Competitive Islamic Auto Leasing – New Dimension

Islam is a religion that deals in every aspect of human life. Aqidah, Sharia and Akhlak are the three pillars on which the whole remarkable structure is standing upon. Islamic Finance deals with Muamalat branch of Sharia which is considered to be beneficial for all no matter which religion the follower belongs to.
The Background: The Abbasids during 762 to 1261 AD developed something very similar to the banking system. They did not have bank buildings but business people invested in long distance trade and goods were bought on credit without any involvement of interest. Businessmen from Scandinavia to Spain, and Africa to China used to visit them for business and deals in interest free economy.
At present, Islamic Finance is growing fast with multiple products available with Islamic banks which are Sharia compliant agreeable and acceptable to the Muslim markets, however, to meet the requirements of mass financial markets we need to find out new dimensions which must be meeting the requirements of Sharia, profitable for Islamic banks, as well as meeting the general public demands.
The New Dimension: The idea was well appreciated by bankers and general public in GFIF 2017, Global Forum on Islamic Finance, “Islamic Finance: The Present and Future” held by Comsats in Lahore, Pakistan, however the Academia raised comments on further research and improvement.
The idea revolves around: 1. Building concrete trust on Islamic Finance among people
2. Making Islamic Auto Leasing economic while keeping the profit margins intact
A common customer is unable to differentiate between conventional finance and Islamic Finance when the amount of instalment differs with time. The time value of money is implemented in both systems in one way or other. To build up confidence of customer we need to fix the price regardless of increase in lending period but it challenges the risk management factors. To cover up risks of the banks we can base the profit margin on maximum landing period and instead of Ijarah we can offer simple returnable Qarz to the borrower with his choice of instalment on agreed returnable time.
To make the idea economic and workable for customers “Branding” and direct “Dealership” is suggested to Islamic banks. Islamic banks need to extend its operations directly or via SPCs (Special Purpose Company) by contracting with auto manufacturers for dealership.
The Islamic bank customer may choose from available brand or brands with Islamic bank with respect to quality, prestige and services.
After sales services can be outsourced, or separate Musharakah contracts can be made with interested investors and management organisations.
Limitations: 1. The Islamic banks work efficiently to be competitive by balancing margins between auto manufacturers and customers rather than putting burdens on customers only.
2. Islamic banks should focus on increasing profits by increasing turnover rather than increasing margin enjoying possible monopoly, otherwise the whole concept will collapse.
3. Avoid investing money on unnecessary showrooms. Remember, your target is Islamic Leasing and not car selling.
4. Do not block your money on vehicles. Customer can always book in advance and wait for delivery.
Critics Comments:
Q1. Fixing price while keeping time flexible may yield to disturb Risk Management.
A. The profit margin keeping time ceiling in consideration has already been absorbed in price.
Banks Should be allowed to do their job. This pattern may suits to Islamic Leasing Companies.
Islamic Leasing companies are expected to perform well in this dimension for sure however we may let this choice be with Islamic banks either to attain or give up their new market share.
It is a premature idea and needs lots of improvements
It sure is. It needs immense research work on designing framework, business structure, demand and supply study of specific brands, designing of various agreements between Islamic bank and manufacturer, Islamic bank and customer, and Islamic bank and outsource establishments, government regulations relating to every possible aspect of the idea. In short, it is merely a start and there is a long way to go ahead. (Dr Furqan Ahmed, Senior Lecturer and Administrator, Pakistan School Muscat)