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The operational issues of AITAB (Islamic car financing) And the computation of profit rates & the application of Ijarah in AITAB October 18, 2009

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The operational issues of AITAB (Islamic car financing) And the computation of profit rates & the application of Ijarah in AITAB

By Rhesa Yogaswara, S.Si

(rhesayogaswara@yahoo.com)

For the first time, we need to know what AITAB is. AITAB is l-ijarah thumma al-bay, which Islamic jurists (fuqaha) today have introduced an Islamic version of hire purchase. In fiqh, al-ijarah means “to give something on rent”. Leterally, it means substitute, compensation, recompense, indemnity, consideration, return, or countervalue.

In AITAB, the contract of al-ijarah runs separately from the contract of al-bay. Since both contracts are executed in succession, AITAB can be used to describe the process of converting an al-ijarah contract into a sale contract.

AITAB shall consist of two separate contracts. It implicates two different contracts executed t two different stages. First stage is executing the contract of true leasing (al-ijarah ‘ain) with a promise to sell. Second stage is, once lease period expires and the lessee completed all payments, the lessor will fulfill his promise by executing the contract of sale (al-bay). That is, he will offer the asset for sale to the lessee.

Based on the above explanations, it is clear that AITAB is a contract of leasing with a promise to sell the asset, when the rental period expires and total payments are finally completed. The lessor will sell the asset at a nominal price once the last rental payment is made.

In Malaysian context, AITAB client normally identifies and approaches vendor or dealer of the asset he needs. The dealer then prepares all related documents pertaining to AITAB financing on behalf of the bank. Here, the dealer merely acts as an agent to the bank. Once the client and the bank concluded the AITAB contract, the car will be delivered to the client, hence effectively commencing rental payment. Upon completing all the agreed payment, both parties shall enter into another agreement in which the customers pay a nominal amount of RM1 signifying sale contract.[1]

For example, if the total rental is 30,000 RM and he terminated the lease after three years or has paid equivalent to (500 RM x 36) or 21,000 RM, the contract of AITAB requires him to purchase the asset for 9,000 RM (30,000 RM – 21,000 RM) less rebate.

However, in practical there are several issues. First, many customers do not really understand the basic differences between AITAB and conventional hire-purchase facility. Second, the misleading view of AITAB among the customers is partly contributed by the lack of experience and knowledge among bank officers in giving correct and satisfactory explanation about AITAB.

The basic operation of AITAB in effect is similar to conventional hire-purchase; the only difference is in the issue of interest (ribā) and issuance of acceptance (‘aqd) letter. The main issue here is how to penetrate into a market which has long been occupied by a more established conventional hire-purchase product.

With less penetration than conventional, I believe that the pricing strategy of AITAB will be higher than conventional since the number of transactions is smaller than conventional. This is one of the challenges of the AITAB implementation, which is affected by the AITAB profit rates to avoid riba.


[1] Abdullah, Nurdianawati Irwani. A Critical Appraisal of Al-Ijarah Thumma al-Bay’ (AITAB) operation: Issues and Prospects. International Islamic University Malaysia

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