the 75% of the people in Pakistan belongs to Middle class,
the ones who doesn’t have high amount of income that’s why they prefer getting Ijara
finance for their vehicles and moreover, as comparing both of the loans Normal (Also
known as Personal loan) and Ijara (Islamic banking loans) Ijara has significant easiness in
term of payment and repayment or rate flexibility. Like in personal loan, there are two
types of loan (Secured and Unsecured) in both of them the rate is variable and goes up if
your income goes up and goes down if your income goes down and sometimes or in some
cases it got fixed and in case of nonpayment they have authority to take caesurae of your
vehicle and can penalize you if they let it to you plus they have right to plus up the
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repayment rate while in Ijara (Islamic car financing) the rate is fixed or the amount above
principle is already decided before paying (Like if you are getting Ijara for a car costs RS.
800,000 and during the documentation for it you decided to pay RS.80,000 extra for a
short term or for a long term and they both agreed to get in RS.880,000) so this kind of
loan is what Pakistani is getting attracted to. Ijara financing has taken over the economy
because it’s easily affordable.
Type of loan suits best for Pakistan:
As we know that 40% Pakistani people lives below poverty line and those people do not
have enough things live. So, apparently they cannot afford to get a loan and the rest 40
per cent of the people belongs to middle class and then rest belongs to upper class. So,
the only 60% out of 100% I am very good at noon and for that text you personally 60 per
cent on 35 per cent. So people don't usually get this and they will not try to get a loan due
to the huge amount of money in personal or any kind of loans. So, here we are focusing
on 35% of the eligible people preferring Ijara car loan instead of personal finance is
involved in car loan. When one can get car through his or her position on the basis of
promotion of the company all this process belongs to the personal car financing. So, in
my opinion Ijara provides the best loan one can get.
Terms for applying for loans (Both):
There is various documentation which has been involved in applying for loan. There are
certain conditions through which you can have to get a loan and there are processes
which you have to go through these steps;
Your income must be enough to bear the repayment.
In personal loan you have to provide security to get a loan while in Ijara you don’t
have to put anything for the security.
You must have anything worth the same as your vehicle, to get a loan for your car.
You must have good credit history but in Ijara, you do not need credit history (But
you have to agree on the terms and you must be able to pay according to your
income.)
You have to agree to the terms about getting penalize if you delay a payment.
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You atleast needed 2 or may be 4 guarantors, who guarantee that you can be
tested and can have their loan.
There are the main steps you have to go through in both of the loan procedures, it takes
time to confirm all the things but once it got confirmed you will able to get loan from
them.
Impact of applying Ijara instead of Personal loan on Pakistani economy:
They are creating a positive impact on economy as on one side car loans (personal) having
constant or going down where the Islamic banking or Ijara financing getting their guards
high and creating a huge revenue on Pakistani economy and as we see throughout the
years. It has given a lot of benefits and revenue on the Pakistani economy.
CONCLUSION
Concluding this topic, as comparing both of these Loans we have come to the point that
we need to go to that loan which is income friendly and can pay the full repayments. As
we are getting on Ijara financing, you should have to go towards the that loan which is
supporting your uses and try to avoid the type of loans which does not support you
income or you will unable to pay but in this case Ijara is an income friendly which has
opened the gates for having a car for yourself with the acceptable repayment with or
without security purposes.
Car financing can also be called as car loan, the party is getting car loan must have a good
credibility of availing and paying back that loan in the time given by the intermediary
between both the parties. There are; Short term secured loans and long term Secured
loans; Short term secured loans: In short terms secured loans, due to the short term or
within a year repayments Lender usually high up the rate of repayment like if normally a
person is paying 8% then he have to pay 12% in short term secured loan while other things
remains same. Like in personal loan, there are two types of loan in both of them the rate
is variable and goes up if your income goes up and goes down if your income goes down
and sometimes or in some cases it got fixed and in case of nonpayment they have
authority to take caesurae of your vehicle and can penalize you if they let it to you plus
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they have right to plus up the repayment rate while in Ijara the rate is fixed or the amount
above principle is already decided before paying so this kind of loan is what Pakistani is
getting attracted to. Furthermore, as comparing both of the loans which have been going
up but in Ijara that has been creating a positive impact and most of the Pakistanis are
preferring Ijara for their future loans and you should go for the loan which collects a huge
revenue and gives you adequate easiness.
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