Hire purchase aims to protect the interest of the hirer, in particular, and other parties involved such as owner and guarantor, in general. Interestingly, we will find that most principles in hire purchase are in fact in line with Shariah, except in certain aspects (Irwani, 2007). Even though in practice Islamic hire purchase may seem quite similar to conventional hire purchase, but they supposed to be distinguished because both have different principles. There are several differences features between Islamic hire purchase and conventional hire purchase.
Al-ijarah thumma al-bai' unites Ijarah (lease) contract and Bay' (sale) contract in one trading document. Under Ijarah contract, the bank as the owner of an asset lease to the customer (hirer) on the predetermined rentals for an agreed period. The hirer enters into a second contract to purchase the goods from the owner at an agreed price upon expiry of the leasing period.
On the other hand, Al-ijarah thumma al-bai' is regarded as a financing instrument. One of the most important elements in any Islamic transaction is that its origin and purpose must be legal. Hence, a customer whose income derives from any has forbidden source or who intends to use hire purchase for illegal activities. For instance, alcohol, gambling, or prostitution cannot take out an Islamic hire-purchase facility. In Malaysia, the customer will be offered conventional hire purchase instead of an Islamic facility. An Islamic hire-purchase facility is applicable to all types of goods, movable or immovable, including real property (Seif El-Din, 2007).
There is a basic difference in documentation. Customer will need to sign two agreements which are hiring agreement ('aqad ijarah) and a sale and purchase agreement ('aqad bai') under Islamic hire purchase. The purchase price in Islamic hire purchase is calculated by adding to the cost price with the amount of profit based on the murabahah principle. It is determined based on the market value at the time of agreement and the installments are computed by dividing the purchase price with period of agreement, which is usually in months. In Islamic hire purchase transaction, the owner will bear basic and structural maintenance of the goods, while the hirer is made responsible for operational and routine maintenance since he uses the goods. Customer will be charge only 1% as the penalty for late payment. Finally, an Islamic facility requires its user to use takaful as an insurance coverage for the goods.
Modes of operation in Al-Ijarah Thumma Al-Bai' as below:
1. Customer picks a car you would like to have.
2. Customer asks the bank for Ijarah of the car, pay the deposit for the car and promise to lease the car from the bank after the bank has bought the car.
3. Bank pays the seller for the car.
4. Seller passes ownership of the car to the bank.
5. Bank leases the car to customer at a rate agreed upon for a specified period of time.
6. Customer pays Ijarah rentals. The customer agrees to pay for road tax and insurance coverage and will be responsible for its maintenance.
7. At end of the leasing period, the bank sells the car to customer at the agreed sale price.
In conventional hire-purchase transaction, hire purchase is commonly recognized as an ordinary type of loan. A customer whose income derives from any forbidden source or who intends to use hire purchase for illegal activities for instance, alcohol, gambling, or prostitution can use the conventional hire purchase. This is because there is no such limitation as Islamic hire purchase. The application of conventional hire purchase is limited to consumer goods, motor vehicles, and machineries. Thus, in conventional hire-purchase facility, customer cannot use this facility to buy a house or other immovable property.
The purchase price of goods in conventional hire purchase is determined by adjusting for timing its cost price with the prevailing interest rate. The interest rate is floating based on the annual rate. All costs and responsibility of maintenance also will be bear by the hirer alone. Conventional hire purchase is a hiring of goods with an option to purchase at the end of the agreement. There is no limitation of its sources of funds in conventional hire-purchase facility (Irwani, 2007).
In respect of the agreement, conventional hire purchase has a standard hire-purchase agreement based on the Hire-Purchase Act 1967, which incorporates details of the transaction, conditions and warranties, parties' rights and obligations, offenses, and penalty. One of the significant differences between the Islamic and conventional facilities is regarding the imposition of a late penalty fee. Defaulters under conventional hire purchase will be charged 8.0% per annum. Some banks do not even impose this penalty, not only because the amount is very low, but as an attraction to their potential customers. Finally, the conventional user will necessarily subscribe to a comprehensive conventional insurance policy for the goods (Seif El-Din, 2007).
The Islamic banking industry has adapted many important conventional products capable of being provided subject to Shariah compliance. Although Islamic hire purchase facing a number of questionable conceptual issues but it seem to have a very promising future prospect (Dusuki, 2006). Competitive services and attractive features that offered will increase awareness among the Malaysian public to use the Islamic hire purchase. Bank Negara Malaysia and banking industries should formulate a better developed hire purchase facility to make this industry more successful.
DIFFERENCES BETWEEN ISLAMIC CREDIT CARD AND CONVENTIONAL CREDIT CARD
General definition of credit card is standard size plastic token, with a magnetic stripe that holds a machine readable code. Credit cards are a convenient substitute for cash or check, and an essential component of electronic commerce and internet commerce. Credit card holders (who may pay annual service charges) draw on a credit limit approved by the card issuer such as a bank, store, or service provider. Cardholders normally must pay for credit card purchases within 30 days of purchase to avoid interest and/or penalties (Business Dictionary, 2011).
Credit card is one of the various products in banking sector. In Islamic credit card, it is a shariah credit card that similar to conventional credit card except it is not permissible for an institution to issue credit cards that provide interest bearing revolving credit. There are several differences between Islamic credit card and conventional credit card. In Islamic credit card, it involves the concept of bai' al-inah where it have two agreements (akad). In the first agreement, the bank sells Bank sells the merchandise to customer at cost plus (deferred payment basis) to the customer at an agreed price. While in the second agreement, the Bank repurchases the merchandise from the customer at cash that is lower price.
In term of interest, there are no interest is charged for the Islamic credit card. Bank is compensated with a fixed monthly fee. As we know, interest (riba) is prohibited in Islam and there are many verses in Quran stated about the prohibition of riba. For example, 3:130 "O you, who have believed, do not consume usury, doubled and multiplied, but fear Allah that you may be successful" (Ali-'Imran 3:130).
Islam allows the use of credit card so long it not engages with the element of interest. Dr Monzer Kahf in Live Fatwa on Islam on line dated August 8, 2001 responded, "Signing a credit card contract and using it in a way that generated payable interest is haram. It is then borrowing on interest. Signing the contract, using it, and making the payments within the grace period and making no cash withdrawals (whenever cash withdrawals generate interest), is permissible because it amounts to a contract that gives you a choice to deal or not to deal with interest" ( Prof. Dr. Mohd. Ma'sum Billah, 2010).
Besides, Islamic banking also imposed the restriction on transaction where it only permit the holders of the card to carry out halal transactions, which prohibit transactions related with categories that do not meet shariah requirements. These categories such as discos, purchase of beers, massage services, pork and gambling. Next, Islamic credit card will impose the fixed amount by 3% of outstanding balance when there are late payments by the card holders and this 3% is typically donated to charity (sadaqah). The fee charged for withdrawal service is not very high as compared to conventional bank. There are also difference in the price which is the bank's maximum profit is determined in advance, unlike the conventional credit card whereby the interest charged is undetermined and it may increase from time to time.
Islamic banking institution proposed to offer Islamic credit card based on the bai`al-inah concepts:
3. Bank sells the merchandise to customer at cost plus profit
4. Bank simultaneously buys back on
1. The customer cash basis (at cost value)
2. Bank identifies asset
In conventional banking, credit card is a plastic card issued by a bank authorizing payment for purchases. It allows a person to purchase goods and services by paying with money borrowed from creditor. The borrower then repays the credit card with its interest and the interest of conventional credit card is charged on the outstanding balance. Credit card does not withdraw money from the consumers account for every operation but the issuers of the card lend money to the customers.
Conventional credit card is different where it allows the customer to make payments on installment basis though interest that charged on the amount. The interest is variable and depending on the outstanding amount. So, we can see that conventional credit card is involved with the riba (interest) which is the element that very prohibited in Islam.
In terms of transaction restrictions, there are no such restrictions on items that can be purchased by customers. Customers can purchase anything that they like and desire to buy included non-halal transaction and this is contradicted with the Syariah law. Next, conventional credit card will impose the variable and compounded fees when there are late payments by the card holders. This will burden the customers because they must pay the high amount of fees. The charged for withdrawal service is also impose with the high fee such as RM 50 is charged for every withdrawal. The charged is undetermined and it may further increase from time to time.
Nowadays customers are more conscious about the usage of the Islamic credit cards. Not only this credit card is interest-free, but there is no profit charges if full payment is made before the due date. With Islamic credit cards, customers will also be able to pay zakat online, and to have takaful. Unlike conventional, the Islamic credit card holders are able to know the maximum profit charged to them within certain contract period. Islamic credit cards are also now being accepted worldwide (Nuradli & Hanifah, 2009). The Islamic credit cards are based on the Shariah contracts, which are free from the riba and gharar, have fixed profit margin, impose zero percent interest on easy payment plan and charge low profit rate on the outstanding balance. So, with all these features, it can encourage Muslim and Non Muslim customers to use the Islamic credit cards.
