3 Things about Vehicle Financing via Islamic Hire Purchase You Need to Know

Islamic hire purchase is one of the alternatives that the Islamic bank’s customer may apply for vehicle financing. This product is based on the Al -Ijarah approach (leasing). The Islamic bank then transforms it into an Islamic hire purchase, generally known as Al-Ijarah Thumma Al-Bay (AITAB). Islamic banks may assist customers, whether individual or corporate, in financing a diverse range of assets through this product. Additionally, this plan is ideal for people seeking interest-free vehicle finance. As noted previously, this product represents a significant milestone in the development of Islamic banking and finance. In this article, Musaffa attempts to highlight the information concerning vehicle financing via Islamic hire purchase.

1- Overview of Islamic Hire Purchase (AITAB)

In general, Islamic hire purchase, or Al-Ijarah Thumma Al-Bay’ (AITAB), consists of a lease agreement (ijarah) and selling agreement (Al-Bay’). The customer leases the asset from the bank for an agreed-upon rental payment for a specified period under the leasing contract. After the lease expires, the customer enters into a selling contract (‘aqd) with the bank to acquire the asset at an agreed price. Apart from those two contracts, this product also includes a wa’d contract. Wa’d is a unilateral promise that refers to an expression of a party’s commitment to another party to carry out specified actions in the future. For additional information, Islamic hire purchase, or AITAB, was established by Bank Islam in Malaysia. This innovative product is a facility that adheres to shariah principles.

2- Vehicle Financing Under Islamic Hire Purchase

There are two procedures for AITAB’s vehicle financing, they are:

a- Ijarah’s contract

• The dealer sells the vehicle ordered by the customer to the bank or financing firm.

• The bank or financing firm makes the complete payment to the dealer for the vehicle. As a result, the bank or finance firm became the vehicle’s owner.

• The customer made a deposit payment to the dealer equal to (often 10%) of the vehicle’s total price. In addition, the purchaser agrees to pay all applicable road taxes and insurance premiums. He is also in charge of maintenance.

• The dealer is responsible for delivering the vehicle to the customer. This step is complete after the bank or financing firm has approved the customer’s application with the intent of purchasing the car during or after the contract.

b- Following the completion of the initial contract, the sales (Bay’) agreement then takes place.

• The owner (the bank) rents the vehicle to the customer, and the customer takes the position of the hirer.

• He is now responsible for paying the rental or instalment to the owner in the agreed-upon amount until the payment is made in whole, either during the contract period or at the contract’s end. This is because he secured funding (about 90%) from the bank or owner.

Furthermore, AITAB agreement will include a clause that specifies the customer that was given wa’d to purchase the vehicle at the end of the lease period. Additionally, the customer gives wa’d to bear the balance of the Ijarah financing if takaful/insurance compensation is sufficient to cover such amount (in the event of loss).

3- Issues behind AITAB

Even though this product has been in operation for years and is one of the alternatives for developing a shariah-compliant financial system, there are some fiqh considerations.

Thus, Musaffa attempts to highlight the issues around the applicability of AITAB in this section.

• Ownership

The owner (bank) would allegedly be responsible for the asset’s risk, liabilities, and responsibilities. However, in this instance, the bank makes an effort to avoid those risks.

• Liability for Maintenance

The owner (bank) would allegedly have to bear the cost of basic maintenance.


The bank will apply a penalty for non-payment. In reality, a failure to make a required payment constitutes a breach of contract. Breaching any of these terms results in a loss for which the bank must compensate the innocent party. However, Shariah law allows this rule to avoid the negative attitude of the client who prefers to defer payment.

• Legal Representation.

AITAB is deemed to be weak in terms of a shariah-compliant regulatory framework. Accordingly, the judge will resolve any dispute arising from an Islamic hire purchase transaction following conventional law.

In the light of the previous information, we hope that AITAB will soon be adequately regulated and treated according to Shariah principles.

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