Islamic Finance - Finding the right Islamic contract
There might have been other traditional contracts available to make the buying of a home easier, each with their own distinguishing qualities. Three actions are at the heart of the choice and use of a traditional contract to support or enable a contemporary Islamic financial product or service: (I) the selection of a certain contract or collection of contracts to serve as the primary underlying contract or template for the proposed product (II) the search for a potential contract, or combination of contracts, that could fulfill the final objective of a specific financial product. (III) the conversion of this customary contract into a commercial product by either enhancing or improving certain of its aspects in accordance with the needs of the market. The simplest way to show the connection between these three tasks is through an example. A hire purchase agreement is typically used to ease vehicle finance. In a car hire purchase agreement, the lessee is given the option to purchase the vehicle by making all of the payments outlined in the schedules. After paying all required payments before the conclusion of the hire buy period, the customer is deemed to have purchased the car. Because deferred payment conditions have been agreed upon, interest is included in the lease payments. Islamic Financial Institutions (IFIs) must provide a comparable product with comparable features. The typical characteristics of this product are I) the customer pays a rental fee to lease a car; (ii) the customer is given the option—not a requirement—to buy the car; if this is exercised, it binds the financier; and (iii) upon full payment of the scheduled rentals, the title of the car is transferred to the customer without the need for a sale agreement. This product's distinguishing feature is that it is a lease agreement with the lessee's right to purchase the leased asset and the financier's responsibility to sell the vehicle if that option is exercised by the lessee. In essence, this product's hire buy feature serves this goal.
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