Fundamentals Of Islamic Banking

‘Islamic Retail Financing’

presented by

Mohamed Firdaus Kader Mohideen

IBFIM’s Trainer

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VEHICLE/ AUTOMOBILE
FINANCING-i

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 Classification

 Hire Purchase (HP)

 Industrial Hire Purchase (IHP)
 Leasing

AITAB COVERS :-
1. Hire then Purchase (HP-i)
2. Industrial Hire then Purchase
(IHP-i)

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 Relationship

 Owner and hirer for HP and IHP

 Lessor and Lessee for Leasing

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 Hire Purchase Act 1967
 All Hire Purchase transactions are governed by the
Hire Purchase Act 1967 (HP Act).
 The forms and contents of HP Agreements, legal
rights, duties, obligations of hirer and financiers are
set out in the Act.
 The Act is under the purview of the Ministry of
Domestic Trade and Consumer Affairs.

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 Goods Under Hp
Various goods can be financed via HP, including the
following:

 All consumer goods which are purchased for

personal, family or household purposes
 Motor vehicles including invalid carriages,
motorcycles, motor cars, (including taxis and hire
cars), goods vehicles and buses

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 What is the meaning of AITAB?
Translation:
–“Ijarah” means hire, lease or rent.
–“Thumma” means then or thereafter.
–“Bai” means sale / purchase

Direct translation = ‘Hire Then Purchase’

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 Contracts

Under AITAB there are two contracts undertaken

separately which are:-

Ijarah - hire contract; and

Bai - sale contract

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 Points Of Contracts

Ijarah Contract

Is executed at the point of hirer applying financing

Bai Contract

Is executed either upon early settlement / maturity of

the HP-i/AITAB agreement

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 Hire (Ijarah) - Essential Elements

 OWNER (FI)

 HIRER (CUSTOMER)

 ASSET

 BENEFIT

 RENTAL

 CONTRACT

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 Sale (Bai)- Essential Elements

 SELLER
 BUYER
 ASSET
 PRICE
 CONTRACT

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 Agreements For AITAB

AITAB
AITAB
AGREEMENT
AGREEMENT

IJARAHCONTRACT
IJARAH CONTRACT BAICONTRACT
BAI CONTRACT
HP-iAgreement
HP-i Agreement SaleAgreement
Sale Agreement
Signedatatthe
thepoint
pointofofapproval
approvalofofthe
thefacility
facility Signedatatthe
Signed theend
endofofthe
theIjarah
Ijarahcontract
contract
Signed

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 The Ijarah Agreement
An Ijarah agreement must contain the following
important information: (2nd Schedule – Part 1)
 Description of motor vehicles
 Computation of the total sum payable
 Minimum deposit
 Term charges and Annual Percentage Rate for term
charges
 Late payment charges (compensation)
 Date on which hiring commences
 Number of instalment payments

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 The Ijarah Agreement - Cont.

 Amount of each instalment payment

 Person to whom payment are to be made, time

and place of payments

 Address where the motor vehicle is to be kept

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 The Ijarah Agreement - Cont.

 Important Notes:

 Ensure that the particulars in the agreement do

not differ from the second Schedule statement
 The Agreement will be stamped at a nominal
rate, which will be borne by the customer
 A lawyer is not needed in order to enter into a
HP agreement

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 Sale Agreement

Under AITAB, customer and FI have to execute the “Sale

Agreement” to denote the purchase transaction of the

asset by the customer from the FI.

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 How is AITAB transacted?

 Dealer/Seller sells the goods/vehicle to the FI. FI

becomes the owner.

 FI lease/rent it out to the hirer.

 Hirer pays rental to FI, as agreed in HP-i Agreement.

 Upon settlement of the rentals, the Sale agreement

will be executed, thus transferring the ownership of

the vehicle from the FI to the hirer.
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 Recovery

In the event of the customer fail to perform his

obligation to service the rental or perform otherwise

from the terms and conditions stated in the HP-i

agreement, the owner (FI) has the right to exercise

reasonable actions to mitigate its losses.

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 Mitigating The Loss

ACT GOODS NON ACT GOODS

FI NEEDS TO STRICTLY FI NEEDS TO FOLLOW THE

FOLLOW THE TERMS AND CONDITIONS
PROCEDURES STATED AS STATED IN THE IHP-i
IN THE HP ACT 1967 AGREEMENT
(AMENDED 1992)

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 Internal Guidelines

 MINIMUM/MAXIMUM TENOR

 MARGIN OF FINANCING*

 INCOME CRITERIA

 CREDIT EVALUATION

 APPROVING AUTHORITY

* Subject to HP Act 1967 for Act Goods

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 Term Charges

 The maximum term charge that FI can charges is

10% flat per annum. This is a fixed percentage

charge over the entire HP tenure.

 If FI charges 10% flat over the period of 5 years for

a hire-purchase financing of RM 50,000, the

Annual Percentage Rate (APR) will be 17.3%.

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 Late Payment Charges

 In the HP Act 1967, the maximum late payment

charges that FI can charge is 8% per annum

calculated on a daily basis on overdue instalment

 However, for the AITAB facility the allowable

‘compensation charges’ is only 1% p.a. calculated

on a daily basis on the overdue instalment.

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 Minimum Deposit

The minimum deposit is 10% of the cash price of the

motor vehicle. However, FI may request for a higher

deposit.

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 Guarantor

 FI may require a guarantor for the HP facility as an

additional security to the HP facility.
 The guarantor will be required to sign a letter of
guarantee. He will receive a copy of the HP
agreement and is liable for the HP facility.
 In the event the customer defaults on payments, the
guarantor is responsible for the unpaid portion of
the HP facility and the profit due.

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 Calculation Of Term Charges

Formula:

Profit earned = Amount financed X Rate X Tenure (Yrs)

Note :

Profit on HP facility is calculated on the initial amount

financed.

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 Calculation Of Term Charges

Example:
Amount financed : RM 50,000
Term Charges : 10% per annum
Tenure : 5 years (60 months)
Profit earned : RM 50,000 X 10% X 5
= RM 25,000
Annual percentage Rate = 17.3%

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 Calculation Of Monthly Installment

Using the earlier example,

Monthly Installment

= (Amount financed + Profit earned)/Tenure

= (RM 50,000 + RM 25,000) / 60

= RM 1,250

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 Takaful (Islamic Insurance)

 FI has the duty to ensure that the motor vehicle in your

customer’s name for the first year only. In subsequent years,
it is the responsibility of the customer to renew the takaful
policy.
 If the customer fail to renew the policy, FI may insure the
motor vehicle and charge any costs incurred to the customer.
 In practice, FI normally requests a comprehensive takaful
policy to be taken on the motor vehicle.

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 Customer’s Right

 To receive a copy of the HP agreement

 To obtain any information regarding the account

 To request a statement of outstanding balance (once

every 3 months)
 To settle early the full outstanding amount

 To terminate the agreement at any time

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 Customer’s Obligation

 Not to remove, sell or dispose off the motor vehicle

without the consent of FI

 To pay instalment on time

 To inform FI of any change of address

 To continue to insure the motor vehicle after the

first year and to inform FI upon renewal within 14

days before the current policy expires

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 FI’S Right

 To repossess the motor vehicle when the customer

default in payment
 To ask the customer to insure the motor vehicle

 To charge the customer any fees relating to the

enforcement of the HP agreement

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 What are the differences between AITAB &
Conventional HP?
1. Aitab vehicle financing follows the Shariah contracts as well as
the spirit of the Hire Purchase Act 1967 (HP Act) while hire
purchase applies only the HP Act (for Act Goods).
2. The financing for AITAB is sourced only from “halal” funds while
the conventional HP has no limitation of its sources of funds.
3. There are two agreements involved under AITAB, viz-a-viz the
Ijarah contract (hiring agreement) and the Bai contract (sale
agreement), but conventional HP uses only one agreement.
4. A minimal late payment (compensation) charges of 1% p.a. (non
compounding) of the installment due will be imposed for
defaulted customer while conventional HP will charge a fee of
8% p.a. (compounding).
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 THANK YOU & WASSALAM

IBFIM
3rd Floor, Dataran Kewangan Darul Takaful, Jalan Sultan Sulaiman
50000 Kuala Lumpur.
(Tel) +603-2031 1010 (Fax) +603-2031 9191

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