Understanding Islamic Finance #
Original Question: “If interest in fixed deposits and insurances are strictly prohibited, then how are we as Muslims to even beat inflation rates in today’s economy?”
As for buying a car or motorcycle through interest-based financing:
1. In Singapore, most auto financing loans and the rights of contracting parties are governed by the Hire-Purchase Act 1969. In principle, a hire-purchase is a financing arrangement where the hirer pays a certain instalment monthly to the owner but enjoys the immediate use of a certain good.
2. For example, Mr. Zack wants to buy a vehicle but does not have sufficient money. Thus, he goes to a bank to apply for an auto financing loan, and the bank will finance the vehicle purchase through a hire-purchase agreement.
3. The term “hire purchase” is self-explanatory in the sense that Mr. Zack will enjoy the right to use the car as a “hirer” with instalments paid to the bank on a monthly basis. However, the transfer of the vehicle ownership (from the bank to Mr. Zack) will only occur when the final instalment payment is completed.
4. From the Shariah perspective, the hire-purchase arrangement is similar to the Islamic financing contract named ijarah thumma al-bai’ (AITAB) contract. The main differences between AITAB and conventional hire purchase contracts include the treatment of late payment and early loan settlement. Within Shariah contracts, it is viewed as riba to charge interest for any late payment or early settlement.
5. Despite the similarities, it is advisable to opt for the existing Islamic auto financing available in the market, such as Maybank Singapore Auto Finance-i. This is because it was narrated: “leave what makes you in doubt for what does not make you in doubt…” (Hadith Sahih, Jami’ at-Tirmidhi no. 2518).
As for deposits, there are plenty of Shariah-compliant fixed deposit products in Singapore (i.e., Maybank and CIMB). Alternatively, such surplus savings/disposable income, can be invested in a variety of halal investments in Singapore or overseas.
Maybank has two fixed deposits: Foreign Currency Term Deposit-i and Singapore Dollar Term Deposit-i.
CIMB has Why Wait Fixed Deposit-i Account.
Both banks have other Islamic savings, current and business accounts for you to consider.
As for insurance, you may read our previous answers in the public question of the week (Question #86) as well as our article on ILPs in our website (ifsingapore.org or islamicfinancesg.com)
In short, while we view term insurance as the best alternative to cover your emergency needs, there are also underlying funds for Investment Linked Policies that are Shariah compliant, these are:
- FTSF Shariah Global Equity
- FTSF Global Sukuk
- AIA Global sharia funds → If you are with an AIA representative.
- NTUC Takaful fund
- HSBC Islamic Global Equity Index Fund
To be continued on part 3 next week. Wallahu A’lam.
