All about Islamic Car Finance
Car loans and car finance acts as a boon when you want to avail your dream car. There are several options for residents in UAE when it comes to car finance and car loans. Many banks in UAE offer Islamic car finance specially designed to suit the needs of the residents of UAE. Islamic financing is a lot different than the regular loans and finances. Islamic financing is designed based on the Sharia principles of the Islamic law. Interest of fee for loans is prohibited in Islamic finance and the same applies for Islamic car finance.
Islamic Car Financing through Ijarah
To purchase a car in the UAE means having to approach the bank for a loan and pay back an un-Islamic interest rate. As a solution to this problem, the concept of Ijarah has been used for auto insurance.
Islamic car finance is available for both new and used cars. Islamic car finance usually works on the principle of Murabaha. All the banks in UAE which offer Islamic financial products offer Islamic car finance.
How does Ijarah work?
Ijarah is an alternative to the conventional leasing method. Under the Ijarah system, the Bank or financial institution acts as the Lessor and the customer acts as the Lessee. When a customer takes the Auto Ijarah Finance, he or she merely rents the car from the bank, who retains ownership until all the payments have been made. It’s only the rights of usage that are transferred to the customer, while rights of ownership remain with the bank. Typically, after all the payments have been made, the ownership rights are transferred to the customer.
Ijarah is a fully Sharia compliant and Halal method of financing an asset.
- The ownership lies with the Lessor (bank) and rights of usage lie with the Lessee (customer).
- Costs are to be borne depending on the usage and rights. For example, the Lessor will have to take care of ownership-related costs like insurance, transportation, registration, etc. and the Lessee will have to take care of usage-related expenses like servicing, repairs (except in cases where any damages, etc. caused are not attributable to the Lessee), fuel, etc.
- The period of lease usually starts from when the vehicle is delivered to the Lessee, irrespective of whether he or she has started using it or not.
How is it different from a regular interest-based loan?
The first thing one must understand is that the difference between interest-based loans and Ijarah does not depend on how much is paid back to the bank.
The ownership of the asset lies with the Lessor until the rent-paying period is complete – which means that the Lessor assumes all the risk until the transfer of ownership to the Lessee.
If the car is destroyed or rendered unusable during the rent-paying period through no fault of the Lessee, the Lessee is no longer required to pay the rent and the asset will be taken back by the Lessor. In this way, the customer is protected and all the risk lies on the large financial institution who can afford to bear the loss.
In the non-Islamic mode of interest-based financing, the customer is required to pay instalments with interest whether the asset is usable or not (as the ownership is transferred upon delivery). Whether the debtor benefits from the money borrowed or not, the bank is entitled to receive its interest and instalments.
So as long as this primary difference is maintained, the buyer is protected from being exploited and even if the rent collected from the buyer is the same as the interest rate (or even higher) it wouldn’t qualify as Riba or interest.
Features and Benefits of Islamic Car Finance
Listed below are some of the important features and benefits of Islamic car finance.
- Works on the Sharia principle of Islamic law
- Prohibits interest rate
- Islamic car finance works on profit rates
- Offers highly competitive profit rates
- High finance amount
- Flexible repayment period
- Financing available for new and used/pre owned cars
- Easy documentation
- Fast processing
Can a non-Muslim sign up for Islamic car loan?
Yes, a non-Muslim can avail Islamic car loan as long as they are meeting the bank’s requirements. Most often when people compare the loans being offered, they might’ve chosen the best plan and it is very likely that it was Islamic car loan.
Why is interest rate not charged in Islamic car loan?
Riba or interest is forbidden in the Islamic finance principle. Instead, the bank charges a profit rate on the resale or lease of the car to their customers.
What happens if you default on the car payment?
The bank cannot charge a compound interest if you default or miss a payment. There is a fixed fee charged. A portion of the fee will be donated to charity to ensure that the fee is Sharia compliant. If you continue to miss payments, the bank can demand the car back and can sell the car to recover for the loss.
How to find the best Islamic car loan?
You will have to do your share of homework and compare the various Islamic car loan available in the UAE. The Central Bank of UAE’s guidelines states that it requires 20% deposit and a maximum repayment of 5 years. Some finance or loan require zero percent as deposit, the bank pays for you and it gets added to the finance amount.
You must first decide how much you want to borrow and then decide on the length of the finance period before you start doing your homework. You have to then watch out for the various fees charged. You get a better profit rate if you transfer your salary to the bank.
Banks in the UAE offering Car Ijarah
There are a number of banks in the UAE offering Ijarah financing for new and used vehicles, the most popular of which are:
- Abu Dhabi Islamic Bank.
- Emirates Islamic Bank.
- Dubai Islamic Bank.
Popular Islamic Car Finances in UAE
Listed below are some of the most popular Islamic car financing options in UAE.
- Emirates Islamic Car Finance- This is an Islamic Car Finance Offered by Emirates Islamic Bank. The loan offers highly competitive profit rates and flexible repayment terms. Salary transfer is not mandatory for Emirates Islamic car finance.
- Standard Chartered Saadiq Finance- Standard Chartered Bank offers Saadiq Auto Finance which is based on the Islamic concept of Murabaha finance. The finance is available for both new and used/ pre owned cars.
- Al Islami Auto Finance- Al Islami Auto Finance is a type of Islamic financing for cars offered by Dubai Islamic Bank. The loan offers financing for a vehicle for commercial and personal needs. The financing is available for both salaried and self-employed individuals.
- Murabaha Auto Finance- Murabaha Auto Financing is a type of Islamic Auto Finance Offered by ADCB. The loan offers up to 80% finance at competitive profit rates along with repayment period of up to 60 months.
News about Car Ijarah in the UAE
Strong Performance of Islamic Finance in 2015
Widely acclaimed rating organisation Fitch has come up with substantial figures and statistics that indicate the growth of the Islamic finance in UAE has yet again beaten conventional banking in the current year of 2015.
The six largest Islamic banks rated by Fitch had their share of total bank gross loans at 21% in the first half of 2015 and they had around 20% of total assets at the end of the first half of 2015. This trend is but an indication of how Islamic banks across the UAE are faring. While including sharia-compliant securities to provide access to liquidity will benefit Islamic banks greatly, keeping the current condition in view, Fitch has positive things to say about growth of Islamic finance in the near future.
25th November 2015
Islamic finance industry will growth will be stunted in 2016
Standard and Poor's Ratings Services says that the Islamic finance industry will drop to single digits in 2016 when it comes to growth. Rapid changes, integration lack, falling oil prices etc. will contribute to this stunted growth. Currently the Islamic finance industry is growing and will be worth $3 trillion in the coming decade. The Islamic finance market is expected to double by year 2020 and their banking assets on a commercial front is projected to grow to $2.6 trillion by 2020 as per Thomson Reuters.
21st October 2015
Islamic financing is becoming for popular in few markets
Going mainstream and growing rapidly is Islamic Finance, the value of the Islamic banking asset is projecting to reach $ 6.5 trillion by year 2020. Islamic finance is a system that complies with Shariah law which doesn’t believe in taking interest or “RIBA’. Many Islamic banks offer a variety of financial products like auto finance, personal loans, mortgages and more. Murabaha is a commonly used interest-free financing tool in Islamic banking, while going through this tool of the bank, and the bank will purchase a product/asset for you along with an additional charge as well. And the customer will pay the bank back in equated monthly instalments.
20th October 2015