The major differences between Car Ijarah & Car Leasing are as follows:

Rights & liabilities of Owner v/s User

An Islamic Ijarah is an asset-based contract, i.e. the Lessor should have ownership of the asset during the period of the contract. Under Islamic Shariah, all ownership related rights and liabilities should lie with the owner while all usage-related rights and liabilities should lie with the user.

A conventional lease contract does not distinguish between nature of these liabilities and places all liabilities on the user of the asset, contradictory to Islamic Shariah.

Continuation of lease rentals in case of total loss or theft of vehicle

If the leased vehicle is stolen or completely destroyed, the conventional leasing company continues charging the lease rent till the settlement of the Insurance claim.

Under the Islamic system, rent is consideration for usage of the leased asset, and if the asset has been stolen or destroyed, the concept of rental becomes void.

Takaful instead of Insurance

Legally (in accordance to Pakistan’s Law and Regulations), it is required for all leasing entities to insure the leased assets. As such, Islamic Banks insure their assets through Takaful only, which is Islamic product for insurance. Takaful will be explained in detail in future postings.

Permissibility for Penalty of Late Payment of Rent under Islamic Shariah

In most contemporary financial leases, an extra monetary amount is charged, in their income, if the rent is not paid on time. This extra amount is the considered as Riba (usury) and is Haram.

Under Ijarah, the Lessee may be asked to undertake, that if he fails to pay rent on its due date, he will pay certain amount to a charity, which will be administered through the Islamic Bank. For this purpose the bank maintains a charity fund where such amounts may be credited and disbursed for charitable purpose.

If you are wondering how does it effect the installments?

The answer is unfortunately, not much.

For a car priced at an even Million Rupees with 50% downpayment and a 3 year tenor the rental/instalment payments are incredibly similar:

Bank Alfalah @ 19% with 3.15% insurance: Rs.20953/month

BankIslami with ‘profit’ & 3.15%insurance: Rs.20585/month