 In this module, we would look at another application of Ijara. Actually, this is in a way a continuation of our previous module, which had some details on Ijara Muntahiya Bitam. We are using a specific example in this module, which is car financing. So there is a customer who is looking for a car. We say that the customer would like to buy a car. But in lease financing, a car doesn't buy a customer immediately. Whenever someone buys a car through a bank on leasing, as you know, technically the customer is not the owner of the car until the lease period has ended. So customer is looking for a car. It goes to a bank and bank decides to offer the customer an Ijara based car financing product. In this case, the bank actually goes to a car dealer. If the customer has identified the car, it says, I want the latest model of Honda Civic. In this color or with these specifications, the bank after accepting the application of the customer would approach the Honda car dealer and would buy the car. Once the car has been bought by the bank from the van door, this would then be leased to the customer for a certain time period. Pakistan may be leased for 3 years, 5 years and in some cases it might go beyond 5 years as well, maybe 7 years. So once that 7 year period finishes, at the end of that period, if the customer has fulfilled all the obligations, first went to the lease agreement or Ijara agreement, the bank would transfer the ownership of the car to the customer at that point in time. So important thing is keep on making monthly payments until the end of the lease period or Ijara period. So in case of car Ijara, monthly payments are important and they are determined in such a way that the bank charges for the price of the car, rental and any depreciation in the value of the car. This depreciation is important while determining the monthly rental in case there is a default and the bank has to sell the car to someone else. The customer is required to hold on an insurance policy over the car. This is strictly speaking responsibility of the bank because the bank is the legal owner of the car. However, for the purpose of ease, the customer is required to buy the insurance and in this monthly payment, this is reflected by way of an adjustment. There is also a service level agreement between the bank and the customer, pursuant to which the customer maintains the car on behalf of the bank and of course there is a provision for this in the monthly installment formula. So important thing is some people who are critics of Islamic banking and finance, they say if the bank is actually the owner of the car then why it does not buy the insurance in its own name. There are different reasons. The bank can buy the insurance but normally commercial insurance is more expensive than what an individual can buy especially in the well-developed country. For example, I live in UK. If I buy a car insurance, as an individual it would be a lot cheaper than if a company attempts to buy insurance on its vehicle. There are a number of documents and contracts involved in Ijara-Muntahiyya-Bitamli because remember it is an Islamic mode of financing. It is no more just an Islamic contract. In case of an Islamic contract, there would be just Ijara contract. In case of Ijara-Muntahiyya-Bitamli as an Islamic mode of financing, there would be an application form. Of course as part of this whole arrangement there would be a sale and purchase agreement between the bank and the vendor. Of course central is Ijara agreement between the bank and the customer and a purchase undertaking signed by the customer. A sale undertaking signed by the bank, insurance slash the car full cover and of course a service level agreement. When you go to an Islamic bank and you attempt to get a car on the basis of Ijara, they get you fine on so many documents and because you are desperate to get the car, you do not want to see what kind of document you are signing on but it is very likely that you are signing on these documents. Now determination of the monthly payment. As I said previously the monthly payment takes into account a number of factors. The price of the car, the rental, service level agreement, insurance etc. So the monthly payment by the customer is determined by the amount of the profit bank wishes to earn from this arrangement and it reflect on the factors which I have mentioned i.e. price, rental etc. Now the price, rental, service level agreement, insurance, the car full they are not necessarily disclosed by the bank to the customer while determining the monthly installment amount. Just to give you an idea, if the car price is 3 million. The rental amount is 2776,243. So that would make this amount 5.776 million rupees minus this provision for the car full. Remember this car full cover is actually purchased by the customer. So if the price of that is 200,000 that is reduced. Minus the maintenance of the car which becomes the responsibility of the customer for that one there could be a provision for 100,000 rupees. So the amount for a period of 5 years would be 5.476 million which would generate a monthly installment of 96,207. So this is how the monthly installment is generated. Of course in this case is 96,270 that looks like quite a big figure but remember when you go to a bank they ask you for a deposit. So if for a 30 lakh car if you come up with 10 lakh rupees as deposit then of course your monthly installment would be a lot less than this example of 96,207. And if that is the case the bank actually gets a rate of return of 12.79% on an annual basis. This is a very simple or simplified example of determination of the monthly installment. It is not as simple in practice. In fact Ijara has got the flexibility of changing the rental over the period of the lease contract. It is not like a fixed rate product like Murabaha, Car Murabaha or Murabaha based car financing. Rather in case of Ijara there is a provision of changing the rental and hence monthly installment over a period of a quarter or after one quarter. On a quarterly basis there is a possibility of revising the rental. However in case of Pakistan the most popular car Ijara product is the one which offers the fixed monthly installment over the duration of the financing period. In some other countries this is not a preferred choice. For example if it is expected that in future the interest rate in the market would be going down then a lot of shrewd clever customers would like to go for a variable rate car Ijara because with the decrease in the interest rate in the market it is expected that the rental rate charged by Islamic banks in that market would go down as well. If on the contrary the expectation about the interest rate in future is that it is going to increase then a lot of people would rather prefer to go for a fixed amount fixed return car Ijara. So depending on the market conditions depending on the personal circumstances of the customer it can be a variable rate Ijara it can be a fixed rate Ijara. In fact a friend of mine a few weeks back went to one Islamic bank in Pakistan wishing to get financing for a car and that person was given an option either to go for a fixed return or fixed amount Ijara or a variable rate Ijara. In that case the person went for the fixed return Ijara because the person happened to be risk avert.