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Islamic Leasing and Auto Financing System in Pakistan in Compliance with Islamic Sharia

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  • Farhan, Jamil Ahmed

Abstract

The basic concept of Islamic banking which is also known as 'INTEREST-FREE BANKING' is based on basic ethical standards with just one main difference- Muslims are not allowed paying or receiving interest. This does not mean that business activities or making a profit are not encouraged, they are but as long as they don’t involve interest in any form. To fulfill this purpose, the Islamic financial institutions to satisfy these requirements have introduced financial instruments. An example that can be seen is that equity financing is used instead of debt financing. Furthermore, instead of giving a fixed interest rate on the savings account, Islamic banks offer a share of the bank's profit, as a return on deposits and this is around 5% annually. Islamic Bank’s ‘Car Ijarah’ has been designed according to the principles of Islam and is completely interest-free. Moreover the Ijarah contract and other documentation also comply with Shariah requirements. On the other hand, a conventional car-financing scheme is actually an Interest based loan given by the financial institution and interest is charged on that loan. Also, in conventional car-leasing schemes, the lease contract is not in compliance with Islamic Shariah and has Riba and other un-Islamic elements in it. The word Riba means excess increase or addition. Interpreted in Shariah, it means any excess compensation without any due consideration (consideration does not include time value of money). An Islamic alternative to conventional car financing is Islamic CAR IJARAH, which meets the principals of Islamic Shari'ah. IJARAH is an Arabic term with origins in Islamic Fiqah, meaning to give something to rent.

Suggested Citation

  • Farhan, Jamil Ahmed, 2006. "Islamic Leasing and Auto Financing System in Pakistan in Compliance with Islamic Sharia," MPRA Paper 116439, University Library of Munich, Germany, revised 03 Jul 2022.
    • Handle: RePEc:pra:mprapa:116439
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Islamic Finance; Ijara;

    JEL classification:

    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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