Islamic finance: Is car leasing permissible?
Back to 'Expert guides'Separating fact from myth is rarely easy, particularly where religion and money are concerned. However, Leasing.com has been looking at how the Islamic faith regards money and how that affects its views on leasing vehicles.
Islamic finance is governed by Sharia law. While this has negative connotations from news reports, Umer Suleman, Executive Manager of the Islamic Finance Council UK, says: “The word ‘sharia’ is literally translated as ‘path’ and it’s meant as a guide through life just as a stream winds its way through the country.
“So, it’s very much about giving Muslim followers clear instruction on how to live their lives well.”
Interest is forbidden
This is very much the same as every other mainstream religion and Mr Suleman goes on to add: “Under Sharia law, trade is permissible, but interest is forbidden.
“Amongst the reasons is, interest is money gained by the lender for no effort and Islamic law says we should conduct transactions where counterparties engage, through trade and risk sharing. Interest can result in one person benefiting while the another takes all of the burden of risk and that is not fair.”
However, this does not mean contract hire is out of the question. Far from it.
Leasing (‘ijara’) is perfectly permissible -
Umer Suleman
Islamic law allows for asset-based financing and leasing ‘ijara’ is perfectly permissible.
Other structures used include ‘Murabaha’, a cost plus, sale contract with a deferred payment term also used to finance assets.
Sharia law is perfectly compatible with car leasing because there is an underlying asset at the heart of the transaction. It also works because all of the information about who owns the vehicle, how much it will cost to lease and what it will be worth at the end of the lease term are all set out in advance.
As such, leasing is a form of vehicle funding very much in step with Islamic principles because all parties are treated equally and with respect.
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Mr Suleman continues: “Sharia law allows for natural risk, which is where a car may be worth more than you originally thought at the end of the lease term. In this case, the greater value of the car could be carried forward into a subsequent lease with no conflict. Whatever the value of the car at the end of the deal, it is decided by market risk.
“However, unfair downside-risk distribution is not acceptable as it places unequal burden on one party. Also, you can only sell or rent what you own, so a lease company owns the car and rents it to you.”
Simple contracts
Again, Islamic law chimes with that of other religions where you should strive to be open and honest.
Mr Suleman sums it up like so: “Once you have ensured there are no prohibitive elements (interest, undue risk or gambling) make the contract as simple as possible to understand and fair for all parties involved.
“That is the root of Sharia law where finance is concerned.”
