Islamic Car Financing: How Does It Actually Work?

Islamic Car Financing

An Islamic car financing is simply a halal financing structure granted by an Islamic lender that provides funding for a vehicle acquisition for a Muslim who wishes to adhere to Sharia law principles. It is primarily intended to meet the needs of any Muslim in terms of financing a vehicle purchase. In addition, it allows the borrower to be Sharia-compliant in the context of Islamic finance.

A halal car financing structure is quite different from the structure of conventional vehicle acquisition. In the case you take an Islamic car loan, if you are the buyer, they will not require you to pay any Riba (interests) because it is not permissible in Islamic law.

You can obtain an Islamic car loan not only from an Islamic bank but also from other shariah-compliant lenders. They can be Islamic car sellers who adhere to Islamic finance principles.

How Does It Work?

The most important criterion of Islamic car financing is the absence of interest. Because financing a vehicle for a Muslim using Riba (interests) and funds previously used for non-halal activities are prohibited. Car financing in Islamic Bank is frequently based on the murabaha principle.

The principle of the car Murabaha financing is relatively simple:

Islamic Car Insurance (Takaful)

In Islamic law, traditional insurance is not permissible as a risk management tool. This is due to the fact that it entails the purchase of something with an unknown conclusion (a form of gharar). Fixed income, a sort of riba, is also used by insurers to satisfy liabilities as part of their portfolio management process.

Cooperative (mutual) insurance (Takaful) is a viable Sharia-compliant alternative. Subscribers contribute to a pool of funds that are invested according to Sharia law. Unclaimed profits are divided to policyholders, and funds are removed from the pool to settle claims. Takaful promotes the concept of brotherhood, solidarity, and mutual assistance whereby the participants agreed to support one another jointly in the case of losses.

An Islamic or takaful insurance has the role of covering a car against all the risks. It is important to know that insurance covers the vehicle and its driver as well as the passengers whose funds are lawful.

When you take an Islamic car financing, the financier (e.g. Islamic banks or financing firms) usually suggests you take Takaful for your car insurance. In motor takaful, you give a sum of money to a general takaful fund in the form of participatory contribution (tabarru’). You enter into an agreement (aqad) to become one of the participants by committing to mutually assist each other in the event that any of the participants suffer a loss as a result of an accident involving his car. Thus, motor takaful is an alternative to general insurance.

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