How does Vehicle Financing Work? (Ijarah)

This video focuses on how vehicle financing works in an Islamic Bank and how it differs to commercial leasing of conventional banks.

How does vehicle financing work in an islamic bank let us have a stand by the story of yusuf yusuf a young professional and a car enthusiast is considering if it’s the right time to purchase a car although he has set his eyes on a car he doesn’t have enough funds to purchase the car outright use of thinks to himself how will i buy it since i don’t have the money

I will have to opt for a financing facility but then he remembers that god has permitted trade and forbidden interest having heard of non interest based financing youssef approaches an islamic bank to find out if there is any possibility to own a vehicle by paying in installments he was informed by the bank officer of a type of vehicle financing call a jarrah which

In arabic refers to renting of an asset so how does this work this transaction works on a rental based structure which forms a relationship of a lessor and lessee the bank as the lessor purchases the vehicle based on use of spread friends and rents it out to yusuf who is the lessee for an agreed period of time for an agreed rental amount since yusuf indicates that

He eventually would like to own the vehicle the bank gives yusuf an undertaking that upon him duly paying all his monthly rentals for the agreed period the vehicle will be gifted to him by the bank to care yusuf’s doubts as to how islamic vehicle financing differs from interest base leasing the officer informs yusuf that if the financed vehicle has lost its usage

Purpose the customer is not liable to pay the rental for the period in which the vehicle is not functional because it is on rent for example if the vehicle meets with an accident and is garaged for one month for repairs the customer is not required to pay the rental for that month unless the non usability of the vehicle is due to misconduct negligence and breach

Of terms of the contract by the customer whereas an interest-based leasing system would require the monthly payment irrespective of the usage condition of the vehicle further the banking officer explains that the islamic bank does not profit from charging the customer any penalties for late payment as the rental amount is already agreed however this feature can

Be easily abused and will result in unduly impacting the profit earning of an investor who has invested his money with the bank in order to avoid this abuse the customer obtaining vehicle finance is required to undertake to make a pre-agreed donation to charity through the bank in case of such delay payments any such donation is completely prohibited from entering

The investment profit pool of the bank in case yusuf decides to settle the facility early the banking officer explains that yusuf is permitted to do so which will result in the termination of the ajara contract and the bank will now offer to sell the vehicle to use of under a sale contract of which terms are to be agreed at such point with better understanding and

Being convinced to the benefits of adjara yusuf decides to get his vehicle financed with an islamic bank and also recommends the same to his family and friends so now that you know how vehicle financing works in an islamic bank you too can make the right decision when looking to purchase a vehicle amana bank it’s your back

Transcribed from video
How does Vehicle Financing Work? (Ijarah) By Amana Bank