Islamic finance has gained a lot of momentum in recent times due to its increasing product demand and stabilized financial position, different countries and financial institutions are inclined towards it. Islamic finance has offered multiple products, among them Islamic car finance is the most debated one.
Islamic car finance is the type of financing which is based upon the model of profit and risk sharing, in which both the bank and customer agree to share the risk as well. it totally prohibits Riba, which is the base of the conventional banking products. However, Islamic car finance totally deny this Riba and works in compliance with the sharia. Islamic car finance works categorically under two different heads.
First, Ijara-a mode of car financing in which the relationship between the bank and the customer is of leasing capacity. It is an installment-based leasing agreement. In which the ownership of the asset remains with the bank and upon the complete payment of the installments the ownership is transferred on the name of another person.
Second, Musharakah– which means joint ownership, under this mode of financing bank take up the partial ownership of the vehicle at the time of purchase.
Key Characteristics of Islamic Car Finance
Key characteristics of Islamic car finance are as follows:
- The leased asset car/partnership car must be transferred on the name of the lessee upon the maturity of the agreement and completion of installments.
- The duration of the lease is specified always
- The terms and conditions of the leased asset must be stated and the damages concerned.
Musharakah is the form of the partnership agreement between the bank and the customer. Under this mode of financing bank takes the partial ownership in the asset with the customer and upon the complete payment of the installments, the ownership is transferred on the name of the lessee.
There are two types of Musharakah
Shirkat-ul-milk is the joint ownership of two or more persons in a particular property.
Shirkat-ul-Aqd is a partnership by affected by mutual contract and can be translated as a joint commercial enterprise.
Additional Reading: Islamic Finance- A potential Opportunity for Pakistan to become a Hub
B- Diminishing Musharakah
Diminishing musharakah is the type of partnership in which the partner agrees to transfer the ownership of the asset gradually by purchasing the share of the other partner. It enables both bank and customer to co-own the asset (car in this case) according to the guidelines of shirkat-ul-milk. An Islamic car financing under the head of diminishing musharakah can be done in the following streams:
a- The joint ownership between the bank and the customer under Musharakah and dividing Islamic bank ownership share into no of musharakah units.
b- Bank rents out its ownership share in the asset to the client. This mode of transaction is the Ijarah transaction between the Islamic bank and the client.
c- Lastly, gradual sale of musharakah units by the Islamic bank to the customer on the payment of the agreed installment, so that after the completion of the agreement and the complete payment the full ownership can be transferred on the name of the client.
A diminishing musharakah is a combination of a musharakah, Ijarah and sale transaction. However, all three transactions are independent and are executed through separate contracts.
Let’s have a look on how Bank Islami is providing Islamic car finance under diminishing musharakah.
Bank Islami-Islamic Car Finance
Bank Islami is providing Islamic car finance for both brand new car and used/reconditioned car. Let’s discuss feature of both these cars and how you’ll get funding for them.
Features of Brand New Car/Used and Re-conditioned Car
Bank Islami is providing auto finance facility for brand new cars for the time period of 1-7 years. The bank Islami also install tracker in their car to avoid unpleasant circumstances. For used vehicles, the vehicle should not be more than 12 years old at the time of maturity. Further, not less than 9 years old for financing.
Procedure to Apply for Islamic Car Finance
The procedure to apply for Islamic car finance are as follows:
- Select the car of your choice under the umbrella of Musharakah auto finance facility
- Fill in the application with complete documents
- Bank Islami will process your application. Further, it approves and reject your application depending upon your credit history and the overall applicant’s vaiability to payback the loan
- Once your application is approved, you will sign the undertaking to Musharakah.
- After this the bank will book the car and made the process smooth as per the approved procedure.
The eligibility criteria for availing the facility of Islamic car finance is as follows:
- You must have a Pakistani citizenship
- Income bracket ranges from PKR 40,000 to 50,000.
- For salaried class the age group will be 21-60 years. While, for the business men the age bracket will be 21-65 years.
- Application form signed by the customer
- 6-months bank statement
- SBP undertaking form properly filled and signed by customer
- 1-year employment proof
- Copy of CNIC and 2 passport size pictures
In a nutshell, Islamic finance is gaining popularity due to its stable return on assets and stringent financing conditions. Added, the Islamic car financing facility is benefitting a lot of people who want to avail the facility of car but under shariah compliance. Log in to Mawazna.com to review the car financ options including Islamic Car Finance. As we love to help all of our customers irrespective of the background they are coming from and the products or providers they are intereste in.
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