Thesis Introduction part

1.1 Islamic banking mechanism

1.1.1 Meezan Bank Car Ijarah

Meezan Bank is offering premium car financing services to the

consumer under the name of “Car Ijarah. Ijarah is an Islamic
terminology which relates to financing services. Under this scheme,
the bank charges a rental from the customer on a monthly basis. The
rent is paid to the bank under an agreement for 3, 4 or 5 years. Over
and above the rent, the bank also charges a security deposit, which is
taken prior to the contract. The security deposit is charged as a
percentage of the total cost of the car. The consumer has the option to
pay the security deposit which varies from 20% to the 50% of the car
value. The higher the security deposit get, the lower will be the rental
charged.

At the end of the contract, the customer has the option to waive off the
security deposit against which the bank will gift the car to the
consumer.

In case if there is any default from the customer regarding payment of

rent, the bank charges a 0.064% charity to the customer. The bank
collects the late charity fee and gives to charity.

The bank also gives free Tracker with each car. This is done to ensure
that the consumer does not defaults payment and runs away with the
car. If the payment is defaulted, the tracker company is told to locate
the car`s position and it is switches off remotely. The bank personnel
can then repossess the car. Over and above the tracker, the bank also
provides compulsory Takkafull services to the customer. It necessary
for the consumer to ensure under the car by Pakistani law.

Under this type of car financing, the ownership of the car remains with
the bank. At the end of the rental contract with the customer is over,
only then is the customer allowed to transfer the car into their own
name.
Meezan Bank primarily focuses on financing new cars rather then old
and use cars. There does not exist a plan in which customers can
replace their cars as well.

1.1.2 Dubai Islamic Bank

Another main player is the Islamic auto financing industry is the Dubai
Islamic Bank. The bank is based in Dubai and is now operating in
Pakistan.

Dubai Islamic bank also provides car ijarah. The bank charges a
security deposit as a percentage of the car value and gives the car on
a rental agreement to the customer. The customer agrees to pay a
fixed rent to the bank depending upon the term of the rental (1 to 7
years). The bank accepts security deposit from 15% to 80%.

The rent is only payable after the first month of usage. This is a facility
which relaxes the customer. The customer has to pay the rent of the
preceding year. Hence there is no pre-paid rent.

After the rental agreement expires, the customer may wish to return
the car to the bank and take the security deposit. If the customer
wants to take the car, it has to forgo the security deposit.

The bank keeps the ownership of the vehicle till the time the rental
agreement is in force. After the agreement ends, the customer is
allowed to transfer the ownership into its name.

1.1.3 Bank Islami

Bank Islami is another bank which is offering Car Ijarah facility to the
consumers. The basic mechanism of the Bank Islami Car Ijarah is
almost the same. There are some changes in the type of service being
offered.

Bank Islami rent out the car to its customer for a specific time period
against a security deposit. After the rental agreement is over, the
ownership of the car can be transferred to the customer.
The security deposit of the rental agreement is charged a percentage
of the vehicle`s value. Bank Islami accepts security deposit from 30%
to 80%. While the rental tenure is varies from 3 years to 5 years.

Bank Islami makes it compulsory on all vehicles that cost more than
PKR 600,000 to be protected by GPS Tracker. The bank charges for the
services and engages an external company which provides the same.