Under this mode Bank may supply implements/ equipment/goods on rental basis. The ownership of the implements/equipment/goods will be with the Bank and the client jointly and the portion of the client will remain to the Bank as mortgage until the closure of the investment account, but the client will be authorized to possess the equipment for certain period. The client, after completion of the installments, will be the owner of the implements/ equipment/goods.
Hire Purchase under Shirkatul Melk is a Special type of contract which has been developed through practice. Actually, it is a synthesis of three contracts:
These may be defined as follows:
Shirkat means partnership. Shirkatul Melk means share in ownership. When two or more persons supply equity, purchase an asset, own the same jointly, and share the benefit as per agreement and bear the loss in proportion to their respective equity, the contract is called Shirkatul Melk contract.
The term Ijarah has been derived from the Arabic works (Air) and (Ujrat) which means consideration, return, wages or rent. This is really the exchange value or consideration, return, wages, rent of service of an asset. Ijarah has been defined as a contract between two parties, the Hire and Hirer where the Hirer enjoys or reaps a specific service or benefit against a specified consideration or rent from the asset owned by the Hire. It is a hire agreement under which a certain asset is hired out by the Hire to a Hirer against fixed rent or rentals for a specified period.
Related Terminologies or Elements of Ijara
The wording : This includes offer and acceptance.
Contracting parties : This includes a Hire, the owner of the property, and a Hirer, the party that benefits from the use of the property.
Subject matter of the contract : This includes the rent and the benefit.
The Hire (Muajjir)- The individual or organization hires/rents out the property of service is called the Hire (muajjir).
The Hirer (Mustajir)- The individual or organization hires/takes the hire of the property or service against the consideration rent / wages / remuneration is called the Hirer (mustajir).
The benefit / asset (Maajur) - The benefit which is hired / rented out is called the benefit (maajur).
The Rent (Aj’r or Ujrat) - The consideration either in monetary terms or in kinds fixing quantity of goods / money to be paid against the benefit of the asset or service of the asset is called the rent or ujrat or aj’r.
This is a sale contract between a buyer and a seller under which the ownership of certain goods or asset is transferred by seller to the buyer against agreed upon price paid / to be paid by the buyer.
Thus, in Hire Purchase under Shirkatul Melk mode both the Bank and the Client supply equity in equal or unequal proportion for purchase of an asset like land, building, machinery, transports etc. Purchase the asset with that equity money, own the same jointly, share the benefit as per agreement and bear the loss in proportion to their respective equity. The share, part or portion of the asset owned by the Bank is hired out to the Client partner for a fixed rent per unit of time for a fixed period. Lastly the Bank sells and transfers the ownership of it’s share / part / portion to the Client against payment of price fixed for that part either gradually part by part or in lump sum within the hire period or after the expiry of the hire agreement.
Stages of Hire Purchase Under Shirkatul Melk
Thus Hire Purchase under Shirkatul Melk Agreement has got three stages:
Types of sale countact in hire purchase under shirkatul melk
As per procedure of transfer of ownership and legal title of the part owned by the Bank is transferred to the other partner, the sale contract may be of various forms, some of the major forms are mentioned below:
Hire Purchase Under Shirkatul Melk through gradually transfer( sale) of legal title/ownership of the hired asset/property.
Under this type certain ‘asset / property’ is purchased with equal or unequal equity participation and owned jointly by the two parties – the Bank and the Client. The Bank’s share / portion of the asset is hired out to the Client partner against fixed rent/rentals per unit of time for a fixed period with a promise that the Hire Bank will sell or transfer the ownership of its portion to the Client Hirer gradually part by part in proportion to the consideration paid. So that the Hirer may acquire the full title of the Hire’s portion of the asset on payment of the total price at the end of the hire period.
Under this system the total price of the hired property / asset should be determined and divided over the period of hire contract (per unit of time) so that the Hirer in addition to the payment of fixed rent / rentals may pay gradually the proportionate consideration of the total price of the hired property or asset to acquire proportionate ownership of the same part by part and become full owner of the hired asset at the end of the hire period.
It should be noted that there should be a separate sale contract for payment / acquisition of each share (per unit of time as per hire deal) / part of asset sold to the Hirer and the amount of rent should be decreased proportionately with decrease of Hire’s ownership and increase of Hirer’s ownership on the property/asset.
If, for any reason, the hire contract is revoked prior to the payment / transfer of full title to the Hirer, the Hirer will share that part of the title to the hired property which has been transferred to him against payment made by him and the remaining part will be shared by the Hire Bank. If any loss arises to the Bank after the sale of Bank’s share to the property / asset that shall be recouped from the Client / Client’s security.
In our Bank, we shall be following this type of Sale Contract in Hire Purchase under Shirkatul Melk.
Hire Purchase Under Shirkatul Melk Through Transfer of legal title by gifts
(for no consideration.
Under this type the portion of asset owned by the Hire partner is hired out to the Hirer partner with a prior promise that the Hire, upon settlement of all the rent / rentals / instalments by the Hirer, will transfer his ownership / title to the property to the Hirer through gift without any further consideration.
After the expiry of the hire period and payment of all the rent / rentals / instalments, the title of property may be transferred by a separate gift deed executed by the Hire or, the title may be transferred by issuing a gift deed by the Hire making it conditional on the settlement of all rental instalments. In the later case, the legal title is automatically transferred as soon as the hire period expires and the fixed rent instalments for rent are settled. The working of the agreement would be: If the agreed upon rental instalments are settled within the agreed upon period, ownership of the asset will be transferred to the Hirer as gift.
Under this mode the rentals fixed and agreed upon will be sufficient not only to amortize the capital outlay but also to yield an adequate amount of profit for the Hire. However, the rent / rentals agreed upon shall not be considered as price or part of price of the asset and the full ownership of the asset shall lie with the Hire till final settlement of the rent / rental installments.
Hire Purchase Under Shirkatul Melk Through transfer of legal title (sale) at the end of hire period for a token consideration.
Under this contract the possession of the asset owned by the Hire is hired out to the hire for a fixed period against fixed rent / rentals and at the end of the hire period the title to the asset is transferred to the Hirer by a separate sale contract on payment of agreed upon token consideration. The consideration may be equal to the value of the asset or not and it would be sufficient if a mutual agreement is reached on the consideration.
Hire Purchase Under Shirkatul Melk through transfer of legal title (sale) at the end of Hire period for payment of a specified amount to the hire by the hirer
This agreement includes an ijarah / hire contract and a sale contract. Under this agreement a specific asset is hired out for a fixed period against specific rent mentioning a specific consideration to be paid by the Hirer (buyer) after the expiry of the hire period and upon payment of the agreed upon consideration. The hired asset becomes sold and its title transferred to the Hirer (the buyer). Under the agreement, the hire contract becomes effective firstly and the sale contract will be effective only after the expiry of the hire contract.
Hire Purchase Under Shirkatul Melk through transfer of legal title (sale) priod to the end of the hire term for a price that is equivalent to the remaining ijarah /rental instruction.
This is an ijarah / hire agreement which includes a promise made by the Hire that he will transfer the title of the hired property to the Hirer at any time during the hire period on payment of the remaining ijarah / rental instalments, if the Hirer wishes so. Under this system first, the ijarah/hire contract becomes effective and remains so until the legal title is transferred to the Hirer. As soon as the title to the asset is transferred to the Hirer the ijarah/hire contract lapses for the remaining period, because both the benefit and the hired property become the Hirer’s property. This type of sale should be executed by a separate sale contract at the time of sale.
In case of Hire Purchase under Shirkatul Melk transaction the asset / property involved is jointly purchased by the Hire (Bank) and the Hirer (Client) with specified equity participation under a Shirkatul Melk Contract in which the amount of equity and share in ownership of the asset of each partner (Hire Bank & Hirer Client) are clearly mentioned. Under this agreement, the Hire and the Hirer become co-owner of the asset under transaction in proportion to their respective equity participation.
In Hire Purchase under Shirkatul Melk Agreement, the exact ownership of both the Hire (Bank) and Hirer (Client) must be recognised. However, if the partners agree and wish that the asset purchased may be registered in the name of any one of them or in the name of any third party, clearly mentioning the same in the Hire Purchase Shirkatul Melk Agreement. However, in IBBL, no third party registration shall be allowed.
The share / part of the purchased asset owned by the Hire (Bank) is put at the disposal / possession of the Hirer (Client) keeping the ownership with him (Bank) for a fixed period under a hire agreement in which the amount of rent per unit of time and the benefit for which rent to be paid along with all other agreed upon stipulations are also to be clearly stated. Under this agreement, the Hirer (Client) becomes the owner of the benefit of the asset but not of the asset itself, in accordance with the specific provisions of the contract which entitles the Hire (Bank) is entitled for the rentals.
As the ownership of hired portion of the asset lies with the Hire (Bank) and rent is paid by the Hirer (Client) against the specific benefit, the rent is not considered as price or part of price of the asset.
In the Hire Purchase under Shirkatul Melk Agreement the Hire (Bank) does not sell or the Hirer (Client) does not purchase the asset but the Hire (Bank) promise to sell the asset to the Hirer (Client) part by part only, if the Hirer (Client) pays the cost price / equity / agreed price as fixed for the asset as per stipulations within agreed upon period on which the Hirer also gives undertakings.
The promise to transfer legal title by the Hire and undertakings given by the Hirer to purchase ownership of the hired asset upon payment part by part as per stipulations are effected only when it is actually done by a separate sale contract.
As soon as any part of Hire’s (Bank’s) ownership of the asset is transferred to the Hirer (Client) that becomes the property of the Hirer and hire contract for that share / part and entitlement for rent thereof lapses.
In Hire Purchase under Shirkatul Melk Agreement, the Shirkatul Melk contract is effected from the day the equity of both parties deposited and the asset is purchased and continues upto the day on which the full title of Hire (Bank) is transferred to the Hirer (Client).
The hire contract becomes effective from the day on which the Hire transfers the possession of the hired asset in good order and usable condition to the Hirer, so that the Hirer may make use of the same as per provisions of the agreement.
Effectiveness of the sale contract depends on the actual sale and transfer of ownership of the asset by the Hire to the Hirer. It is sold and transferred part by part, it will become effective part by part and with the sale and transfer of ownership of every share / part. The hire contract for that share / part will lapse and the rent will be reduced proportionately. At the end of the hire period when the full title of the asset will be sold out and transferred to the Hirer (Client), the Hirer will become the owner of both the benefit and the asset consequently the hire contract will fully end.
Hire Purchase under Shirkatul Melk is a binding contract for the parties to it - the Bank and the Client who are committed to fulfill / meet their undertakings / obligations in accordance with the relevant agreement.
Under this agreement the Bank acts as a partner, as a Hire and at last as a seller ;on the other hand the Client acts as a partner, as a Hirer and lastly as a purchaser.
Ownership risk is borne by both the Hire and Hirer in proportion to their retained ownership / equity.
Under this agreement the role of Hirer is one that of a trustee, the hired asset being a trust property in his hands; he will manage, maintain the asset in favour of the interest of the Hire at his own cost as the exact subject of hirer except in cases of any accident due to any event entirely beyond control of the hirer and natural calamity/disaster (acts of Allah) to be determined by the Bank after proper investigation within the knowledge of the hirer.
The Hirer is responsible for keeping the hired asset(s) in good condition throughout the whole period of hire and if the asset is damaged or destroyed due to mismanagement, corruption, negligence, transgressions, default, etc. of the Hirer, he shall be responsible to compensate the Hire (Bank) for that. Of course, such mismanagement, corruption, negligence, transgressions, default, etc. of the hirer shall be determined by the Hire (Bank) after proper investigation within the knowledge of the hirer.
The Hirer cannot, without obtaining prior written permission of the Hire (Bank) make any changes in the exact item of the hire, and / or remove it from its place of installation and transfer it to another location.
In a Hire Purchase under Shirkatul Melk agreement any stipulation may be made, provided it is not against the nature and requirements of the contract itself, nor does it violate the /this may be the last one devine laws of Islam and is also acceptable to both the parties.
Hire Purchase under Shirkatul Melk facilities may be for medium-term or long-term period hich may be utilised for the expansion of production and services, as well as housing activities. The duration of Hire Purchase under Shirkatul Melk contract shall not exceed the useful life of the subject / asset of the transaction. The Bank should not normally enter a Hire Purchase under Shirkatul Melk transaction for items with useful life of less than two years.
Hire Purchase under Shirkatul Melk transaction facilitates the Client (Hirer) to get benefit from the hired asset in exchange of rental and also to become full owner of the asset by purchasing it part by part.
If, for any reason, the hire contract is revoked prior to the transfer of full title of the asset to the Hirer, then the title of the asset will be shared by both Hire and Hirer – the Hirer will share that part of title which has been transferred to him against payment and the Hire will share the remaining part.
The Hirer to secure the Bank (the Hire) will pledge / hypothecate / mortgage his portion / part / share in the asset (acquired / to be acquired) and or any other asset / property of his own / third party guarantor to the Bank to fulfill his all liabilities / commitments including the accrued rental, if any.