Al-Ijarah Thumma Al-Bai (Vehicle) PDF

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IMUISLAMIC BANKING THEORY AND PRACTICEASSIGNMENTTITLE: ​ AL-IJARAH THUMA AL-BAI’ (VEHICLE FINANCING)LECTURER’S NAME: DR MUHD HASIF BIN YAHAYACLASS:​ IC2105PNAME MATRIC NUMBERAMIRA NURSYAFIKA BINTI AZMAN 2019893532NUR AFIQAH BINTI BASAR 2019672556NUR FARZANA BINTI MOHD NURJI 2019892932NURUL ASYIQIN B...

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IMU602 ISLAMIC BANKING THEORY AND PRACTICE

ASSIGNMENT TITLE: AL-IJARAH THUMA AL-BAI’ (VEHICLE FINANCING) LECTURER’S NAME: DR MUHD HASIF BIN YAHAYA CLASS: IC2105P

NAME

MATRIC NUMBER

AMIRA NURSYAFIKA BINTI AZMAN

2019893532

NUR AFIQAH BINTI BASAR

2019672556

NUR FARZANA BINTI MOHD NURJI

2019892932

NURUL ASYIQIN BINTI MESBAH

2019455428

NURUL ASYIQIN NAEMAH BINTI MD AMZAR

2019848562

TABLE OF CONTENTS

CONTENT 1.0 INTRODUCTION 1.1 DEFINITION OF AITAB 1.2 LEGAL EVIDENCES 1.3 MODUS OPERANDI 1.4 THE ELEMENTS OF AITAB 2.0 DEVELOPMENT OF AITAB FACILITY IN MALAYSIA 3.0 ADVANTAGES OF AITAB 3.1 NO NEED TO PAY IN THE EVENT OF DEATH 3.2 ISLAMIC FINANCIAL INSTITUTION INCUR LOSSES IN THE EVENT OF “FORCE MAJEURE” 3.3 COMPETITIVE PRICE OFFERS AND FIXED RATES 3.4 LOW LATE PAYMENT CHARGES 4.0 DISADVANTAGES OF AITAB 4.1 LACK OF SHARIAH FRAMEWORK 4.2 LACK OF AWARENESS AND COOPERATION AMONG TRADERS 4.3 COMPETITION IN THE MARKET 5.0 APPLICATION ON SEVERAL BANKS IN MALAYSIA 5.1 BANK ISLAM 5.2 BANK MUAMALAT 5.3 MAYBANK ISLAMIC 6.0 CONCLUSION 7.0 REFERENCES

PAGE

1.0

INTRODUCTION 1.1

DEFINITION OF AL-IJARAH THUMA AL-BAI’

Al-Ijarah Thumma Al-Bay' (AITAB) is a contemporary revolutionary product explicitly developed to comply with the Shariah principle for Islamic hire purchase facilities. AITAB or Islamic Hire Purchase, described by ISRA (2012), is an Islamic vehicle financing feature based on two combinations of Shari'ah principles, Ijarah (leasing) and bay’(sale). Ijarah is a contract for the transfer within an agreement between the parties of the benefits of an item with a payment, while bai 'is the exchange of goods to a contract between two parties which gives ownership to the parties. (Mohd Azizi, n.d.) According to Wahbah al-Zuhayli (2002), it refers to the ownership for a given period of time of the benefit of such properties by the payment of the agreed rental amounts, with the provision that the landlord would transfer the leased asset to the renter at the end of the agreed period or during that period, provided that all rental payments or instalments have been made in full. (Nurdianawati Irwani Abdullah & Asyraf Wajdi Dusuki, 2006) A hire purchase agreement has been described by Section 2 (1) of the Hire Purchase Act 1967 as the lease of goods with an option to purchase and an agreement to purchase goods in installment. The goods can be sold in a lease-purchase agreement with a cross-reference to Section 2 (1) and the First Schedule of the HPA 1967, indicating that all types of consumer goods and motor vehicles. (Mohd Azizi, n.d.) Al-Ijarah Thumma Al-Bay (AITAB) is a form of lease contract in which when the hirer purchases the asset, the legal title of the leased asset will be passed on to the hirer at the end or end of the rental term. The asset consists of machinery, equipment, software and hardware or motor vehicles that are items that are not rented for purchase. (Remali Yusoff & Nor' Azurah Md. Kamadari, 2014)

1.2

LEGAL EVIDENCES

The majority of Muslim jurists based their permission on the al-Quran and the sunnah and the consensus of Muslims for the ijarah agreement. Several Quranic verses are commonly cited as evidence of the ijarah contract. For instance, as mentioned in Surah Al-Qasas verse 26-27 and surah At-Talaq verse 6: Meaning:

 ne of the two daughters suggested, “O my dear father! Hire him. The best man for “O employment is definitely the strong and trustworthy one. The old man proposed, “I wish to marry one of these two daughters of mine to you, provided that you stay in my service for eight years. If you complete ten, it will be ˹a favour ˺ from you, but I do not wish to make it difficult for you. Allah willing, you will find me an agreeable man.” (Al-Qasas:26-27) Meaning: “Lodge them [in a section] of where you dwell out of your means and do not harm them in order to oppress them. And if they should be pregnant, then spend on them until they give birth. And if they breastfeed for you, then give them their payment and confer among yourselves in the acceptable way; but if you are in discord, then there may breastfeed for the father another woman” (At-Talaq:6) The verses above emphasises that doing something in consideration of a reward is lawful and normal. The above verses clearly prove, according to Al-Syafie, that the ijarah contract, in especially Al-Ijarah Thumma Al-Bai’ contract is lawful in all acceptable transactions. Other than that evidence from the Al-Quran, there are also hadiths that support the practice of leasing such as hadith narrated by Abu Ya’la, Ibnu Majah, At-Tabrani and At-Tarmizi: “Give a worker his fee before his sweat dries up” And hadith narrated by ‘Abd-ar-Razzaq and al-Baihaqi “ He who hires a person should inform him of his fee” It is also known that during the time of the companions, the Muslim jurists reached an agreement on the permissibility of ijarah by the Prophet SAW. At that

moment, the practise of ijarah was allowed because there was a need for such a transaction. Ijarah is like a deal, a significant contract. If the sale is permitted for the purpose of purchasing a property, ijarah is then obviously permitted for the purpose of the use of the property. (Mohd Azizi, n.d.)

1.3

MODUS OPERANDI In Malaysia, AITAB is a commodity where tenants are provided the option by the

bank to either rent or purchase the asset at the end of the term. In AITAB operations two separate contracts are used, which are approved at different times. The first rank in the leasing agreement is the leaseholder, who rents the commodity from the bank and will pay the rent at the negotiated rate of payment and rental term. The lease rate is calculated depending on the asset price and the length of the lease. The bank is the landlord of the asset and the lessee has the option to buy the asset if the lease ends or the original deposit is made. When the consumer opts to buy the estate, a sales and purchase deal to pass the asset title to the lessee reinforces the second contract. From a structural standpoint, it is a fusion of two arrangements and is also accepted by the leasing and selling arrangement under Islamic rule. In the modus operandi of AITAB, banks will lease their properties to clients who will then reimburse the negotiated sum in increments for a certain duration. Rental rates are dependent on asset values and rental periods. The buyer is offered the option of purchasing the asset at the end of the leasing term, whether or not. If the consumer wishes to purchase, only the nominal amount would be taken into consideration as the price of the leasing deposit made so far. When used as an AITAB in Islamic banking institutions, all deals are signed in a different manner and the purchasing of the properties is deemed a pledge of the occupant later at the completion of the rent. The modus operandi of AITAB is shown in Figure 1 below :

Figure 1: Modus Operandi AITAB Source : Dr. Aida Othman, Zaid Ibrahim & Co (2010) Therefore, the bank has power over the rental properties under the AITAB operation. If the client declines to pay, and the bank will pursue proceedings against the client to repossess the money. Although if the consumer follows the arrangement by paying and then fulfills all necessary payments, at the completion of the agreement, the bank will sell the properties to the customer.

1.4

THE ELEMENTS OF AITAB There must be four components in the Ijarah deal. First of all, at least two parties

to the ijarah arrangement shall be the party making a lease or leasing and the person approving a lease or leasing. All sides should be completely legible and have the legal power to enforce the contract. Only a sensible individual who has entered puberty may create a contract. This is that by forming a deal, they should think rationally and those with conditions such as disability, irrational or kids can not make the ijarah contract. The contract would be binding only where such a deal is carried out by a legal agent, wali or guardian in the case of an infant. Moreover, all parties shall freely agree without pressure to enter into the ijarah contract. If one party executes the contract in contravention of the free will, the contract becomes invalid. Until an ijarah contract becomes successful, the lessor must have total custody and lawful ownership of the object. After the end of the Ijarah contract the leased item or property shall be granted to the leaser although he still retains the property title. assets will be handed over to the buyer. Liability stemming from the possession would be incurred by him as an investor. In case of renting a home, for instance, he must pay all house taxes that are relating to ownership harm. If any injury happens to the rented object owing to the incompetence of the leaser/hirer the owner has the ability to seek reimbursement. For the lessee, he serves as a representative of the lessor in properly processing the leased land. Lessee should take good care of and not use the land in a dangerous manner. If the landowner destroys the house, he is liable for the repairs and quality of the property. In case of neglect or harassment by the leaser who may have destroyed the leased object, the lessee may be liable for reimbursement. It is the leaseholder's responsibility to compensate for all ordinary operating charges, such as for hiring a vehicle, gas and motor oil. Unless otherwise stipulated in the contract, the lessee can use the property only for the specified purposes. Assets are one of the elements of AITAB as well. At the point of the deal, the ijarah contract properties must be anything of worth and exist. For example, if a house is leased, the house must be physically built so there is no house in nature to gain from

renting the house (except in forward ijarah). The usufruct for leasing must meet such requirements, namely that it must be legal in Shariah, as the lessor and the leaser alike recognize it. It is an advantage and can be turned off to the lessee that it has no flaw that will incompetently supply the lessee with the expected benefit. Its usage is therefore confined to those agreed dates. The item to which the usufruct is attached shall be a tangible commodity or land. Last but not least, bid and approval is the next feature of AITAB. In every form of arrangement, this is the same. Ijarah ijab a nd qabul are referring to a scenario in which one party agrees to rent an item and the other party embraces the bid. The general contract laws also established some requirements for the creation of a valid offer and approval. Next, an invitation and approval must be explicitly articulated to illustrate the purpose of the group. These phrases can be suggested verbally, written, or signaled, etc. Secondly, in answer to a definite bid at the same session a simple acceptance is made. Thirdly, approval must lead to a bid exactly. For example, the other party needs to announce his agreement by stating, 'I accept the rented house' or 'I approve'. .

2.0

DEVELOPMENT OF AITAB FACILITY IN MALAYSIA

3.0

ADVANTAGES OF AITAB 3.1

NO NEED TO PAY IN THE EVENT OF DEATH In the first place, the benefits of AITAB are not taxable in the event of death. In

the event of the death of the buyer, heirs do not have to pay anything if the vehicle is returned to Islamic financial institutions. This is because AITAB applies to the rental, rental that ends with the transaction. The Parties enter into contracts that enter into operation on a serial basis to form a full lease or purchase agreement. Besides, it does not add to the burden on the heirs to pay the balance of the deceased to pay the balance of the vehicle that is still outstanding. Then, there is no burden to be borne by the heirs because when the heirs die there is no need to pay if he has died. 3.2

ISLAMIC FINANCIAL INSTITUTION INCUR LOSSES IN THE EVENT OF

“FORCE MAJEURE” Next, Islamic Financial Institutions incur losses in the event of “Force Majeure”. Islamic financial institutions will incur losses in the event of an inevitable 'Force Majeure'. In this context, IKI and the customer will purchase the related property in partnership at a certain rate. Customers need payment advance (which will be part of the customer's ownership) and subsequently IKI will lease the property in question (part of IKI's ownership). Monthly delivery or customer rental will increase the rate of customer ownership which eventually the customer will own the related property. Significant advantages of Musharakah housing financing products Mutanaqisah each IKI will together with the customer buy the property at the agreed rate. Next, the customer is the co-owner of the property. Problems such as abandoned projects and cannot be continued, IKI will return the install price in time construction that has been used by customers. In addition, this will incur a loss on the amount of withdrawal that has been provided on behalf of the developer on the basis of internal partnership this contract for the beginning of which any party is oppressed in the agreement signed.

3.3

COMPETITIVE PRICE OFFERS AND FIXED RATES Another advantage of AITAB is that it offers competitive prices and a fixed rate.

Competitive pricing is the practise of choosing strategic price points to take the best leverage of a market relating to products or service compared to competition. More commonly, companies offering homogeneous products use this pricing approach because services can differ from company to company, although a product’s features increase slightly. This kind of pricing technique is usually used after a price has achieved a degree of abundance for a product or service, which happens when a product has been on the market for decades and the commodity has several alternatives. Fixed rates, in the meantime, did not adjust during the financing process. Competitive price analysis helps the organization to monitor rivalry by avoiding the loss of rivals’ consumers and market share. This is one of the most important competitive pricing opportunities, allowing the company to adapt to their competitors’ each advance. This will help assist them in managing their organization better. Pricing strategy is a comprehensive strategy and ranks at the top of the strategies of competitive pricing evaluation. Common insights on the pricing policy of rivals can be collected with the aid of competitive pricing. This also enables them to succeed in the market efficiently and thus maximizes profit. This is one of the most valuable competitive price opportunities that can take company growth to the next phase. Overview of competitive pricing involves tracking the market and adjusts the prices accordingly. This research can best be achieved by standardising the software, as it presents an option to maximize the selling price while tracking the strategy of the competitor. This will assist in raising profit margins. Price information data obtained by such tools leads to improved price positioning and price differential identification. Since the rivals are well-known players on the market and have been around for quite a while, the risk is minimal that the pricing plan will go incorrect. Depending on a value based model or a cost-plus pricing, a company may measure its pricing. But before hitting the final price based merely on the two models above, they should equate themselves to the market and modify the pricing a little in line with the changes with the rivals. They will be conscious and sound of the demand through the combination of two models that they can remain cognizant of the contest and

protect their expenses 3.4

LOW LATE PAYMENT CHARGES As we know, the advantage of AITAB is that Islamic Financial Institutions only

charge late payment (ta'widh) which is low if customers pass by to make payment monthly or rent. Ta’widh i s the provision for the real losses incurred by the bank as a result of the customer’s default and incompetence in taking out the financing transaction. Ta’widh revenue may be regarded as bank revenue and can be paid on delayed fee of financial commitments resulting from exchange contracts (such as sale and lease). In the end, BNM published a detailed manual on how Islamic banks in Malaysia can compensate default accounts for missed fees. This is definitely a concern for banks, as Islamic banks have been exploited by irresponsible customers for the longest time because of the low fines for missed fees. Traditionally, only 1.0% p.a. has been accepted by BNM. Reimbursement fee for arrears with the purpose of covering the true costs of the non-performing account management. As negotiated by all parties involved, ta’widh c an be enforced only after the maturity date of the financing has been due. On the core principle that it is paid as reimbursement for the actual loss incurred by the organization, Islamic financial institutions may accept ta’widh a s profit. The SAC BNM authorised this statement by taking into account predefined hadiths and maxims of fiqh. First, the origin of the declarations is the hadith of Rasulullah SAW: ‫ﻣﻄﻞ اﻟﻐﻨﻲ ﻇﻠﻢ‬ “ Delay by a rich person (in payment of debt) is a tyranny.” Next is from fiqh maxim; ‫ﻻ ﺿﺮر وﻻ ﺿﺮار‬ “Neither harming nor reciprocating harm (in Islam).” SAC BNM claims that late fee by the consumer can cause detriment to Islamic financial institutions by pointing to the maxim, as they will experience real losses in terms of risking extra expenses, legal fees and other related costs as mentioned

previously. In addition, the debtor’s delayed payment would later influence financiers as they are unable to use the money for other commercial purposes. To put it bluntly, on the basis of this theory, the SAC BNM claimed that by enforcing ta’widh o n delayed payments, it would minimize the damage or loss incurred by Islamic financial institutions while at the same time reprimanding the debtor to refinance within a stated time. 4.0 DISADVANTAGES OF AITAB 4.1

LACK OF SHARIAH FRAMEWORK

According to Seif. Tag El-Din & Nurdianawati Irwani, 2007, the current Islamic hire buying practise in Malaysia is based on conventional regulations on hire-purchase. Unfortunately despite being one of the most demanding facilities of an Islamic bank, Islamic hire purchasing is lacking in an explicit regulatory framework of Shariah. Any conflict resulting from the Islamic hire purchase transaction will be referred to conventional legislation, as there is no written Shariah law expressly governing the Islamic hire purchase operation. The lack of a shariah structure framework is a major problem in implementing AITAB in Malaysia. The distinction between the financing of AITAB and the conventional financing of hire purchases is that the financing of AITAB has an additional arrangement, which is the selling contract after the lease period. (Nurul Azma et al., 2014) In the Malaysian sense, the Ministry of Finance, the Ministry of Domestic Trade, the Department of Road Transport and the Ministry of Internal Affairs jointly regulate hire-purchase transactions. There is currently no formal law regulating this Islamic hire purchase, so any organisation undertaking to offer this facility appears to enforce its own laws, which are said to obey the Shariah principle and in the spirit of the Hire Purchase Act 1967 and the Contract Act 1950. While there is no clear regulatory law on Islamic hire-purchase transactions, some banks have successfully offered this facility. The primary reference to this procedure at the moment is still the Hire Purchase Act 1967. Both consumer goods and motor vehicles are protected by this Act. Some basic Shariah requirements for Islamic transactions are missing from the Hire Purchase Act 1967. Among the main issues are the intention and understanding of

parties, the signing ...