8 February 2017
By Dr Hanudin Amin
AITAB is the abbreviation for al-ijarah thumma al-bay, a financial lease, which ends with a purchase.
Typically, it is a hybrid combination of lease and sale contract in one trading document.
In this regard, however the bank serves as a lessor or the owner of the car who lends it out to the customer who acts as a lessee for predetermined rentals and for an agreed period of time.
Bank Islam Malaysia Berhad (BIMB) was the first Islamic bank in Malaysia originating AITAB facility beginning 1995 to meet customers’ desire for buying motor vehicles.
Later, it was extended to Islamic Banking Scheme (IBS) in which three banks involved, viz., Maybank, Bank Bumiputera Malaysia Berhad (now known as CIMB Bank) and Bank Rakyat.
In this week, I intend to write on the topic of AITAB facility, in which three (3) issues are expounded.
Issue #1 – What are some virtues pertinent to AITAB facility in Islam?
Issue #2 – Does AITAB facility similar to its conventional peer?
Issue # 3 – What are challenges facing AITAB facility in Labuan?
In fact, there is a strong support from the primary sources mentioning that ijarah is tolerable.
According to the Quranic verses (28: 26-27), one of the two daughters of the Prophet Shuaib advises him to hire Prophet Musa on wages.
In another verse, Prophet Musa told Khidr that he could have demanded recompense for setting up the wall straight (18: 77).
These verses imply that ijarah was found during the two Prophets’ era.
On the Hadith posture, the Prophet Muhammad (S.A.W) commanded the believer to pay the wages of his employee before his sweat dries up, with no delay, implying the permission for the ijarah contract.
Explicitly, the Shariah Advisory Council (SAC) has resolved the issue pertinent to AITAB concept in car financing in its first meeting dated back on 8th July 1997 and 26th June 2003.
AITAB is valid if the following conditions meet:
(1) The modus operandi of AITAB shall consist of two independent contracts, namely ijarah contract and bay contract,
(2) The sale price upon expiry of the lease period may be equivalent to the last rental amount of ijarah, and
(3) An agency letter to appoint the customer as an agent for Islamic bank shall be introduced in the modus operandi of AITAB, inter alia.
As for the second issue, I attempt to explicate three (3) discrepancies, making AITAB is quite distinctive.
Firstly, the terms used by AITAB are financing, profit rate, mark-up, late payment charges while its peer uses loan, interest rate, hiring charges, late payment interest.
Secondly, AITAB takes two contracts in one dealing while its peer only has one.
Thirdly, AITAB facility is funded by halal source of funds while a conventional hire purchase has no such a requirement. Conversely, both have similarities but are not limited to:
(1) Hire Purchase Act 1967 – Both AITAB and conventional lease are subject to the same regulatory framework – Hire Purchase Act 1967. This likeness has made AITAB violates the Shariah compliancy. An Islamic bank becomes a “beneficial owner” of the car while a customer becomes a “legal owner” that is contradictory to the Shariah. It should be the other way around.
(2) Responsibility – Both AITAB and conventional hire purchase suggests customer bears all costs of maintenance associated with the car bought. A normal three month services for the car is borne by the customer and not the bank.
(3) Pricing – Monthly instalment serviced by a customer is similar for both AITAB and its peer. For instance, a customer who takes up AITAB facility or its conventional peer tends to repay the same amount monthly, say RM765 (Assume: the financing amount is RM36,000 for 5 years at 5.5% p.a.).
Moreover, there exists four (4) challenges for AITAB but are not confined to:
(1) Regulation – The government imposes strict rulings on the outflow of Labuan-registered vehicles to the mainland of Sabah as well as new rules for duty-free shops. The new ruling took effect on the November 1, 2016. The bank guarantee of 50% of the CIF valuation (cost, insurance and freight) for vehicles 2.501 CC and above can affect future sales for the vehicles. Although trivial, but its effect to the AITAB’s demand in the long run is doubtful.
(2) Market priority – The demand for AITAB facility is also very much depending on the customers and dealers’ awareness on AITAB. In real case, however an emphasis is given more to the car instead of AITAB. Customers are not fully aware about the facility until they are called for signing the AITAB’s agreement at the bank’s counter.
(3) AITAB knowledge – Some vehicle dealers are found in Labuan, viz., Ghee Hwa Motorpol, UMW Toyota Motor, Mitsubishi Motors, Edaran Tan Chong Motor and Peniaga-Peniaga Borneo Labuan, among others. It is not denied that the talented salespeople of the dealers have contributed significantly to an improved sales of cars like in the case of Toyota. The artistic salespeople, however are confined themselves to their routine tasks in maximising the quota of car sales at the expense of knowledge seeking for AITAB facility. With this setback, AITAB is of potential to be unheeded by prospective car buyers, leaving it with uncertainties in demand.
(4) Competition – In Labuan, three core banks are found, namely Maybank, Public Bank and CIMB Bank. The banks are known for their great reputation in offering great banking solutions to customers. Other banks offering AITAB facility, however is forcing to be creative to tap into the customers’ demand for better profits in return. Personalising customers’ service can be a recommendation that can be taken by small banks to attract new customers for AITAB facility.
In a nutshell, AITAB facility has a bright future in Labuan given the fact that the island is a dreamland for the imported cars in East Malaysia.
Three parties are involved for the successful AITAB – dealers, banks and customers. As such, the dealers should sell the best car offerings to the customers while the banks should offer best AITAB packages for their customers.
In turn, the customers should build an altruistic behaviour for better support of the facility.
Yet, the next extrapolation of Labuan’s car market is about future traffic congestion and market saturation on the island that can have a direct effect on AITAB demand unless otherwise the atmosphere is opened where a new breed can be bent, at least.
*The author is an Associate Professor/Dean at the Labuan Faculty of International Finance, Universiti Malaysia Sabah, Labuan International Campus. He has a PhD from the International Islamic University Malaysia (IIUM) in Islamic Banking and Finance (PG310163).