Islamic Finance FAQs Explained #

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.

For example, Mr. Zack wants to buy a vehicle, but he 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. 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.

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.

Despite the similarities, it is advisable to opt for the existing Islamic auto financing available in the market, including those formulated based on the AITAB contract. It is narrated that Prophet Muhammad (peace be upon him) said:“Leave what makes you in doubt for what does not make you in doubt…” (Hadith Sahih, Jami’ at-Tirmidhi no. 2518)