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Al-Ijarah Thumma al-Bay (AITAB)

1.0

Introduction

Ijarah in Islamic banking and finance can simply mean leasing or hiring. These two
interpretations are used interchangeably in the literature. The term ijarah originates in
the Arabic verb ajara which denotes rewarding or recompensing. Literally, ijrah
is derived from the noun al-ajr which means compensation, reward, consideration,
return or counter value (al-iwad) against the use of an object. From a juristic (fiqh)
definition, ijarah refers to a contract to utilize a lawful benefit against a consideration
(Al-Zuhayli 2002). In ijarah, the right to use the object is transferred to the hirer, not
its ownership. Hence, ijarah is a sale of usufruct not of a physical entity

Technically, ijarah is an agreement between two parties, one being the owner of the
asset, who gives possession of the assets for the use of the other party, the hirer, on an
agreed rental over a mutually agreed period. It is also defined as transferring the
usufruct of a particular property to another person in exchange for a rent claimed from
him (Usmani, 2002).

In particular, there are various definitions of ijarah cited by the Muslim scholars as
the four schools of jurisprudence have given different explanations to the meaning of
ijarah, which are illustrated as follow:
The Maliki School defines ijarah as a transfer of ownership of
permitted usufruct for a known period in exchange for compensation
(price).
The Hanbali School has described ijarah as a contract where the
subject matter is lawful and for defined use (manfaah); corporeal

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object (ayn) is also lawful and determined; and for a specific period of
time.
The Hanafis define ijarah as a contract intended to give ownership of a
determined and legitimate usufruct (manfaah) of a rented corporeal
object (ayn) against a consideration.
The Shafiis view ijarah as a contract where the subject matter is the
determined, legitimate, assignable and lawful usufruct of an object
against a fixed consideration

The above definitions vary in their wordings but they are actually unanimous in the
substantial meaning of ijarah. All four schools of jurisprudence are in agreement that
ijarah is a contract for utilising the usufructs (manfaah) of a defined object against a
determined consideration.

Product innovation is a key in securing the competitive advantage in the development


of Islamic banking and finance. As the pace of globalization and liberalization
accelerates, securing competitiveness has increased demands for more robust and
resilient Islamic banking product. Along with the development of Islamic banking,
there is now also a challenge to be faced by the bank to increase efforts in designing
innovative Islamic financial products in order to achieve a competitive market based
on Islamic principles. Therefore in Malaysia, one of ijarah contract that designed by
Islamic Banking is Islamic Hire Purchase and popularly recognised as Al-Ijarah
Thumma Al-Bay (AITAB) which is utilised to finance a wide range of assets, either
for individual or corporate customers.

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2.0

Legitimacy of Ijarah Contract

The majority of Muslim jurists based their permission of the ijarah contract on the
Qur'an, the Sunnah and the consensus of Muslims. There are several Qur'anic verses
which are frequently quoted as evidence for ijarah contract. As stated in verse 26-27
of Surah Al-Qasas:
One of the two women said: O my father! Hire him! For the best (man) that
thou canst hire is the strong, the trustworthy. He said: Lo! I fain would marry
thee to one of these two daughters of mine on condition that thou hirest thyself
to me for (the term of) eight pilgrimages. Then if thou completest ten it will be
of thine own accord, for I would not make it hard for thee. Allah willing, thou
wilt find me of the righteous.

and also in verse 6 of Surah At-Talaq:


Lodge them where ye dwell, according to your wealth, and harass them not so
as to straighten life for them. And if they are with child, then spend for them
till they bring forth their burden. Then, if they give suck for you, give them
their due payment and consult together in kindness; but if ye make difficulties
for one another, then let some other woman give suck for him (the father of the
child)

The above verses stress that it is legal and common to do something in consideration
of a payment. According to al-Shfi, the above verses show clearly that the ijarah
contract especially Al-Ijarah Thumma Al-Bay' contract is lawful in any permissible

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transactions. Even the first verse indicates that the ijarah contract had been used in the
time of Moses.

Besides the clear evidences from the Qur'an, there are also several hadith that support
the practice of leasing such as Hadith narrated by Abu Yala, Ibnu Majah, At-Tabrani
and At-Tirmizi:
Give a worker his fee before his sweat dries up.

and Hadith narrated by Abd-ar-Razzaq and al-Baihaqi:


He who hires a person should inform him of his fee.

It is also known that the Muslim jurists during the time of the companions that the
Prophet s.a.w. reached a consensus on the permissibility of ijarah (Al-Zuhayli, 2003).
The practice of ijarah has been allowed at that time, because there was a need for such
transaction. Ijarah is an important contract like sale. If sale is permitted for the
purpose of acquiring a property, thus, ijarah is necessarily allowed for purpose of
using a usufruct of the property (Sulaiman, 1992)

3.0

Al-Ijarah Thumma Al-Bay

One of the innovations of ijarah contract carried out by the Islamic Banking in
Malaysia is Islamic Hire Purchase financing, known as Al-Ijarah Thumma Al-Bay'
(hereinafter referred to as "AITAB"). AITAB product is combination of two concepts
of Ijarah (leasing) and bay'(buy). Ijarah is a contract for the transfer of the benefits of
an object with a payment within an agreed between the parties while the bay is the

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exchange of goods to a contract between two parties that gives ownership to the
parties.

Section 2 (1) of the Hire Purchase Act 1967 (hereinafter referred to as "PPA 1967")
has defined a hire-purchase agreement as hire of goods with an option to purchase and
an agreement for the purchase of goods by installments. With a cross-reference to
Section 1 (2) and the First Schedule of the HPA 1967, the goods can be sold in a
lease-purchase agreement is that all types of consumer goods and motor vehicles.

AITAB product was first introduced by Bank Islam Malaysia Berhad (BIMB) to
expand its operations through conventional banks under the Islamic Banking Scheme
(IBS), which was spearheaded by three banks of Malayan Banking Berhad
(Maybank), Bank Bumiputra Malaysia Berhad (now known as CIMB) and Bank
Rakyat.

Currently, there are 15 banks in Malaysia that offers AITAB for individual and
corporate customers. If seen, almost all banks provide AITAB facilities for vehicle
financing unless Bank Pembangunan and HSBC are using AITAB to finance
machinery and industrial goods. Banks such as Maybank, Am Islamic Bank, Affin
Islamic Bank and Bank Muamalat also offers AITAB to individuals and corporate
customers. Other banks, such as Bank Rakyat, EONCAP Islamic Bank, Hong Leong
Bank, Public Bank and RHB Islamic Bank puts emphasis on the financing vehicle for
the growing demands of the public and corporate clients. While the Bank Islam
OCBC Al-Amin tend to offer a lease-purchase mechanism quite different to corporate
clients which is Ijarah Muntahiyyah Bit Tamlik.

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4.0

Application of AITAB in Islamic Banking and Finance

From the definition of AITAB which means lease followed by sales combines the
lease contract (Ijarah) and sales contracts (Bay) in one trading document. Even
though there are two different contracts in one trading but the contract must be handle
separately. Under the lease contract (first contract), hirer (customer) leases goods
from the owner (banks and finance company) at an agreed rental over a specified
period of time. At the end of the leasing contract, the hirer enters into sale contract
(second contract) to purchase the goods from the owner at an agreed price. The sale
contract also can be done during the leasing contract as long as the rental payments
have been fully settled.

AITAB involves three main parties which are customer known as the hirer, banks or
finance company known as the owner and vendor or dealer or seller as the middle
party between these two mentioned parties.

In Malaysian, AITAB client normally identifies and approaches vendor or dealer of the
asset he needs. The dealer then prepares all related documents pertaining to AITAB
financing on behalf of the bank. Here, the dealer merely acts as an agent to the bank.
Once the client and the bank concluded the AITAB contract, the car will be delivered to
the client, hence effectively commencing rental payment. Upon completing all the agreed
payment, both parties shall enter into another agreement in which the customers pay a
nominal amount of RM1 signifying sale contract. Under AITAB mechanism, bank has an
authority over the leased asset. If the customer defaulted, bank can take an action against
him and repossess the asset. If the customer constantly pays and then satisfies all required
payments, the bank will sell the asset to him at the end of the agreement.

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The basic operation of AITAB is depicted in Figure 1.

Figure 1: Operation of AITAB in Malaysia


Source: Nurdianawati Irwani and Ashraf Wajdi (2006)

4.1

First Contract : Contract of Lease (Ijarah)


a) Vendor or Dealer or Seller sells the vehicle ordered by the customer to
the bank or finance company.
b) The bank or finance company pays to the Vendor full amount of the
vehicle. Therefore the banks or finance company became the Owner of
the vehicle.
c) The customer paid the deposit payment (mostly 10%) of the full
amount of the vehicle to the Vendor. The customer agrees to pay the
road tax and insurance coverage. He is also responsible for the
maintenance.

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d) Vendor delivers the vehicle to customer. This is done once the bank or
finance company approved the customers application upon in the
purpose to purchase the vehicle during or at the end of the contract.

4.2

Second Contract : Contract of Sales (Bay)


a) Owner hires the vehicle to the customer. The customer became the Hirer.
b) He is now responsible to pays the rental or installment to the Owner with
the agreed amount until the payment fully paid either during the contract
or end of the contract. This is due to financing he obtained (mostly 90%)
from the bank or owner.

5.0

The Objectives of Al-Ijarah Thumma Al-Bay

Nowaday, Islamic Hire-Purchase is viewed as one of project financing and technical


assistance. This facility can be used to finance many activities, which include those in
trade and commerce, industry, agriculture and fisheries, housing and personal
advances other than those for business purposes and housing. It is significant to note
that this facility has been operated in several manners by different banks and regions.
In fact, it has been one of the most popular modes of allocating funds by almost
Islamic banks, not only in Malaysia, but also in Jordan, Sudan, Qatar and even Islamic
Development Bank (IDB).
In a commercial context, AITAB is a mode of financing adopted by Islamic banks and
other financial institutions offering Islamic products. It is a contract under which the
finances an asset such as equipment, building or other facilities for the

customer

bank
against

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an agreed rental together with an undertaking from the customer to

make

additional

payments in an account which will eventually enable him to purchase

the

rental and the purchase price are fixed so that the bank gets back its

principal

asset.

The
sum

along with some profit which is usually determined in advance.

In the Malaysian context, the government undertakes to establish a Sharah framework


for AITAB by proposing a Muamalah Hire-Purchase Bill in order to ensure the
transaction and its practitioners adhere to the Sharah principles. Activities that

involve

interest (riba), gambling (maisir), and speculation trading (gharar) are

prohibited.

AITAB has fulfill all conditions of a valid contract stipulated by the Shariah.

The

contract has executed by mutual agreement, responsibilities and benefits of both


parties and clearly spelt out. The agreement has stated for a known period and against
a known price. In particular, AITAB has adhere to both principles of leasing (ijrah)
and sale (bay) contract in respect of conditions imposed onto the contracting parties,
offer and acceptance, consideration and subject matter of the contract.

The basic operation of AITAB in effect is similar to conventional hire-purchase. The


only difference is in the issue of interest (rib) and issuance of acceptance (aqd)
letter. As regards to determination of fixed rate, standard documentation, and
formation of agreement, AITAB transaction follows the same spirit of IFSA 2013
Act. In many instances, as evidenced in the case of AITAB, the Islamic financial
products are repackaged along the features of conventional financial products, while
eliminating elements that are not in-compliant with the Sharah. While the
adaptation

will still continue, Islamic financial products are likely to expose to certain

conventional practices that are in conflict with Shariah principles, thus rendering the

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practice to be invalid. Islamic bankers and Muslim scholars have attempted to resolve
some basic and operational issues in order to make AITAB operation more viable and
acceptable by Shariah.

AITAB seems to have a very promising future prospect. AITAB is a name which
capture a public acceptance because it provides better features compared to
conventional hire-purchase. The increasing Islamic awareness among the Malaysian
public has attracted them to AITAB which offers competitive services with and
attractive features. Muslim customers, who accept and understand its operation,
request it as an alternative to conventional hire-purchase. They will come to an
institution which they know offering such Islamic product. The exclusive legal
protection provided by the Hire-Purchase Act 1967 and IFSA 2013 Act has
undoubtedly gained confidence of both bankers and customers to engage in AITAB.

6.0

Distinctions between AITAB and Conventional Hire-Purchase

AITAB
Definition/
Concept

2 contract (qd) in
sequence
interest-free

AITAB
Eligible Customer

those who do not


involve in immoral
activities which against

CONVENTIONAL
hire then option to
purchase
1 contract; 2 qd in
one

CONVENTIONAL
No such limitation as
AITAB
Individual and non-

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Sharh eg. Gambling,


drug and prostitution.

individual who have


good credit rating

Type of
Goods

similar to
conventional hirepurchase
non-Act goods;
industrial goods

refer to 1st Schedule


of HPA
non-Act goods

Profit Margin/ Term


Charges

flat rate, similar to


conventional
lower margin for
non-Act goods
3 4%
rental based on profit
cost price + profit
no. of instalments

Maximum 10%
cost x interest rate

Period of Financing

same with
conventional hirepurchase
Maximum: 7 years,
Minimum: 1year

Maximum: 84
months, Minimum: 12
months

Calculation of
Instalment

Fixed rate

Fixed rate

Ownership

Asset purchased in the


name customer

Remains with owner


(bank)- asset purchased
in banks name

Transfer of Ownership

bank gives release


letter after full
settlement
a document
evidencing the transfer

After payment of the


last instalment or upon
early settlement
gradual retirement

AITAB
Maintenance
Responsibility

similar to
conventional hirepurchase
hirer bears the

Year
based on interest

CONVENTIONAL
Maintenance
responsibility not put on
Owner because it is not
pure lease

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responsibility
Documentation

Follows standard
hire-purchase but add
qd letter.
2nd Schedule,
AITAB Agreement,
AITAB Guarantee
Agreement, AITAB
Purchase Agreement,
qd Letter (if
applicable), Release
letter

Hire-Purchase Act
1967
2nd Schedule, HP
Agreement, Guarantee
Agreement, Release
letter

Governing Law

Hire-Purchase Act
1967 and IFSA 2013 Act
Sharh law
Guidelines from
Bank Negara Malaysia

Hire-Purchase Act
1967

Taxation

treated as leasing
expenses
Nominal RM10
In certain
circumstances,
Government exempted
stamp duty for Islamic
products

RM10

Early Settlement
(Rebate/ Ibra)

rule 78-Sign qd
letter after fully
settlement
similar to
conventional hirepurchase
Banks right, looking
into current practice
Banks discretion,
cannot declare, if so
obliged to give

Rule 78
3 months notice
Statutory calculation

AITAB

CONVENTIONAL

Penalty for Late


payment

1% of outstanding
amounts

impose late charges


8% (Hire-Purchase

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Insurance responsibility

7.0

Conclusion

charged on principal,
example:
Instalment=$300, next
month, must pay
$600.30 (300+300+1%)
binding by BNM
circular
treatment of penalty
after maturity
discretion of bank

Act 1967)
If 2 successive
defaults, instalment are
calculated again and
charged. Total amount
will be different and
exceed original amount
in agreement

Same to conventional
in respect of
responsibility to bear
insurance cost
Islamic insurance
(Takful)
Comprehensive- not
3rd Party

banks responsibility
during first year
hirers responsibility
in subsequent years
Third-party insurance

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7.0

References

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