The Islamic Bank Automobile Financing Facility

With the growing demands of everyday life, vehicle ownership has shifted from a mere luxury to a vital necessity. Purchasing a vehicle is often the second most expensive and important purchase after purchasing a house. While doing so, we have two options: either to make a hand on hand (cash) purchase or to go for car financing.

However, such facilities are not adequately provided by many banks in Ethiopia. Moreover, automobile financing facility based on Sharia Principles was not even started in banks that provide Interest free banking services in Ethiopia. However, many banks in the world have started Islamic automobile financing facility by designing innovative Shariah compliant contracts. let’s take a look at such two contracts that would help finance a vehicle.

2.1) AITAB/IMBT Automobile Financing

The Shari’ah contracts generally applied in vehicle/auto mobile financing is Al Ijarah Thuma Al Bay’ (AITAB) (is a contract of leasing ending with sale) or Al-Ijarah Muntahiah bi al Tamlik (IMBT) (a contract of leasing ending with ownership) which is a leasing contract with an option to purchase at the end of the leasing period. For the case of AITAB, the contract is a hybrid contract that put together the Ijarah (Leasing) contract and Sale (Bay’) contract.

Components in AITAB

There are two types of contracts involved which is Ijarah and Al-Bay’. let’s first differentiate their components:

1. Components under Rental (Ijarah) Contract:

· The owner (which will be the lessor)

· The Lessee

· The Goods that is rented out

· "Usufruct" or benefit in use

· The Rental Amount

· The Rental Contract

2. Components under Purchase (Al-Bay') Contract:

· The Seller (formerly the owner of the goods)

· The Buyer (the former lessee)

· Goods for sale (the one rented out)

· The price (i.e. the last instalment or early settlement fig.)

· The Sales Contract (Bank as the Seller and the Hirer as Buyer)

By applying the contract of AITAB/AIMAT, under the Automobile Financing facility, the bank will first purchase the vehicle from the dealer and pay the price of the car. So if you’re looking into purchasing a vehicle from a dealer and is seeking for financing facility, then this is for you!

AITAB/IMBT Automobile Financing process,

2.2) Murabahah Automobile Financing

Besides applying the contract of AITAB or IMBT, in some jurisdiction, Islamic banks also apply the contract of Murabahah in vehicle financing. Murabahah as previously defined is the cost plus mark-up profit contract where bank will buy the vehicle and sell to customer at mark-up price. For this purpose, the Murabahah to Purchase Orderer (MPO) concept is used.

Murabahah Automobile Financing Process

The Islamic Consumer Financing Products:

1. The Islamic Bank Credit Card Facility
2. The Islamic Bank Personal Loan Facility
3. The Islamic Bank Automobile Financing Facility
4. The Islamic House Financing Facility

Tuesday, April 23, 2019