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Islamic Hire Purchase : The Better Alternative To Your Car Financing Need

Hire Purchase Financing-i (HP-i) is the Islamic version of conventional hire purchase concept  that adopts the Shariah Principle of Al-Ijarah Thumma Al-Bai (AITAB). The term Al-Ijarah means lease, rent or usage, whereas Al-Bai means purchase. Islamic hire purchase financing is not something new. Such transactions were documented in the early nineteenth century during the Ottoman Caliphate era.

There are two types of HP-i, namely:


Hire Purchase of Controlled Goods (Act Goods)

Included under this category are passenger cars, 4 X 4, MPVs, window vans, goods carrying vans and lorries (up to 5000 kg). All transactions are regulated and must comply with the Hire Purchase Act 1967 (Amended 1992).


Hire Purchase of Non-Controlled Goods (Non Act)

Under this category, the goods financed are generally industrial and commercial vehicles such as tractors, trailers, excavators, etc. Transactions are not regulated by the Hire Purchase Act 1967

As with most other Islamic financing products, HP-i, too, subscribes to a fixed rate mechanism, thus, addressing the clarity, predictability and certainty issues of its transactions. In general, the modus operandi of HP-i is similar to that of Conventional Hire Purchase financing with the following main exceptions:

a. Under HP-i, the bank will purchase the vehicle and lease it to him with an option to purchase
b. There are two (2) agreements involved:
Al-Ijarah Contract (Hiring Agreement)
Al-Bai Contract (Purchase Agreement)

HP-i has become one of the more popular Islamic financing products amongst consumers for purchase of Act Goods (passenger cars, MPVs, etc.) where the market share for HP-i grew from 13.8% in 2002 to 21% in 2004. The upward trend is expected to continue. 

The similarity of the Islamic HP with its conventional counterpart per se together with its value proposition has made the product easily accepted by the customers. The following main value propositions that the public has begun to understand, play a pivotal role in the product being patronized by the customers, be it individuals or corporations:

Lower late charges imposed should payments by customers be not according to the agreed schedule.
The fixed rate mechanism means fixed monthly installments. One will not be asked to pay more than what has been contracted even when one faces financial difficulty in servicing the obligation resulting in the bank having to revise the financing tenure.
If one decides to end the agreement before the maturity date, rebate will be given. The quantum of the rebate will vary depending on the settlement date; the sooner, the higher. The method of calculation is similar to that of conventional Hire Purchase.

HP-i is available for all irrespective of race or religious beliefs. For Muslims, logically, this product will fulfill their religious obligations while for non-Muslims, this is a viable alternative to their financing needs.

 
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