1341 leasing versus conventional financing 3 tma 2 nd

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1.3.4.1 Leasing versus Conventional Financing 3
TMA, 2 nd semester 2018 - 2019 B341 Conventional Financing The conventional financing schemes provide financing for purchasing a car; that is, in essence the financier is giving a loan and charging interest. Islamic Financing The Islamic car financing – Ijara – is based on a lease contract. It is not a financing scheme; rather it is a lease contract. As mentioned earlier leasing is a contract whereby usufruct rights to an asset are transferred by the owner, known as the lessor, to another person, known as the lessee, at an agreed-upon price, called the rent, and for an agreed-upon period of time, called the term of lease. 1.3.4.2 Rentals versus Instalments Conventional Financing A conventional car financing scheme is actually an interest-based loan given by the financial institution, with interest being charged on the loan. Islamic Financing Islamic car financing is based on pure rentals. In Car Ijara the asset remains at the ownership and risk of the bank and the customer only pays the rental for use of the asset, just like the rent for a house. 1.3.4.3 Ownership Conventional Financing In conventional car financing, the car is purchased in the name of the buyer from the dealer. Islamic Financing Under Ijara the ownership remains with the bank; that is, the car is purchased from the dealer in the name of the bank. This is because it is one of the foremost conditions of the Islamic mode of leasing that an object cannot be leased out unless it is in the possession of the lessor. 1.3.4.4 Risk/loss Conventional Financing Since the car is bought in the name of the buyer in the traditional mode of car financing, the risk is immediately transferred to the buyer, whereas in the case of Islamic financing, this is not so. Islamic Financing The car is purchased in the name of the bank from the dealer and so the risk remains entirely with the bank. As the corpus of the leased property remains in the ownership of the lessor, all the liabilities and risks emerging from the ownership are borne by the lessor. The lessee is responsible for any loss caused to the asset by misuse or negligence. The lessee can also be made liable for the wear and tear, which normally occurs during its use. But the lessee cannot be made liable for a loss caused by factors beyond his control. (The agreements with traditional car financing generally do not differentiate between these two situations.) In a lease based on Islamic principles, both situations should be dealt with separately. 1.3.4.5 Down-Payment versus Security Deposit Conventional Financing 4
TMA, 2 nd semester 2018 - 2019 B341 Both the down-payment and the security deposit are one-time payments. The major difference occurs because the buyer can buy back the car against the security deposit in the case of Ijara , whereas in conventional banking the down-payment remains with the bank, and no buy-back of the car can occur against the down-payment.

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