Vehicle Financing Products In Islamic Banking
Vehicle financing has been introduced as an Islamic financial product in Malaysia since 1983 initially by Bank Islam Malaysia Berhad (BIMB). Commonly, Islamic banks offer two types of underlying Shariah contract in this type of financing which are Bai’ Bitthaman Ajil (BBA) and Al Ijarah Thumma Al Bai’ (AITAB). Upon examining the Islamic Bank’s Product Disclosure Sheet (PDS), the margin of financing offered by the bank usually will not attain 100% financing but up to 90%.
Bai’ Bitthaman Ajil (BBA) Vehicle Financing
Two separate agreements will be executed by the bank and the customer. Firstly, the Asset Purchase Agreement (APA) when the bank acts as the purchaser where they will purchase the vehicle from the customer. Secondly, the Asset Sale Agreement (ASA) where the bank will proceed to act as the seller and sell the vehicle back to the customer with markup price on deferred basis.
Operation of BBA
Customer will firstly become the beneficial owner of the vehicle of which an advance payment or down payment will be made to the dealer.
Customer sells the vehicle to the bank in accordance with the financing amount. The ownership of the vehicle now is being transferred to the bank.
The bank completes the full payment of the vehicle’s price to the dealer.
The bank sells back the vehicle to the customer with a markup price payable on deferred basis and transfer the ownership to the customer.
Al Ijarah Thumma Al Bai’ (AITAB)
Al Ijarah Thumma Al Bai’ (AITAB) vehicle financing is a combination of several Shariah contracts which are wakalah (agency), ijarah (leasing) and bai’ (sale).
Operation of AITAB
Customer approaches the bank and makes a request to acquire an identified vehicle from the dealer. Wa’ad contract or is simply known as promise is invoked by the customer to rent the vehicle from the bank after the bank has taken possession of the vehicle.
A Shariah contract of Wakalah is used here where the bank appoints the customer as its purchasing agent to purchase the vehicle from the dealer.
After the appointment, the customer purchases the vehicle from the dealer on behalf of the bank.
The bank leases (ijarah) the vehicle and the customer must pay the rent at an agreed rental over a specified period by way of monthly instalments. During this period, the ownership is on the bank.
Upon the end of the leasing tenure, a sale contract will be executed where the bank will sell the vehicle back to the customer. The customer is now the beneficial owner of the vehicle.
In conclusion, this-has successfully met the public demand to have a vehicle financing facility that is in compliance with Shariah legal framework due to its greater benefits as Islamic banking products which are based on the principles of mutual risk and profit sharing between parties and assurance of fairness for all with the prohibition of interest (riba’), gambling (maisir) and uncertainty (gharar).