Issues of implementing Islamic hire purchase in dual banking systems: Malaysia's experience

Abstract

Malaysia, being one of the first countries to promote Islamic finance, has experienced a dual banking system whereby a full‐fledged Islamic banking system operates on a parallel basis with a sophisticated conventional banking system. Operating within a dual banking system provides a relative advantage to Islamic banks as compared to operating in a single Islamic banking system. One of the latest innovations is the development of the Islamic hire‐purchase instrument, which is commonly known as al‐ijarah waiqtina'; in the Malaysian experience, it is called al‐ijarah thumma al‐bai' (AITAB). This article aims to examine some critical issues arising from the implementation of AITAB from jurist, legal, and practical perspectives. It presents a comparative study with conventional practices to highlight similarities and differences, thus invoking a number of jurist, legal, and practical issues about the concept and implementation of AITAB. It is hoped through the assessment of the Malaysian experience to offer practicable solutions to help provide better and more legitimate structured implementation of Islamic hire purchase in financial institutions. © 2007 Wiley Periodicals, Inc.

Gauging Profitability and Liquidity of Islamic Banks: Evidence from Malaysia and Pakistan

“…Strong consensus required to be developed among academicians, researchers and Islamic scholars to explore and probe Islamic banking profoundly to bring novelty in Islamic banking products. Government's role is vital in encouraging the newly introduced Ijara (El-Din & Abdullah, 2007).…”

Issues and Prospects of Islamic Hire Purchase Financing: Malaysian Evidence

“…But the mechanism of AITAB does not comply 100% Shari'ah principles. As researchers Abdulla & Dusuki (2012) have explained the mechanism of AITAB financing in Malaysia: (i) the client for AITAB financing usually identifies a car dealer and selects the car that he needs, (ii) the customer will approach the bank for the car financing and make an agreement to purchase the car after the bank has purchased the car from the car dealer, (iii) the bank purchases the car from the dealer, and hence retains ownership of the car while the car is leased to the client for a specified period of time, (iv) upon having the ownership of the vehicle, the bank and the customers will enter the Ijarah or lease agreement, and (vi) at the end of leasing tenure, both will enter a second contract in which the car will be sold to the same client at agreed price (ISRA, 2012;El-Din & Abdullah, 2007). AITAB has no specific law and its application is based on the conventional Hire Purchase Act 1967.…”

“…Conventional banks in Malaysia are also operating AITAB under Islamic banking scheme due to the growing demand by the customers. Despite being one of the most popular products of the Islamic banks, AITAB is being criticized by many people due to its lacking in explicit Shari'ah regulatory framework (El-Din and Abdullah, 2007). Critics argue that Islamic hire purchase financing (AITAB) is simply a carbon copy of the conventional hire-purchase instrument as it is mainly based on the conventional Hire Purchase Act 1967.…”

“…As researchers Ismail (1999) has explained, any dispute pertaining to the transaction of Islamic hire purchase refers to the conventional regulations as there is no written Shari'ah law that specifically regulates the operation of AITAB. Therefore, any institution that offers AITAB tend to impose its own rules and regulations, which merely follow Shari'ah principle and the Hire Purchase Act 1967 and Contract Act1950 (El-Din and Abdullah, 2007). Despite of having no specific regulatory law on AITAB transactions, some banks manage to offer it successfully following the Hire-Purchase Act 1967 which is not entirely contradicted by Shari'ah principles (Haneef, 1997).…”

“…But this view has criticized: many Islamic scholars now consider AITAB as conventional product rather than Islamic product, influenced by many non-Shari'ah-compliant factors. El-Din and Abdullah (2007) have further noted that the practice of AITAB in Malaysia does not seem to be 100% Shari'ah-compliant because it involves several issues like Shari'ah framework, ownership, transfer of ownership, maintenance responsibility, insurance responsibility, deposit payment, penalty in case of default, and legal treatment. Abdullah and Dusuki (2004) also documented many issues that question the validity of AITAB transaction for instance, intention and lack of understanding of parties, signing of two separate documents in sequence, and interest-based calculation of profit.…”