Ijaah Munthaia Bittamaleek
What Is Islamic Car And Asset Finance
This is an important principle in Islamic banking. The principle translates ( lease to own). This is a financing method used by institutions that follow the principles of Islamic finance. The idea behind Ijarah Muntahia Bittamleek while respecting the Quran rules and assuring the right due diligence of the bank.
In principle, this is a contract where the Islamic bank finances the opening of a business or the purchase of various houses or assets. The client agrees to share profits from the use of the business and/ or the equipment. While the client pays the bank a share of the profits, the bank has ownership of the business, or the equipment purchased. When the client gives to the bank the last payment of profit sharing, then the bank transfers ownership of the business /equipment to the client.
In this transaction, two details are important. The first is that the percentage of profit sharing that the client gives to the bank can be fixed or can be varied according to the economic situation of the country. The second principle is that at the last payment, the client must also pay back the initial cost of the purchase. So, the bank gives the client ownership of the business, and it gives to the bank the acquisition cost of the business.
It might happen that the bank might not agree to fully finance the client’s project, and hence it must deposit some money ahead. This is done in a remarkably interesting way yet straightforward way.
When the property, business, or equipment has been purchased, the bank signs another agreement with the client. The client is appointed as the sole entity responsible for the maintenance of the home and all its legal requirements, including property insurance. The bank pays all costs associated with the signing of all these secondary contracts. The bank then charges a fixed fee to the client.
During the period that the client pays rent or shares its business profits with the bank, the client may ask to close the deal by paying the principal ahead of time, which assures the client to close the deal and get ownership of the property or the equipment. In case the client defaults on its payments, the bank can sell the property and recover its initial investment, as the bank is the sole owner of the property until the customer pays back the principal.
The idea behind Ijarah Muntahia Bittamleek is to respect the Quran laws while allowing people to engage in financial transactions.