Academic journal article Journal of Management Research

Issues and Prospects of Islamic Hire Purchase Financing: Malaysian Evidence

Academic journal article Journal of Management Research

Issues and Prospects of Islamic Hire Purchase Financing: Malaysian Evidence

Article excerpt

Abstract

Despite the popularity of Islamic hire purchase among the customers as an alternative for conventional hire purchase, the criticism especially on issues pertaining to its legitimacy and validity should not be overlooked. This study therefore, aims to highlight several issues and prospects of Islamic hire purchase Ijarah Thumma al Bai' (AITAB) in Malaysia and subsequently, provides a comprehensive exploratory study on the various ways to have a better and more legitimate structured AITAB in financial institutions. Descriptive and analytical research method had been applied in this study to analyze the collected data. The findings point out the limitations of AITAB implementation such as Shari'ah framework, ownership, maintenance responsibility, deposit payment, penalty in case of default, intention and lack of understanding of parties, signing of two separate documents in sequence, and interest-based calculation of profit. The findings also indicate the endless prospect of AITAB in Malaysia due to its strong public acceptance, competitiveness, and religious inclination. It is hoped that issues pertaining to Islamic hire purchase can be resolved through having Shari'ah regulation. Therefore, efforts should be strengthened to offer practicable solutions to help provide better and more legitimate structured implementation of Islamic hire purchase in financial institutions.

Keywords: Islamic Hire Purchase Financing, Issues of Islamic Hire Purchase, Prospects of Islamic Hire Purchase, Conventional Hire Purchase, Hire Purchase Act (HPA)

Introduction

Over the last decade, Islamic hire purchase financing which is recognised as Al-Ijarah Thumma Al-Bay' (AITAB) became the most demanding product provides by the Islamic banks in Malaysia. Bank Islam Malaysia Berhad is the first Islamic bank in Malaysia that has implemented AITAB in 1995(Abdullah and Dusuki, 2004). AITAB became a popular and demanded product as an alternative for conventional hire purchase since its first commencement in more than 10 years ago. Conventional banks in Malaysia are also operating AITAB under Islamic banking scheme due to the growing demand by the customers. Despite being one of the most popular products of the Islamic banks, AITAB is being criticized by many people due to its lacking in explicit Shari'ah regulatory framework (El-Din and Abdullah, 2007). Critics argue that Islamic hire purchase financing (AITAB) is simply a carbon copy of the conventional hire-purchase instrument as it is mainly based on the conventional Hire Purchase Act 1967. As researchers Ismail (1999) has explained, any dispute pertaining to the transaction of Islamic hire purchase refers to the conventional regulations as there is no written Shari'ah law that specifically regulates the operation of AITAB. Therefore, any institution that offers AITAB tend to impose its own rules and regulations, which merely follow Shari'ah principle and the Hire Purchase Act 1967 and Contract Act1950 (El-Din and Abdullah, 2007). Despite of having no specific regulatory law on AITAB transactions, some banks manage to offer it successfully following the Hire-Purchase Act 1967 which is not entirely contradicted by Shari'ah principles (Haneef, 1997). But this view has criticized: many Islamic scholars now consider AITAB as conventional product rather than Islamic product, influenced by many non-Shari'ah-compliant factors. El-Din and Abdullah (2007) have further noted that the practice of AITAB in Malaysia does not seem to be 100% Shari'ah-compliant because it involves several issues like Shari'ah framework, ownership, transfer of ownership, maintenance responsibility, insurance responsibility, deposit payment, penalty in case of default, and legal treatment. Abdullah and Dusuki (2004) also documented many issues that question the validity of AITAB transaction for instance, intention and lack of understanding of parties, signing of two separate documents in sequence, and interest-based calculation of profit. …

Search by... Author
Show... All Results Primary Sources Peer-reviewed

Oops!

An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.