Luckily it is not much different.
1. What is an Islamic Hire Purchase Financing scheme?
An Islamic Hire Purchase Financing scheme is a car financing facility, which adopts the Syari'ah concept of Al-Ijarah Thumma Al-Bai' (AITAB).
2. What is the definition of Al-Ijarah Thumma Al-Bai' (AITAB) under Syariah Principle?
The term "Al-Ijarah" means hire, lease or rent whereas "Al-Bai'" means purchase. Under the Syari'ah principle, Al-Ijarah Thumma Al-Bai' (AITAB) refers to two contracts undertaken separately which are:
- Al-Ijarah Contract (hiring); and
- Al-Bai' Contract (purchase)
3. How Is AITAB Transacted?
DEALER/SELLER sells the goods to the finance company, which becomes the OWNER, in return for payment, which is cash price less deposit paid by HIRER for the goods under AITAB AgreementUpon settlement of the hire rentals, the Purchase Agreement will be executed automatically, thus transferring the ownership of the vehicle from the finance company to the hirer.
4. What is the main mechanism under AITAB Financing?
Under the Al-Ijarah contract, the hirer (customer) hires the goods from the owner (finance company) at an agreed rental over a specified period. Upon expiry of the hiring period, the hirer enters into the Al-Bai' contract to purchase the goods from the owner at an agreed price.During the period of the agreement, the finance company owns the vehicle. Upon settlement of the hire rentals, the Purchase Agreement will be executed automatically, thus transferring the ownership of the vehicle from the finance company to the hirer. However, in the event of the customer failing to perform his obligation to service the hire rental or performs otherwise from the terms and conditions stated in the agreement, the finance company has the right to exercise reasonable actions to mitigate its losses.
5. What are the differences between AITAB Car Financing and Conventional Hire Purchase Loan?
In essence, the features of both products are quite similar. The differences between the two are as noted below:
- AITAB Car Financing follows the Syari'ah Principle as well as the spirit of the Hire Purchase (HP) Act while Hire Purchase follows only the HP Act
- The financing for AITAB is sourced from halal funds whilst the Conventional HP has no limitation of its sources funds.
- Different usage of terms such as:
Conventional Islamic Loan Financing Interest Rate Profit Rate Hiring Charges Mark-up Late Payment Interest Late Payment Charges
- There are two agreements involved under AITAB namely:(i) Al-Ijarah Contract (hiring agreement); and
(ii) Al-Bai' Contract (purchasing agreement).whereas Conventional HP uses only one agreement
- A minimal late payment fee of 1.00% p.a. of the instalment due will be imposed for customer who did not pay promptly whilst Conventional HP charged a fee of 8.00% p.a. of the instalment due. However, some finance companies do not impose this condition. They charged an administrative charges for all the fees incurred to normalize from accounts in arrears. In addition, some finance company imposed both fees to mirror the actual losses when hirers failed in their obligation to pay the monthly instalments.
- Under AITAB, customer has to sign the 'Aqad Letter (Acceptance Letter) to denote the offer and acceptance of transactions whilst Conventional HP does not have such agreement.
6. Is there any restriction in applying for AITAB Car Financing scheme?
Under AITAB Financing the purpose of financing is of paramount importance and it must be clearly stated and revealed to ensure customer whose income or nature of business derived from a forbidden source under the eyes of theSyari'ah does not take up the facility, such as:(i) Customers who are selling alcohol, illegal drugs etc.(ii) Customers who are operating a gambling business.(iii) Customers who are involved in immoral business such as prostitution.
7. What are the charges imposed for customer who do not pay his/her monthly instalment on time?
A minimal late payment fee of 1.00% p.a. of the instalment due will be imposed for customer who did not pay promptly whilst Conventional HP charged a fee of 8.00% p.a. of the instalment due. However, some finance companies did not impose this condition. They charged an administrative charges for all the fees incurred to normalize from accounts in arrears. In addition, some finance company imposed both fees to mirror the actual losses when hirers failed in their obligation to pay the monthly instalments.
8. How to calculate the monthly instalment for AITAB Financing?
Total Amount Payable = Financing Amount + ( Financing Amount x Profit Rate x Period [in years] )Note: "Financing Amount" is equivalent to amount borrowed
Monthly Instalment = Total Amount Payable Period [in years] x 12Illustration:
Total Amount Payable = (RM50,000) + (RM50,000 x 5.00% x 5 years) = RM 62,500
Monthly Instalment = RM 62,500 5 x 12 = RM 1,041.67
9. What is the minimum and maximum period of financing for AITAB?
Normally, the minimum period of financing is 1 year (12 months) and a maximum financing is 7 years (84 months). However, period of financing used by finance companies is determined based on various factors such as:
- Type of cars, i.e., new or second-hand
- Age of vehicle
- Customer profiles
- Income exposure
- Market Condition
10. What is the maximum margin of financing for AITAB?
Since AITAB follows the spirit of HP Act, the maximum margin of financing allowed is 90%. Again, various factors are being used to determine the maximum margin of financing such as:
- Type of cars i.e. new or second-hand
- Age of vehicle
- Customer profiles
- Income exposure
- Market Condition
11. Can a Non-Muslim apply for AITAB Car Financing?
Yes, it is designed to cater for the needs of both Muslim as well as Non-Muslim customers.
12. Do I get a rebate (ibra') for early settlement under my AITAB Financing?
Yes, customer will be entitled for a rebate for any early settlement cases. The calculation of rebate follows the standard formula accorded under the HP Act. The rebate is not given in cash but it will reduce the balance outstanding. The settlement amount is the net figure after deducting the rebate.
13. What are the courses of action available for finance company for the hirer who does not fulfil his obligation such as paying the monthly instalment?
The HP Act stipulates the specific course of actions available for owner of the vehicle (finance company) to take for such scenarios. Under AITAB Financing, the same recourse will be taken, like issuing out repossession order, repossessing the car, auctioning the car or taking legal action against the hirer. These actions are allowed under Syari'ah principle.
14. Are the fees like motor insurance and transfer fees similar under AITAB Financing to that of Conventional HP?
Yes, hirer is subjected to the same fees imposed under Conventional HP when they take up AITAB Financing.
15. What are the benefits of AITAB Financing compared to Conventional HP?
AITAB financing enables Muslims to perform their financial transaction according to the principle of Syari'ah and in line with their religious beliefs. In addition, the late payment charge is slightly lower compared to Conventional HP. Other than that, the features and benefits of AITAB are as good as what are available under Conventional HP. As such, customers do not lose out when taking up AITAB Car Financing scheme.