ISLAMIC FINANCE TERM REPORT

CAR IJARA
SUBMITTED TO: DR. IMRAN USMANI MR. MOHAMMAD IMRAN

SUBMITTED BY: AYESHA A. SATTAR KANWAL HASAN NADIA KHAN SHEHLA AHSAN SOBIA MAQBOOL MBA 3 (DPO)

DATE: 16TH DECEMBER 2002

INSTITUTE OF BUSINESS ADMINISTRATION KARACHI

ACKNOWLEDGEMENTS
At the completion of this report, we are very thankful to Mr. Ahmed Ali of Meezan bank for his sharing of valuable information, time and providing us with useful insight into the subject of Islamic car financing.. We are thankful to Mr. Farid Khan, of Meezan Bank for sharing his knowledge of car financing with us. We are also thankful to Mr. Mansoor Ali of Citibank for providing us with information on conventional car financing. Without their co-operation, the completion of this report would have been a difficult task.

We are also thankful to our course instructors Dr. Muhammad Imran Usmani and Mr. Imran for their valuable guidance. They were able to direct us throughout the course of this report. Apart from this, the text available on this subject by Dr. Muhammad Imran Usmani was also very helpful.

This report was a real experience towards becoming Business Executives. We hope that all those who refer to this report find it as beneficial as we intended it to be.

TABLE OF CONTENTS ACKNOWLEDGEMENTS NEED FOR CAR FINANCING CONVENTIONAL CAR FINANCING SCENARIO IN PAKISTAN CITIBANK-THE PIONEER IN CONVENTIONAL CAR FINANCING
BACKGROUND AND OPERATIONS

CITIBANKS CAR FINANCING

FEATURES OF CITICAR FINANCING BENEFITS ELGIIBILITY

CITICAR FINANCING SCHEMES

NEW CAR PROGRAM (10TH ANNIVERSARY SPECIAL OFFER) 0% PROGRAM USED CAR PROGRAM

THE PREVALENCE OF RIBA IN CONVENTIONAL BANKING WHAT IS RIBA? CONVENTIONAL FINANCING FORBIDDEN IN ISLAM ISLAMIC BANKING ALTERNATIVES TO CONVENTIONAL CAR FINANCING ISLAMIC CAR FINANCING: THE ULTIMATE SOLUTION FAYSAL BANK MEEZAN BANK: THE PREMIER ISLAMIC BANK
MEEZAN BANKS CAR IJARAH SCHEME CAR IJARAHS UNIQUE FEATURES BENEFITS OF CAR IJARAH COMPLIANCE WITH SHARIAH

MAIN FEATURES OF MEEZAN BANKSS CAR IJARAH

FINANCING

PAYMENT INSURANCE ARRANGEMENT LEASE PROCESSING TIME RENTAL CALCULATIONS ELIGIBILITY CRITERIA DOCUMENTATION REQUIRED FOR CAR IJARAH

ENTRY INTO THE CONSUMER BANKING SEGMENT PROBLEMS FACED IN DEVELOPING AND IMPLEMENTING CAR IJARAH
CONSUMER ATTITUDE PROBLEMS DURING DESIGNING OF THE PRODUCT LACK OF EXPEREINCE UNPREDICTABILITY REGARDING CONSUMER REACTION CAR INSURANCE (TAKAFUL) FIERCE COMPETITION IN THE MARKET CHANGES IN THE DOCUMENTATION REQUIREMENTS

THE PROCEDURE
ELIGIBILITY ENTERANCE OF FORM IN THE SYSTEM. GENERATION OF PROPOSAL. PROMISE TO LEASE AGREEMENT. PAYMENT COLLECTION. PLACING OF ORDER AND PAYMENT TO DEALER.

DIFFERNCE BETWEEN CONVENTIONAL AND ISLAMIC CAR FINANCING BASIC DIFFERENCES

LEASING V/S FINANCING RENTALS V/S INSTALLMENTS

DIFFERNCES IN SCHEME
OWNERSHIP

RISK/LOSS DOWN PAYMENT V/S SECURITY DEPOSIT RETURN TERMINATION

DOCUMENTATION
SEQUENCE/PROCESS

MARKET PRESENCE
INFRASTRUCTURE

ISSUE OF ISLAMIC INSURANCE (TAKAFUL) FOR CAR FINANCING PROBLEMS IN DEVELOPING TAKUFUL
INSURANCE ACT 1938 INVESTMENTS Re INSURANCE

CONCLUSION

NEED FOR CAR FINANCING

With the increasing demands of everyday life, vehicle ownership has shifted from a mere luxury to a vital necessity. Purchasing a car is often the second most expensive yet important purchase, after buying a home. While doing so, an individual has two options available: either to make a hand on hand (cash) purchase or to go for car financing. However, due to the exorbitant car prices and lack of the funds available, many individuals prefer the latter option and approach the various financial institutions, which provide this facility at different rates.

CONVENTIONAL CAR FINANCING SCENARIO IN PAKISTAN

In Pakistan, the following banks and leasing companies are providing conventional carfinancing facility at the following rates:

Company

Claimed rate

3 years IRR

5 year IRR

Avg. IRR

Tenor (years)

Down pmt.

Commercial banks Soneri bank MCB Bank Al Falah Union bank SCB (no docs) Citicar approved/docs) Citicar (no docs) Habib bank Leasing companies Orix Paramount Cres lease Askari lease 17% 17% 19% 22% 17% 20% 21% 21% 16-21% 3-5 3-4 3-5 3-5 20% 10% 10% 10% 13% 22.4% 19.9% 21.9% 18.6% 19% 1-7 3-5 15% 10% (pre 15% 16% 14% 15% 14% 16% 14% 17.7% 21.3% 21.8% 13.5% 16% 14% 17.7% 20.8% 21.9% 22% 14% 14-16% 14% 18% 3-5 1-5 1-5 1-5 1-5 1-7 15% 20% 20% 20% 20% 10%

CITIBANK-THE PIONEER IN CONVENTIONAL CAR FINANCING

BACKGROUND AND OPERATIONS1[1] Citibank is at present the largest and most important multinational bank in Pakistan. The bank is currently the market leader in the banking industry and is constantly working to improve its position by introducing newer, better and more consumer-oriented products. The nineties were a decade of domination and leadership for Citibank in the Pakistani marketplace and the trend continues into the new millennium. Some of the major milestones in the banks history showing not only the banks aim to develop customer tailored products specifically for the convenience of its corporate and individual customers but also its commitment to social responsibility in the form of grants and aids include: 1990 1992 Consumer Bank was established. Consumer Asset Business is launched. Auto Financing is introduced. Citigold Priority Banking is established. 1994 1995 1996 1997 Citiphone Banking launched. Citibank Visa Card (Gold and Silver) is launched. Self-Service Banking launched. Citibank, N.A. launches its Intranet System in April. First bank to launch a Photo Credit Card. Citibank wins over 35 awards under the Euromoney Excellence Awards. These awards included "Best Bank" and "Best Emerging Market Bank" for two successive years. Citibank Credit Cards acquire 100,000 members in less than 3 years. This milestone was achieved faster than any other Citibank business in the Asia Pacific Region. Citibank and IBA develop an MBA program focused on Marketing of Financial Services (MFS). Citibank, N.A. undertakes a three year support program for fund raising for the Lady Dufferin Hospital.

1[1]

www.citibank.com

Citibank, N.A. pledges a donation to LUMS for their "Students Aid Program". Citibank, N.A. in November holds its first ever Auto Dealer conference in Bhurban. Citibank, N.A. opens its sixth branch on Shahra-e-Faisal in Karachi in December. This branch has the first 24-hour zone with ATMs and Citiphone booths. Citibank launched Pakistan's first affinity card known as the "Citibank-Shaheen Credit Card". First foreign bank to launch MasterCard in Pakistan. Citibank Home Loans is launched. Auto Product Feature enhancement (25% Down Payment, Free Pre-approved Credit Card with each car). 0% Down Payment product for your second car. Complaint Tracking System (CTS) launched. 2000 Citibank, N.A. is the first Financial Institution to launch Personal Loans in Pakistan. The cards business launches the first ever Co-brand Credit Card in Pakistan with Caltex. Dewan Farooq Motors Limited manufacturers of KIA and Hyundai cars in Pakistan, and Citibank joint label financing program. Suzuki Car Financing private label auto loan financing program. Citibank Home Loans introduces Adjustable and Fixed Rate Home Loans. The Paktel-Citibank Credit Card is launched in June. LG-Citibank Installment Plan is launched in June. The liabilities business launches the "Karobar Account". Citiphone Banking introduces Self Service Banking.

1998 1999

CITIBANKS CAR FINANCING

Citibank is the market leader in the Car Financing market. Though it has the widest range of car loan packages, the average rate charged by it is relatively higher as compared to other players in the market.

FEATURES OF CITICAR FINANCING Loan Processing Charges are Rs. 4,000. The Total Monthly Installment (TMP) consists of the Equal Monthly Installment plus 1/12th of the annual insurance premium of the following year. First year insurance is taken up-front with the down payment.

BENEFITS Pre-approved Credit Card with every car. Citibank Financing Counters offer the convenience of sales officers trained in providing with the best financing option. Largest network of authorized dealerships ensures that you get the car of your choice in the color of your choice. Round the clock Citiphone Banking Service, to help and assist you regarding any customer queries. Comprehensive insurance at reduced premium rates from AIG, New Hampshire and EFU. Special pricing breaks for selected Credit Card members.

ELGIIBILITY
NORMAL PROGRAM You are at least 21 years of age at the time of financing and will be less than 65 years before full payment. You are a resident of Pakistan, residing in Karachi, Lahore, Faisalabad or Rawalpindi/ Islamabad.

FOR 0% EQUITY CAR FINANCING PROGRAM Your existing car is locally manufactured. If it is less than 1000 cc - it should be 3 years old or less. If it is 1000 cc or more-it should be 5 year old or less. Your existing car is in your name and is comprehensively insured. Loan size can be a maximum of twice the value of your existing car as determined by Citibank.

FOR USED CAR FINANCING One should be at least 21 years of age at the time of financing and will be less than 65 years or (retirement age) before full repayment. Should be a Pakistani national residing in Karachi, Lahore, Rawalpindi, Islamabad or Faisalabad. Maximum age of the car at loan maturity should not exceed 8 years. Other terms and conditions apply. Processing Charges: Rs 4,000. Vehicle Evaluation Charges: Rs 1,000 (if applicable).

CITICAR FINANCING SCHEMES

The following are Citibanks car financing schemes:

1. NEW CAR PROGRAM (10TH ANNIVERSARY SPECIAL OFFER) No Documents Required All you need is your NIC Low Down Payment 15% Down payment for customers who apply on no doc's criteria Up to 10 Installments waived 1 to 7 year financing period Period (months) 1 YR 2 YRS 3 YRS 4 YRS 5 YRS 6 YRS 7 YRS Pricing factor 0.09168 0.04992 0.03768 0.03097 0.02705 0.02483 0.02312 No. of installments waived 0 0 2 4 5 8 10

For example ,if you want to take a loan of Rs. 300,000 for 5 years Simply multiply the 5years factor(0.02705) with Rs. 300,000 to get Rs.8,115 as your equal monthly installment. For total monthly installments waived multiply the EMI (8,115) by number of installments waived (5) that would amount to Rs. 40,575 for 5 years. Installments waiver benefit is for the last applicable installment. Incase of pre-payment installment, waiver benefit does not apply. Different factor may apply for different segments. The Total Monthly Payment (TMP) will consist of the equal Monthly Installment (EMI) plus 1/12th of the annual insurance premium for the following year.

SPECIAL INSURANCE OPTION* Affordable to suit your pocket No more first year insurance to be paid up front, Citibank Car Financing offers you first year's insurance as a part of the loan. For customer who pay minimum 15% down payment

ADDITIONAL BENEFITS 24-hours access to CitiPhone Banking. Wide range of dealership network. Value added comprehensive insurance at competitive rates. Pre-approved Credit Card. Processing Charges: Rs 4,000

2. 0% PROGRAM The financing period that one can avail is from 1-5 years. He/she can be an existing customer of Citibank or a non-customer. Financing Periods Pricing Factor 1Yr 2Yrs 3Yrs 4Yrs 5Yrs

0.09311 0.05139 0.03768 0.03151 0.02762

For example. If you want to take the loan of Rs. 300,000 for 5 years simply multiply the 5 year factor (0.02762) with Rs. 300,000 to get Rs. 8,286 as your equal monthly installment.

3. USED CAR PROGRAM The financing period is up to 5 years. There are two options available under this scheme: a) DIRECT BUYER/SELLER PROGRAM Offers the facility to buy and sell used car in the most efficient and convenient manner. One can get financing on the car of his own choice (through classified section of the newspapers). b) PRE-AUTHORIZED CUSTOMER PROGRAM Under this scheme, the customer can get a loan even before he chooses the car. Period (months) 12 24 36 48 60 Pricing factor 0.09408 0.05237 0.03871 0.03260 0.02877

For example, if you want to take a loan of Rs. 300,000 for 5 years simply multiply is it 5year or 60 months factor (0.02819) with Rs. 300,000 to get Rs.8,631 as your equal monthly installment.

BENEFITS OF THE USED CAR FINANCING: 24-hours access to CitiPhone Banking Wide range of dealership network Value added comprehensive insurance at competitive rates Pre-approved Caltex-Citibank Credit Card

THE PREVALENCE OF RIBA IN CONVENTIONAL BANKING

The setup of a conventional bank is interest based. On either sides of its balance sheet it carries assets that are driven by the whims of interest. Only current accounts are devoid of this curse, the rest of the accounts - savings and fixed accounts are interest driven. The depositors deposit their money in the hope of earning an interest on their surplus. Although the bank plays its role of a guarantor yet, the primary motive of depositors is to earn interest on their surplus. The bank invests in different ventures to generate profit over the deposits and gives to the depositors a fixed rate of return on the invested amount regardless of what it actually generates profits/losses. This is injustice to both the depositors and the bank because if the profit rate is too high the depositors loos out and when the bank incurs losses, the bank is victimized to carry all the burden of the loss and to yet provide the fixed rate of return. On the asset side, the bank gives out interest-based loans, both short term and long term. It indulges in interest based financing activities such as leasing, which is far too different from the Ijarah under Islamic banking and is just a long term interest based loan where interest is termed as rent and mortgage is called the leased asset. The real differences as recognized under the Islamic system are ignored here.

WHAT IS RIBA?
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).

The definition is derived from Quran and is accepted by all Islamic scholars. There are two types of Riba namely Riba An-Nasiyah and Riba Al Fadl.

Riba An-Nasiyah is defined as excess, which results from predetermined interest, which a lender receives over and above the principle.

Riba Al-Fadl is defined as excess compensation without any consideration resulting from sale of goods.

During the dark ages only Riba Al-Nasiyah was considered to be Riba. However Holy Prophet (P.B.U.H) has classified second form Riba Al-Fadl as also Riba.

The meaning of Riba has been clarified in the following verses of the Quran: O those who believe, fear Allah and give up what remains of Riba if you are believers. But if you do not do so then be warned of war from Allah and his messenger. If you repent even now, you have the right of the return of your capital neither will you wrong nor will you be wronged. Al-Baqarah 2:278-9

These verses clearly indicated that the tern Riba means any excess compensation over and above the principal which is without due consideration. However the Quran has not altogether forbidden all types of excess as it is present in trade as well and is permissible. The excess rendered Haram is named Riba. In the dark ages the Arabs used to accept Riba as a type of sale, which is unfortunately still misunderstood as one.

Islam has categorically made a clear distinction between the excess arising out of trade and that from interest. The first type is allowed while the latter is Haram. Seized in this sate they say: Buying and selling is but a kind of interest, even though Allah has rendered buying and selling lawful and interest unlawful Al-Baqrah 2:275

CLASSIFICATION OF RIBA 1. The first and primary type is called Riba an Nasiyah 2. The second type is called Riba al Fadl

Since the first type was classified in the Quranic verses before the saying of Holy Prophet, this type was termed as Riba al Quran. However the prophet did explain the second type and hence it was called Riba al Hadees.

RIBA AN-NASIYAH This is the real and primary form of Riba. Since the verses of Quran have directly rendered this type Haram, it is called Riba al Quran. Similarly since the type was considered Riba in the dark ages it has earned the name of Riba al jahiliya. That kind of loan where specified repayment period and an amount in excess of capital is predetermined. Imam Abu Bakr Hassas Razi. Every loan that draws interest is Riba Ali ibn Talib (RAA)

Riba an Nasiyah refers to the addition of the premium, which is paid to the lender in return of his waiting as a condition for the loan and is technically the same as interest. The prohibition of this form of Riba is one of those issues, which have been confirmed in the revelation of all prophets. Some of the old testaments have rendered Riba as

Haram. The Quran has also stated the prohibition of Riba in various verses, has warned those who persist in practicing of a war which is certain to be declared on them by Allah Himself and His messenger and has seriously threatened those engaged as writer, witness and dealer in Riba transactions.

The giving and taking of any excess amount in exchange of a loan at an agreed rate is included in interest irrespective of a high or a low rate. It has been proven through Ahadith that that the holy prophet paid excess at the loan repayment time but since this excess was not paid through an agreed rate, it cannot be called interest. This clarifies the word draws in the ahadithThe loan that draws interest is Riba>has been used to highlight the giving and taking of excess amount through an agreed rate in the loan contract.

The fact that this form of Riba is Haram has never been disputed in the Muslim community.

WISDOM BEHIND THE PROHIBITION OF RIBA AN NASIYAH

Although everything has its own goodness and utility yet things that have more benefits and less harms are beneficial and useful. Thus the curse of sins generated by this form of Riba outweighs the benefits and hence it is rendered haram. The curser of such transitory profits is carried to the world Hereafter and is punished for. The spiritual and moral loss incurred by injuring the communitys peace and security is too great a costs for such monetary profits. On these grounds, this Riba is forbidden in Islam.

CONVENTIONAL FINANCING FORBIDDEN IN ISLAM

Conventional financing is forbidden in Islam due to its direct involvement with interest. 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.

For millions of Muslims, banks are institutions to be avoided. Islam is a religion that keeps Believers from the teller's window. Their Islamic beliefs prevent them from dealings that involve usury or interest (Riba). Yet Muslims need banking services as much as anyone and for many purposes: to finance new business ventures, to buy a house, to buy a car, to facilitate capital investment, to undertake trading activities, and to offer a safe place for savings. For Muslims are not averse to legitimate profit as Islam encourages people to use money in Islamically legitimate ventures, not just to keep their funds idle. However, in this fast moving world, more than 1400 years after the Prophet (P.B.U.H.), can Muslims find room for the principles of their religion? The answer comes with the fact that a global network of Islamic banks, investment houses and other financial institutions has started to take shape based on the principles of Islamic finance laid down in the Qur'an and the Prophet's traditions 14 centuries ago. Islamic banking, based on the Qur'anic prohibition of charging interest, has moved from a theoretical concept to embrace more than 100 banks operating in 40 countries with multi-billion dollar deposits world-wide. Islamic banking is widely regarded as the fastest growing sector in the Middle Eastern financial services market. Exploding onto the financial scene barely thirty years ago, an estimated $US 70 billion worth of funds are now managed according to Shari'ah. Deposit assets held by Islamic banks were approximately $US5 billion in 1985 but grew over $60 billion in 1994. The best known feature of Islamic banking is the prohibition on interest. The Qur'an forbids the charging of Riba on money lent. It is important to understand certain principles of Islam that underpin Islamic finance. The Shari'ah consists of the Qur'anic

commands as laid down in the Holy Qur'an and the words and deeds of the Prophet Muhammad (P.B.U.H.). The Shari'ah disallows Riba and there is now a general consensus among Muslim economists that Riba is not restricted to usury but encompasses interest as well. The Qur'an is clear about the prohibition of Riba, which is sometimes defined as excessive interest. "O You who believe! Fear Allah and give up that remains of your demand for usury, if you are indeed believers." Muslim scholars have accepted the word Riba to mean any fixed or guaranteed interest payment on cash advances or on deposits. Several Qur'anic passages expressly admonish the faithful to shun interest.

ISLAMIC BANKING
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 dont involve interest in any form. To fulfil this purpose, financial instruments have been introduced by the Islamic financial institutions to satisfy these requirements. 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.

HISTORY The modern banking system was introduced into the Muslim countries in the late 19th century when most of these countries were performing that well economically as well as politically. These banks founded branches in the capital cities of major Muslim countries to cater their business needs. However, the branches were limited to the capital cities and the other surrounding cities were totally ignored by the banking system. Nevertheless, most local businesses still refrained from engaging with these commercial banks, mainly for religious reasons. The reason behind this is that banks operate on the basis of charging interest, a concept totally forbidden by Islam. As time went by however, it became challenging to avoid commercial banks. They were more efficient in certain banking aspects such as money transfers and current accounts, but borrowing loans and opening saving deposits were still avoided due to the prohibited interest issue. As the second half of the 20th century has witnessed, any businessrelated transaction almost always involves a bank and hence, avoiding the modern banking system has become virtually impossible. Banks extended into local communities and thus, forced themselves into almost every kind of business and their related transactions. This is when many Muslim intellectuals recognized the need for an Islamic banking system that will serve the needs of Muslims from the business point of view and at the same time respecting the codes of Islam. Islamic banking as an

institution has been around for 25 years but interest-free banks have also been tried before. There was one such bank in Malaysia in the mid-forties and one in Pakistan in the late fifties. Neither of them survived. The early seventies saw the institutional involvement. The Islamic Development Bank, an inter-governmental bank was established in 1975. The first private interest-free bank, the Dubai Islamic Bank was also setup in 1975 by a group of businessmen from several countries. Two more private banks were founded in 1977 under the name of Faisal Islamic Bank in Egypt and Sudan. Twenty-five years since the establishment of the first Islamic bank, more than 150 Islamic institutions have come into existence. Though most of these are in Muslim countries, there are some in Western Europe as well as in North America and Asia.

ISLAMIC BANKING IN PAKISTAN Pakistan, which historically was formed in the name of Islam, lacks a truly Islamic economic and financial system even after more than half a century of independence. Starting from the first founder of Pakistan, vowing to establish an Islamic financial system, attempts by successive regimes have failed due to lack of initiative and determination in leaders of a country, inhabited by more than 150 million Muslims. At present there are only a handful of institutions that are truly Islamic in their functioning. Meezan bank is the pioneer of Islamic banking in Pakistan.

ALTERNATIVES TO CONVENTIONAL CAR FINANCING

Conventional financing is forbidden in Islam due to its direct involvement with interest. 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. Regarding the problems encountered with the conventional mode of car financing and regarding the fact that such a form of financing is strictly prohibited in Islam the following alternatives have been considered while deciding on the option or the ultimate solution for the car financing: Diminishing Musharakah Ijarah wa iqtina Leasing Ijarah

DIMINISHING MUSHARAKAH According to the Diminishing Musharakah the financier and the client take part in a contract in which the share of the financier is further divided into a number of units and it is understood that the client will purchase the units of the share of the financier one by one periodically, thus increasing his own share until all the units of the financier are purchased so as to make him the sole owner of the property or the car. the financing done through diminishing Musharakah is most commonly done for the following three purposes:

House financing For carrying business of services such as diminishing Musharakah for the purchase of the taxi. Diminishing Musharakah may also be done for trade.

IJARA WA IQTINA Ijara wa Iqtina is an alternative available to the lessor. It is an arrangement signed by the lessor in which he promises to gift the leased asset to the lessee at the end of the leased period. But this promise to gift is subject to the lessee paying all payments of rent on timely basis. The validity of Ijara wa Iqtina depends upon: The promise is to be recorded in separate agreements than the agreement of Ijara. The promise should be unilateral and binding on the promiser only.

The asset can be sub-leased by the lessee with prior permission by the lessor. All schools of Islamic jurisprudence are unanimous on the permissibility of the sub lease if the rentals received from the sub lease are less than or equal to the rent payable to the original lessor. It is however a preferred view in the Shafite and Hanbali school of thought that the lessee is allowed to earn rentals in excess of the rentals he pays to the original lessor and this surplus can be enjoyed by the lessee. This view is though not acceptable to the Hanafi school of thought, according to which the excess belongs to charity, exceptions being:

Value addition activities undertaken by the lessee. The asset is subleased in different currency.

The lessee can also sell the leased asset to a third party and a new relationship will be established between the lessee and the new lessor. However this cannot be done for monetary consideration because sale of money for sale can only take place at par value and if on excess will be taken as riba.

Ijara is preferred and more common in use than Ijara wa Iqtina which is an alternative form of leasing and includes a promise to gift.

IJARAH - LEASING

An Islamic alternative to conventional car financing is Islamic Car Ijarah, which meets the principals of Islamic Shari'ah. This is the ultimate solution or the best alternative being considered. Lease is not originally a mode of financing. It is simply a transaction meant to transfer the usufruct of a property from one person to another for an agreed period and an agreed upon consideration. Leasing can be used as a mode of financing in the Islamic banks as an alternative to the conventional car financing. However the consideration of leasing as a mode of financing should be based on certain conditions. It should be understood by all, using it as a mode of financing that it is not sufficient to substitute the name of interest by the name of rent and the term mortgage instead of the leased asset. There must be a significant difference between leasing and an interest-bearing loan. This form of lease is an alternative to car Ijarah because it deals with the problem of interest by charging rent only after the car has been delivered to the client or the lessee. Where as in the conventional car financing the payment of the rent (interest) starts before the delivery of the car to the lessee which is nothing but pure interest.

Moreover in the leasing or Car Ijarah the risk is not entirely of the lessee as in the case of conventional car financing. The lessee only has the risk of the damage to the property done due to his negligence otherwise the bank bears all the liability of the ownership of the car.

Thus car Ijarah is the best alternative chosen foe the Islamic mode which is permissible by Fiqh and Shariah.

ISLAMIC CAR FINANCING: THE ULTIMATE SOLUTION

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. 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. Legally, the lease contract is not a, sale of the object, but rather a sale of the usufruct (the right to use the object) for a specified period of time. The sale of usufruct is permissible in Islam, as evidenced by the verses (translation of meaning by Yusuf Ali (1991)): Said one of them: 'O father, hire him on wages, for truly the best to employ is a strong and trustworthy man'. He said: `I intend to wed one of my daughters to you, on condition that you work for me for eight years, and if you complete ten full years, that will be a grace from you'. [28:26 27] It is also established by the following Hadith narrated by ' Ahmad, 'Abu Dawud, and Al Nasa.'i on the authority of Sa'd (mAbpwh): The farmers during the time of the Prophet (PBUH) used to pay rent for the land in water and seeds. He (PBUH) forbade them from doing that, and ordered them to use gold and silver (money) to pay the rent. Also, 'Ahmad, Al Bukhari and Muslim narrated on the authority of 'Ibn 'Abbas that the Prophet (PBUH) hired a man to cup [water] for him, and paid him his wages.

There are a number of conditions for lease financing to be permissable. The most important financial difference between Islamically permitted leasing and conventional financial leasing is that the leasing agency must own the leased object for the duration of the lease. Therefore, while leasing an automobile from a car manufacturer or dealership may in principle be permitted (if the contract satisfies the other conditions), Muslims should be careful. In many cases, the dealership will in fact use a bank or other financial intermediary to provide a loan for the present value of lease payments, and

charge the customer an interest on this loan. This would constitute the forbidden Riba. Careful Islamic, financial institutions ensure that the contract abides by all the restrictions set in the Shari`a (e.g. sub leasing requires the permission of the lessor, late payment penalties must be handled very carefully to avoid the forbidden Riba, etc.). Recently, Muslim jurists have also provided an Islamic alternative to conventional lease purchase agreements (called in Arabic 'Ijarah wa 'Iqtina'). In this contract, a lease is written as discussed above, with an additional promise by the lessor that he will agree to sell the leased object at the end of the lease at a pre determined residual value. This promise is binding on the lessor only, and the lessee has the option of purchasing the item at the end of the lease, or returning it to the owner lessor (c.f. ibid. (pp.l75 6)). A common model for equipment, auto and home financing in North America is based on leasing or lease purchase. The Islamic financial institution buys the financed object, and retains the title through the life of the contract. The customer makes a series of lease payments over a specified period of time, and may have the option at the end to buy the item from the lessor (and owner) at a pre specified residual value. The period of the lease and the rent payments may be made such that the final payment is only symbolic. It is no secret (at least it should not be a. secret) that the Islamic bank or financial institution will take into consideration the same factors when determining the rental payments and residual value that a regular bank would consider: the value of the financed item, its depreciation value, inflation, the credit worthiness of the lessee, the opportunity cost value of the money (as reflected by market interest rates) etc. of course, an implicit '`interest rate" can trivially be calculated from the price, residual value, term of the lease and the lease payment. There is no need to hide this fact, and indeed, the intelligent Muslim customer (as Muslim customers should always be) must be encouraged to "shop around" and ensure that the Islamic financial institution is not implicitly charging an interest rate, which is not in line with the conventional market. However, in the final analysis, the difference will be in the form of the contract. If the lease is structured in accordance with the various conditions detailed in books of jurisprudence, it will contain no Riba and will ensure that it cannot contain such forbidden Riba in the future (e.g. in terms of late payment fees, etc.).

The most important financial difference between Islamic permitted leasing and conventional financial leasing is that the leasing agency must own the leased object for the duration of the lease. Therefore, while leasing an automobile from a car manufacturer or dealership may in principle be permitted (if the contract satisfies the other conditions), Muslims should be careful. In many cases, the dealership will in fact use a bank or other financial intermediary to provide a loan for the present value of lease payments, and charge the customer an interest on this loan. This would constitute the forbidden Riba. Careful Islamic, financial institutions ensure that the contract abides by all the restrictions set in the Shari`a (e.g. sub leasing requires the permission of the lessor, late payment penalties must be handled very carefully to avoid the forbidden Riba, etc.). Unlike conventional financing, Islamic financing is not a loan provided with fixed or nonfixed interest. Instead, it is the sale of named commodities for a deferred price. This simply means that if a person is buying a car and an Islamic financial institution has agreed to provide him with the funds needed to obtain the vehicle that you desire, the institution will pay for the car, become the car owner and will promptly sell him the car. Now, that person is responsible to pay the amount over the course of a mutually agreed upon period of time. How does the institution make its money if there is no interest involved? They add an agreed upon profit to the total financial responsibility, which is highly unlikely to meet or exceed the total interest one would pay with a conventional loan, and furthermore, it is Shari'ah compliant.

FAYSAL BANK LIMITED

Faysal Bank Limited (FBL) is a subsidiary of Shamil Bank of Bahrain E.C. (Islamic Bankers) which is controlled and managed by the Dar Al-Maal Al-Islami Trust.(DMI).The bank has been serving the Pakistan economy and market since 1987, first as a branch network of its Bahrain principals and since 1996 as a locally incorporated bank. The Pakistani Operations of FBL covers: BRANCH BANKING At FBL "full service" does not merely mean offering a range of products and services. It also means that providing an array of products and services accompanied by a high level of personalized service. The bank believes in achieving an outstanding quality in all its activities CONSUMER BANKING The retail structure provides not only high value in-branch service but also offers an easy and affordable way to acquire motor vehicles and consumer durable items for personal use. The bank purchases the items and its customers use these against payment of monthly installments. This way the customers do not have to make large initial outlays for expensive items. CORPORATE BANKING FBL is fully geared to meet the ever changing economic challenges present in Pakistan. It strives to build meaningful relationships with its customers and become partners in their growth and progress by acting as financial advisors and consultants as well as financiers. Its Corporate Bank extends both short and long term financing facilities designed to fulfill the individual need of each customer. Amongst the customers are: the Government of Pakistan, multinationals and some of the leading local corporations.

TRADE FINANCE Faysal Bank Limited has established its strong presence globally in Trade Financing through its network, affiliates and correspondents. It has conveniently maintained relationships with major banks in the international markets and continues to develop new ones wherever needed. The banks Trade Finance Services include a full range of import, export and guarantee products, thus offering each customer tailor-made solutions to fit their individual needs. INVESTMENT BANKING With the changing business environment in the country, one needs expert partners with a keen understanding of his business to help him achieve the profit objectives. FBL offers businesses and institutions corporate advisory services and a wide array of tools to help them accomplish their goals. It advises and facilitates the arrangement of commercial paper and modaraba floatation, syndications, mergers and acquisitions, underwriting arrangements amongst many others.

FAYSAL BANKS CAR FINANCING

Faisal bank was the pioneer in introducing Islamic car financing in our country. However the procedure followed for the purpose of financing is not truly Islamic in nature. In other words the bank charges a fixed mark up on the rentals, which is tantamount to Riba and is not permissible under the jurisprudence of Islam. Therefore even though the bank claims to provide riba free car financing, it does not complies to the basic rulings of Sharia which is Meezan bank is the only bank which providing a truly Islamic car financing at present.

MEEZAN BANK: THE PREMIER ISLAMIC BANK

Meezan Bank Limited (formerly Al-Meezan Investment Bank Ltd.) is a publicly listed company incorporated on January 27, 1997. Meezan Bank was issued an investment banking license under SRO 585-(1)/87 in August 1997 and commenced business in September 1997. In January 2002 Meezan Bank was granted a full-fledged commercial banking license dedicated to Islamic Banking.

VISION Establish Islamic banking as banking of first choice to facilitate the implementation of an equitable economic system, providing a strong foundation for establishing a fair and just society for mankind.

MISSION STATEMENT To be a premier Islamic bank, offering a one-stop shop for innovative value added products and services to our customers within the bounds of Shariah, while optimizing the stakeholders' value through an organizational culture based on learning, fairness, respect for individual enterprise and performance. Meezan Bank has recently acquired the banking operations of Societe Generale, Pakistan (SG). The deal has been approved by the Shariah Supervisory Board of the Bank and will enable Meezan Bank to implement state of the art banking procedures and systems inherited from SG, the 16th largest bank in the world. As a part of this deal, SG will also invest Rs. 100 million in the share capital of Meezan Bank representing approximately 6.7% of the total paid-up capital. Meezan Bank operates strictly under the principles of Islamic Shariah. The Bank has an in-house Shariah advisor, a Ph.D. in Islamic Finance, who monitors all transactions to ensure conformity to Islamic Shariah. Meezan Bank has a paid-up capital and equity of Rs.1.3 billion. The Bank is publicly listed and its shares are traded on the Karachi Stock Exchange. Meezan bank is sponsored by leading financial institutions based in Pakistan, Kuwait, Bahrain and Saudi Arabia and offers innovative Shariah compatible products structured to meet customer needs. The Management team is comprised of

highly qualified and experienced professionals sharing a strong commitment to Islamic finance.

The sponsor shareholders of Meezan Bank are all leading financial institutions. The main sponsors are: Pakistan Kuwait Investment Company (Private) Limited(a joint venture between Government of Pakistan and the Government of Kuwait) and Shamil Bank of Bahrain EC (the commercial and investment banking arm of Dar Al Maal Islami Group, based in Geneva). Other sponsors include: Islamic Development Bank, Jeddah Kuwait Awqaf Public Foundation and Saudi Pak Industrial and Agricultural Investment Company (Private) Limited.

The Bank strives to provide efficient commercial banking, services and products that can also be tailor-made to suit customer needs. With a highly professional team dedicated to the cause of Islamic finance, the Bank has established itself as one of the leading Islamic banks in the country. We believe in adding value to our customers businesses and at the same time endeavoring to deliver competitive risk adjusted returns to our stakeholders.

MEEZAN BANKS CAR IJARAH SCHEME: As a step towards their mission of providing a one-stop shop for innovative value added Shariah compliant products to their customers, Meezan Bank introduced Car Ijarah- a car-financing scheme that is based on the principles of Ijarah and is free of the element of interest.

Car Ijarah is Pakistan's first "Interest Free" car-financing scheme based on Islamic financing mode of Ijarah or Islamic leasing. This product is ideal for interest averse individuals, looking for a car financing scheme that provides the convenience of a well designed product while avoiding an interest based transaction. Car Ijarah is simply a rental agreement under which the car will be given to the customer on rent for a period, agreed at the time of the contract. Meezan Bank purchases the car and rents it out to the customer for a period of 3, 4 or 5 years. CAR IJARAHS UNIQUE FEATURES First Islamic Car Financing Scheme (Approved by Meezan Banks Shariah Board) Free from Interest/Riba It is not a Hire-Purchase agreement

BENEFITS OF CAR IJARAH No applying fee Ease of acquiring any new locally assembled car No up-front Insurance Payment No advance Rental Available in tenures of 3, 4 and 5 years As little as 20% security deposit

COMPLIANCE WITH SHARIAH Meezan banks Shariah Advisor, Dr. Imran Usmani, a PhD in Islamic Finance is involved in overseeing the activities of the bank on a day-to-day basis and works closely with Meezans team of professionals in structuring and developing new products. He ensures that all documentation which supports the products offered by Meezan Bank Limited, are fully compliant with the rules of Shariah. The Shariah Supervisory Board periodically reviews the activities of the Bank and approves its new products. They therefore ensure that all transactions, which are undertaken by the Bank, comply with the tenets of Shariah. The Shariah Board comprises of the following eminent scholars of Islamic finance: Justice Muhammad Taqi Usmani. Dr. Abdul Sattar Abu Ghuddah Sheikh Essam M. Ishaq Dr. Muhammad Imran Ashraf Usmani (Pakistan) (Saudi Arabia) (Bahrain) (Pakistan)

MAIN FEATURES OF MEEZAN BANKSS CAR IJARAH

Following are the main features of Car Ijarah: FINANCING Meezan Banks 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.

PAYMENT The customer can pay in flexible, easy rentals over a period of 3, 4 or 5 years, with as low as 20% Security Deposit.

INSURANCE ARRANGEMENT Meezan Bank being the owner of the Car will be responsible for Insurance of the car and for paying the insurance premium. Until the availability of Takaful (Islamic Insurance) in Pakistan the Insurance will be done under the present Insurance modality.

LEASE PROCESSING TIME Meezan Bank being the owner of the Car will be responsible for Insurance of the car and for paying the insurance premium. Until the availability of Takaful (Islamic Insurance) in Pakistan the Insurance will be done under the present Insurance modality.

RENTAL CALCULATIONS To calculate the monthly rentals simply multiply the cost of the car with the rental factors given in the table below RENTAL CALCULATION ** Security Deposit 20% 25% 30% 35% 40% 45% 50% 3 years 0.03144 0.02971 0.02797 0.02624 0.02451 0.02277 0.02104 4 years 0.02582 0.02443 0.02304 0.02165 0.02026 0.01887 0.01748 5 years 0.02246 0.02127 0.02008 0.01889 0.01770 0.01651 0.01533

* No separate Insurance will be charged

For example: If you are interested in a car costing Rs. 300,000 for a tenure of 5 years and are willing to pay a 40% Security Deposit, your monthly rental would be, Rs. 300,000 X 0.01770 = Rs. 5,310/- per month for 5 years ** (**All other costs will be charged at actual)

ELIGIBILITY CRITERIA You can enjoy the benefits of Car Ijarah if you: Are a salaried individual/ self-employed professional/businessman Have a net take home income exceeding three times your monthly

installment Have 3 years working/professional /business experience Are working with your present employer for at least 6 months (for salaried individuals)

DOCUMENTATION REQUIRED FOR CAR IJARAH It is very easy to apply for Car Ijarah, just bring the following documents. Individuals/Self-Employed Professionals/Businessmen Copy of NIC Two recent passport sized photographs Recent Utility Bill (Electric/Gas/Water) received at the residential address Last Six Month Bank Statement Last Six Month Bank Statement of Business (for Businessmen) Certified/Original copy of Recent Pay slip (for Salaried Individuals) Copy of Rent Agreement (if applicable)

ENTRY INTO THE CONSUMER BANKING SEGMENT Meezan bank started its operations as an investment bank four years back in 1998. Its mission statement is: to make Islamic banking the first choice for consumers. Meezan bank started consumer-financing activities on July 15 2002 with the launch of its Ijara product. Work on the development of this product started in Dec 2001, with a market survey conducted to measure consumer attitudes towards the product itself and the affect of major players on the market and consumers. The major players in the car financing market are various Islamic banks, commercial banks and leasing companies namely: Citi bank Standard chartered. Bank Alfalah Cres bank Muslim commercial bank Orix leasing.

PROBLEMS FACED IN DEVELOPING AND IMPLEMENTING CAR IJARAH

Meezan bank had to face various problems in the development and launch of their car financing project-Ijara. The problems faced are as follows:

CONSUMER ATTITUDE The prominent problem faced was the consumers attitude toward the product. It is very difficult to educate people on the basic differences underlying between conventional car financing and Ijara. They could not differentiate between the conventional and Islamic modes of car financing and could not understand in what ways is Ijara is Islamic. They therefore were not willing to pay a higher rate charged by the Islamic mode of car financing. The consumers were reluctant to go for car financing until they were completely satisfied with this mode and were able to comprehend the concept of Ijara.

PROBLEMS DURING DESIGNING OF THE PRODUCT A number of problems were faced in the designing of the product as well. This was because Meezan bank was the introducer of Ijara in Pakistan and hence no follow up was available which would have aided them in the development of the product. There was great risk involved as to whether the product would be accepted by the consumer because product like this was not available in the market and hence consumer reaction could not have been specifically measured.

LACK OF EXPEREINCE Another problem was the inexperienced and the small size of the team responsible for the development and launch of Ijara. They had no former experience in retail banking and consumer financing and were in the initial stage of their learning curve. Because of inexperience in the market and as a team, they faced problems initially in communicating ideas to each other and in making a comprehensive, combined effort toward the development of the product.

UNPREDICTABILITY REGARDING CONSUMER REACTION How will consumers behave and competitors react to Ijara? This was the key question in everybodys mind at Meezan bank. Since this was a new product introduced in the Pakistani market, the team had no follow up on similar products launched in the past and consumers and competitors reaction to it. They had to undergo a market survey to identify consumer attitude towards Islamic banking and car financing. But a lot of risk was involved as the results could not lead to the identification and measurement of competitors and consumers attitude towards the product.

CAR INSURANCE (TAKAFUL) A major problem faced was the issues related to insurance. Takaful (the term for insurance in Islam) is available in Pakistan. Therefore conventional insurance schemes are used, as no other option is available. The explanation of this to customers is difficult because they believe that Ijara remains no more Islamic if its insured using conventional methods. The issue with insurance is uncertainty. This is explained to consumers that the primary concern in Ijara is of interest and not of uncertainty related with the conventional insurance policies. They have to face this problem until Taqaful is not introduced in Pakistan. This problem is discussed in detail towards the end of the case study.

FIERCE COMPETITION IN THE MARKET Meezan bank had to face stiff competition from conventional banks and leasing companies involved in the activities of car financing. These banks and leasing companies have strong long term relationships built with dealers and operate on a larger scale as compared to Meezan bank in the area of car financing. These have direct sales agents aiding in the process of car financing and have proper infrastructure built with an area in the bank or the leasing company devoted to car financing.

CHANGES IN THE DOCUMENTATION REQUIREMENTS The documentation requirements were very severs at Meezan bank for applicant of car financing. These documentation requirements are revised recently and are relaxed. The major changes are as follows:

The tax assessment required earlier is removed now.

When financing a car for businessmen, a management account was required before. The auditors placed this requirement. Now the requirement is placed on cars financed with a market value of greater than 5 lack rupees. An ownership document was required earlier but now the requirement has been waived. This is in view of the inconvenience faced by the customers and their reluctance to provide the ownership document. The approval document is being fine-tuned. It is a part of Meezan banks policy not to finance cars for people related to show business, policemen, politicians, estate agents, lawyers and for negative areas as Landhi and Malir where repossession of the car in an undesirable situation is difficult.

THE PROCEDURE
1. ELIGIBILITY Meezan bank has set criterions for eligibility to car financing - Ijara. Individuals who can fulfill these criterions and requirements are eligible to car financing at the Meezan bank. The eligibility requirements are as follows: A three years working experience with at least six months stay at the last job. The net income earned by the applicant to be three times more than the rental charged by the bank.

2. ENTERANCE OF FORM IN THE SYSTEM. After the collection of the information on the applicant, this form is then entered into the system developed at the Meezan bank .the information provided in the form by the applicant is cross-checked and referred in an attempt to uncover any false information provided.

3. GENERATION OF PROPOSAL. The proposal is then generated for approval. There are basically four kinds of approvals. These are basically approval by the: Head of leasing department. Head of business development department. Chief operating officer. Chief executive officer.

4. PROMISE TO LEASE AGREEMENT. After the generation of proposal and the acceptance through approval by the heads, an agreement to lease is signed by the customer which is basically an understanding between the seller and the buyer that the buyer promises to buy and the seller promises to see that is lease.

5. PAYMENT COLLECTION. After the signing of the agreement to lease, the bank collects the following payment from the customer: Processing fee. Security deposit. The minimum amount for security deposit is 20% and the maximum 50%. Documentation charges.

6. PLACING OF ORDER AND PAYMENT TO DEALER. After collection of the payments mentioned above by the bank from the customer, the bank places the order to the dealer. The payment to the dealer is made in the name of the customer. Meezan bank basically deals with Indus Motors, Pak Suzuki, Honda and Deewan Motors, directly.

DIFFERNCE BETWEEN CONVENTIONAL AND ISLAMIC CAR FINANCING

Meezan Banks 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. In Car Ijarah the asset remains in the ownership and risk of bank and the customers only pay the rentals for use of the asset; just like house rent. These differences are described in detail below:

BASIC DIFFERENCES
LEASING V/S FINANCING: The traditional schemes provide financing for purchasing car, i.e. in essence they are giving loan and earning interest. The Islamic car financing is entirely different. It is not a financing scheme rather it is a lease contract. The word financing here has been used as a generic term. The Islamic car financing -- Ijarah is based on a lease contract. It is not a hybrid contract. IJARAH is an Arabic term with origins in Islamic Fiqah, meaning to give something to rent. 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.

 RENTALS V/S INSTALLMENTS Islamic car financing is based on pure rentals. In Car Ijarah the asset remains in the ownership and risk of bank and the customers only pay the rentals for use of the asset; just like house rent. 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.

DIFFERNCES IN SCHEME
OWNERSHIP In case of the conventional mode of car financing, the car is purchased in the name of the buyer from the dealer. This is not the case in Ijarah, where the ownership remains with the bank, that is the car is purchased from the dealer in the name of the primarily. This is because it is the foremost condition of Islamic mode of leasing that an objet cannot be leased out unless it is in the possession of the lessor. RISK/LOSS 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. 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 shall be borne by the lessor. The lessee is responsible for any loss caused to the asset by his misuse or negligence. He can also be made liable to the wear and tear, which normally occur during its use. But he cannot be made liable to a loss caused by factors beyond his control. The agreements of the traditional car financing generally dont differentiate between the two situations. In a lease based on the Islamic principles, both the situations should be dealt with separately. DOWN PAYMENT V/S SECURITY DEPOSIT

In Ijarah the buyer is required to keep a security deposit at the bank. The minimum requirement for security deposit is 20% of the car value and the maximum is 50%. The requirement is different in the case of conventional car financing. In the traditional mode there is a down payment made by the buyer of the car. The amount required for the down payment is 20% of the price plus the installment for the first year. Both the down payment and the security deposit mentioned above are one-time payments. The major difference occurs because the buyer can buyback the car against the security deposit in case of Ijarah, where as in case of conventional banking the down payment is entirely of the bank, and no buy back of the car occurs against the down payment. RETURN In the Islamic mode of financing, the buyer has the right to return the car anytime during or at the end of the lease period. Since this is a lease agreement and the lessee has been paying rentals, he can return the car to the bank and take back the security deposit any time he wishes to. On the other hand in a traditional car financing scheme the customer takes a loan to purchase the car and which h cannot return in any case what so ever. TERMINATION The buyer of the car has the option and right to terminate the contract and return the car before the contract reaches its maturity in both the conventional and Islamic mode of car financing. The difference lies in post termination phase. In the conventional carfinancing scheme if the customer wants to terminate the contact the only option he has is to buy the car by paying the rest of the installments. Whereas in the Islamic car financing scheme the customer has two options; either he can return the car and get back the security deposit or he can buy the car from the bank at the market value plus a certain percentage of spread for the bank.

DOCUMENTATION

 SEQUENCE/PROCESS Islam considers the procedure as a significant factor in case of all modes of financing. The underlying difference between the Islamic and the conventional mode of financing is that of the process. It is not only the end result it is also the means to it that are important. If the result is correct and the steps are wrong or vice versa, the entire process is wrong. According to Islamic principles, lawful steps to lawful results are very important. The most important financial difference between Islamic permitted leasing and conventional financial leasing is that the leasing agency must own the leased object for the duration of the lease. Ownership of the asset is the prerequisite for leasing out its usufruct and therefore Islam emphasizes on the sequence.

MARKET PRESENCE
INFRASTRUCTURE The conventional banks and leasing companies have strong long-term relationships built with dealers and operate on a larger scale as compared to Meezan bank in the area of car financing. These have direct sales agents aiding in the process of car financing and have proper infrastructure built with an area in the bank or the leasing company devoted to car financing.

ISSUE OF ISLAMIC INSURANCE (TAKAFUL) FOR CAR FINANCING

Despite the inefficient legal system and policies of the Central Bank of Pakistan, there is a handful of Islamic financial institutions in operation in the country, providing its people

with an alternative mechanism in tune with their faith. Although efforts of these institutions should be lauded, there is not a single Takaful operator in the country. Due to this reason, Meezan bank at is present using the conventional insurance for car financing until an Islamic model of insurance is created. However the bank in collaboration with Pak Kuwait investment is involved in developing a working model of Takuful to overcome this issue. The Federal Shari'ah Bench of the Supreme Court, Pakistan, had, in a landmark judgement late last year declared the present financial system repugnant to the principles of Islam and ordered the government to abolish the 'interest-based system' and establish an alternative Shari'ah-based system. Although the judgement frees the Insurance Act 1938 from the payment of interest (amendments in clauses S.29 (8) b, c iii, S.47 B (1), (2) and S.81 (2)(d) that relate to the calculation and payment of interest), the Supreme Court is silent as to the permissibility of insurance practiced in the country since it was not part of the case filed with the apex court. Now, if the country were to transform its entire financial system to a Shari'ah-based system, it has to extensively inspect all the obstacles involved and must altogether resolve the loopholes found in the system. It is no doubt a daunting task but the government is confident that the objective will be met.

PROBLEMS IN DEVELOPING TAKUFUL

Here is a brief detail of some of the foreseen problems in the establishment and working of a Takaful company in Pakistan.

INSURANCE ACT 1938 The Insurance Act 1938, a legacy of the former British rulers, is the law governing the insurance operations in Pakistan and does not have any provisions for the establishment of a Takaful company. Although the Act has a provision for registration and operation of a mutual insurance company that is very close to the concept of Takaful, there are a number of requirements unlawful from the Shari'ah viewpoint. A new Insurance Act, the draft of which has been prepared to replace the old one, does not even have the provision for the operation of a mutual insurance company.

INVESTMENTS The law requires all insurance companies to invest a minimum amount in government securities, which are Riba-based, and thus is unacceptable for an Islamic insurance company. Besides the legal requirements, the avenues for halal investments are currently limited. Investment in the country's volatile stock markets is also unsuitable for a Muslim and is considered un-Islamic due to the risk and interest involved.

Re INSURANCE According to the Insurance Act, insurance companies are required to have a minimum of 20 percent reinsurance from the Pakistan Insurance Corporation, which provides reinsurance based on the conventional set-up and does not offer the facility of ReTakaful. A number of local businessmen and investors have initiated steps to establish a Takaful company in Pakistan and practical models and products have been developed through the assistance of Takaful companies and Islamic financial experts in the Muslim world. Repeated requests for the grant of permission as a special case with the National Insurance Controller have however gone unheard.

Following the judgement of the Supreme Court against riba, Pakistan, with a population all set to switch to an Islamic financial system, presents a promising market for Takaful. Although the first company to offer Takaful in Pakistan will have to face a number of regulatory problems, the Takaful operator will nevertheless enjoy a flourishing market, comprising the ever growing number of Shari'ah-based transactions.2[2]

2[2]

Takaful A case study in Pakistan

CONCLUSION
Islamic banking, though a relatively new concept, compared to the centuries old conventional banking, has developed at a very fast pace. The introduction of various Islamic financial products around the world, is itself a success story.

Meezan Bank, the pioneer in Islamic banking in Pakistan, has also progressed a great deal. Though it faced initial problems at the soft launch of its car Ijarah scheme, but its team of dedicated people has been working continuously to upgrade the product and bring it in complete compliance with Shariah principles.

The acceptance of the product can be seen by the large number of consumers applying for the scheme. The teams employed by various banks and leasing companies managing their operations according to the Islamic mode of financing to carry out Ijarah are able to fulfil their job quite successfully. This is due to the fact that they have become well trained and they have gained experience. The lack of experience was deterrent to their performance initially but they have been able to cope up with this deficiency and have come up with amazing results.

It still has a problem with regard to insurance that is the Islamic insuranceTakaful is yet not introduced and the scheme of car Ijarah has to carry out its operations with the help of conventional insurance available to all. The significant factor in Islamic car financing is that of corpus of ownership of the asset remains with the lessor and only the usufruct of the asset is transferred to the lessee.