Ammar

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2 Case Studies in Islamic Banking and Finance

COURSE
NAME:
Islamic
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 Case Study 1: Ijara Contract 3

respected::
Mam
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javaid
Case Study question answers
1. Outline the key differences between conventional
leasing and Islamic leasing.

The most important financial difference between Islamic

leasing and conventional leasing is
 4 Case Studies in Islamic Banking and Finance

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
Riba.
Scrupulous Islamic financial institutions ensure that the
contract abides by all the restrictions
Set out in the Sharia’a (e. g., subleasing requires the
permission of the lessor; late payment
Penalties must be handled very carefully to avoid riba,
etc.).
The differences between conventional and Islamic
financing schemes are described in the
Sections below.
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 Case Studies in Islamic Banking and Finance
Islamic Financing
 Case Study 1: Ijara Contract 5

The Islamic car financing – Ijara – 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 usufruct rights
To an asset are transferred by the owner, known as the
lessor, to another person, known as the
Lessee, at an agreed-upon price, called the rent, and for
an agreed-upon period of time, called
The term of lease.
Rentals versus Instalments
Conventional Financing
A conventional car financing scheme is actually an
interest-based loan given by the financial
Institution, with interest being charged on the loan.
Islamic Financing
Islamic car financing is based on pure rentals. In Car
Ijara 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.
Ownership
Conventional Financing
In conventional car financing, the car is purchased in the
name of the buyer from the dealer.
Islamic Financing
Under Ijara 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
 6 Case Studies in Islamic Banking and Finance

Mode of leasing that an object cannot be leased out

unless it is in the possession of the lessor.
Risk/loss
Conventional Financing
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.
Islamic Financing
The car is purchased in the name of the bank from the
dealer and so the risk remains entirely
With the bank. As the corpus of the leased property
remains in the ownership of the lessor, all
The liabilities and risks emerging from the ownership are
borne by the lessor.
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 agrment
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.
Down-Payment versus Security Deposit
Conventional Financing
 Case Study 1: Ijara Contract 7

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 Ijara,
Whereas in conventional banking the down-payment
remains with the bank, and no buy-back
Of the car can occur against the down-payment.
Islamic Financing
With Ijara 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 different in the case
Of conventional car financing, where a down-payment is
made by the buyer of the car.Return of the Car
Conventional Financing
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.
Termination of Contract
The buyer of the car has the option and right to terminate
the contract and return the car
 8 Case Studies in Islamic Banking and Finance

Before the contract reaches its maturity in both the

conventional and Islamic mode of car
Financing. The difference lies in the post-termination
phase.
Conventional Financing
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 instalments.
Islamic Financing
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 value plus a certain
Percentage of spread for the bank.
6 Case Studies in Islamic Banking and Finance
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 Sharia’a perspective. According to
Sharia’a principles, lawful steps to lawful
 Case Study 1: Ijara Contract 9

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 usufruct. As mentioned,
Islam places great emphasis on the sequencing.
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Case Studies in Islamic Banking and Finance

2. How do insurance needs differ under conventional

leasing and Islamic leasing?
Answer: insurance in Islamic leasing doesn’t charge
interests (riba), unlike conventional leasing where
interests can be charged on the insurance. Ijarah is a
rental agreement that is free from the element of interest.
Interest can’t be paid if the lessee fails to pay the rent in
time.
3. What are the key Sharia’a requirements for the Ijara
contract?
Answer:For a valid Ijara contract the corpus of the
leased asset or usufruct right must remain in the
ownership of the aajir or lessor. Anything fully
consumable by its use cannot be leased. Examples
are grain and other eatables, fuel, money, etc.

4. Would a Car Ijara be structured identically to a

home purchase Ijara?
Answer:Yes, the same, as it’s an asset also .
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5.
Would non-Muslims consider Car Ijara schemes a
serious alternative to conventional car finance
schemes?
Answer:A conventional car financing scheme is
actually an interest-based loan given by the financial
institution, with interest being charged on the loan,
while ljara - is based on a lease contract. It is not a
financing scheme; rather it is a lease cointract. So it
depends on the customer objectives

6. Calculate the monthly rental payments when buying

a new car, costing Rs. 300,000, for aterm of four
years, if the potential purchaser is willing to pay a
25% security deposit.
Answer:The rental payment when buying a new car
is 6683.1

7. Calculate the monthly rental payments when buying

a new car, costing Rs. 400,000, for aterm of three
years, if the potential purchaser is willing to pay a
30% security deposit
Answer:The rental payment when buying a new car
is 10,474.4
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Case Study 1: Ijara Contract

8. Calculate the monthly rental payments when buying

a new car, costing Rs. 500,000, for aterm of five
years, if the potential purchaser is willing to pay a
40% security deposit.
Answer: The rental payment when buying a new car
is 8108
9. Calculate the monthly rental payments when buying
a new car, costing Rs. 350,000, for aterm of three
years, if the potential purchaser is willing to pay a
45% security deposit.
Answer :The rental payment when buying a new car
is 7471.1
10. Calculate the monthly rental payments when
buying a new car, costing Rs. 600,000, for aterm of
four years, if the potential purchaser is willing to pay
a 50% security deposit.
Answer:The rental payment when buying a new car
is 9597.6
11. the monthly rental payments when buying a new
car, costing Rs. 400,000, for aterm of five years, if the
 13
potential purchaser is willing to pay a 20% security
deposit.
Answer:The rental payment for buying a new car is
8290

12. Do you think that the Meezan Car Ijara contract is

correctly named?
Answer: Several features of scheme are in fact ,very
similar to ijara wa Ikitna ..