Leasing Professionals

Anwar Halari argues that UK auto lenders are missing a valuable business opportunity

halari anwar

It is widely acknowledged that Islam is the fastest growing religion in the world. Islam is the second largest religion in the UK, with around 5% of people living in England alone identifying as Muslim: many are individuals and SMEs running businesses, requiring loans, houses and cars.

Current car financing options available to Muslim customers in the UK conflict with their core religious beliefs, which create an awkward conundrum for the followers of the Islamic faith.

They either have to go against their fundamental belief, which is not dealing in interest (Riba), or wait until they have enough savings to buy a car outright.

However there is a third option: Sharia-compliant leases, also known as Ijara.

The untapped Muslim market would be attracted to Sharia-compliant leases (Ijara) – or at least would welcome the chance to obtain a car or a van using Sharia-compliant agreements, either for themselves or the businesses they run.

Consumer banking has been one step ahead of the game. Some well-known UK banks have set up services for Muslim customers offering Sharia-compliant products. For example, Islamic mortgages involve the bank purchasing the property and selling it back to the borrower after an agreed period of time. The customer pays “rent” plus a little more to increase equity until the total amount is paid off. Hence, with minor modifications to their existing mortgage agreements, banks are reaching out to more customers.

The car industry needs to follow suit

The current lack of Sharia-compliant leases is surprising because the UK is no doubt the western hub of Islamic Finance. The UK has become the first nation outside the Islamic world to issue sovereign Sukuk, the Sharia-compliant bonds.

This was a step not only to reinforce London as the Islamic capital market of the western world but also to cater to the needs of Muslim investors in the UK.

Another example is the removal of double tax on Islamic mortgages.

Understanding Sharia-compliant leases (Ijara)

Leasing (rental that doesn’t include interest) is Sharia compliant whereas loans and hire purchase (which involve interest) are prohibited. Conventional leases impose fixed penalties (to compensate for interest) on late or no payments.

Because of this, conventional leases become unattractive to Muslim customers.

Sharia-compliant financial products are bound to differ from conventional counterparts, mainly due to one colossal difference: the prohibition of interest (Riba). Islamic teaching suggests that prohibition of Riba would promote social justice and welfare of society. The central feature for any Islamic finance product is the nonexistence of interest and the reliance on equitable profit and loss risk sharing.

The difference between conventional leasing and Ijara is that the latter does not entail any condition that makes the contract void under Sharia rules. The basic condition is the prohibition of interest.

Furthermore, Islamic law dictates that if the asset is not in use by the customer due to it being stolen, lost or destroyed, the rental becomes void. Another difference is that, under Islamic law, no interest can be charged on late payments (most banks enforce penalty charges on late payments on Islamic financial products however these are not kept by banks. Rather these payments are donated to charities, which are permissible).

Due to these factors, the rental on Islamic leases are usually a little higher than conventional counterparts as there is a built in “Islamic compliant insurance” cost to protect the lender (also known as Takaful).

How could it work?

The leases offered by the automotive industry could easily be adapted to become Sharia compliant.

All that may be required is to refine existing lease agreements to bring them into compliance with Islam and promote them as “Islamic”. Detailed information on the principle conditions which make a conventional lease acceptable under Sharia law is beyond the scope of this article.

Readers who are interested in further information regarding the suitability of Islamic compliant leases are encouraged to visit the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) website.

Car dealerships offer personal and business contract hire (leases) which, with minor modifications to the contract and terminology, would be completely acceptable from a Sharia point of view. The same concept applies for the fleet industry’s main product: contract hire (a lease) would be equally compliant with a bit of tweaking.

However, none of these businesses market to the Muslim community who would be attracted to Sharia-compliant arrangements.

Not fundamentally different

Although Islamic financial products differ in terms of detail – the contract, terminology, law, the risk bearer and ownership of the equity – in practice they are not fundamentally different from their conventional counterparts. In my experience, it is more about convincing the customers that they are buying into something exclusively Islamic, something that reinforces their ‘Muslim identity’.

Given the choice, majority of Muslim customers would likely choose Islamic products over the conventional ones.

The perceived benefits of offering Islamic financial products exceed the conventional norms. For instance, society benefits from Islamic financial products as any penalties are passed on to charities. If the car industry were to implement the option, they would, I am sure, be pleasantly surprised to find that it would appeal not just to Muslim customers, but perhaps more ethically-minded individuals.

Dr Anwar Halari CPA, is Lecturer in Accounting and Finance and Programme Manager at University of Buckingham.