Islamic banking : Misconception around Hire Purchase Shirkatul Melk

There are resemblance and similarity in the terminology and in modus operandi of Hire Purchase Shirkatul Melk (HPSM) with some other conventional terminologies as well as Islamic modes. This has given rise to some confusion to the HPSM itself. Some of the confusions are outlined below: HPSM vis-à-vis Diminishing Partnership, Lease and orHire Purchase: All these terminologies are close to each other. They have some common features. At the same time, there also exist uncommon features. We must bear in mind that some common features of more than one mode are not enough to make them identical. But it is observed that sometimes HPSM is wrongly perceived as any of the above. But the fact is that despite having some common characteristics in HPSM with those of Lease, Hire Purchase or even with Diminishing Musharaka, the HPSM has got some fundamental uncommon or distinct characteristics which recognise HPSM as a separate mode of investment in the context of Islamic Banking in Bangladesh. It is neither hire purchase only, nor is fully Shirkatpartnership business, nor Diminishing Musharaka, nor perfect lease. It has, however, some characteristics of Diminishing Musharaka, lease as well as hire purchase. It may, therefore, be called a hybrid or joint product with some characteristics of more than one commonly known product. This leads to misnomers. For example, many practitioners are not aware that HPSM is not mere hire purchase. It may be treated as hire purchase, only when such hire purchase includes, an extra stipulation of joint ownership in it since the beginning of the contract. It is not lease, as lease or Ijara by itself does not transfer ownership of asset to the hiree. So a lease, to qualify as the HPSM, must have an extra stipulation or provision for culmination of ownership favouring the hirer. It is not Diminishing Musharaka as unlike Diminishing Musharaka, HPSM's condition of Musharaka sharing remains in ownership only, and neither in profit, obviously nor in business loss, because hiring contract of an asset at a fixed rate in hire purchase or HPSM disregards the amount of profit or loss generated from the total business of the client. Thus, we see that HPSM is a unique product of Islamic Banking in Bangladesh which has been evolved from combination of more than one mode with some of their characteristics, but not the full characteristics of any single mode. HPSM is not lease as HPSM culminates ownership to lesseehirer as opposed to the concept of lease. In HPSM, repayment installment clearly differentiates between rental and principal amount unlike lease where total installment amount is treated as rental. It is not hire purchase as ownership by only a single party (Bank) at the beginning of the project disqualifies the condition of Shirkatul Melk (ownership partner since start of the project). It is not Diminishing Musharaka, because HPSM is not at all a partnership business deal. More surprisingly, when lease is named in the Arabic term Ijara, there are some people who take it for HPSM. Ijara by nomenclature does not differ from leasing and it is not HPSM. Similarly when hire purchase is named in the Arabic term as 'Ijara - bil - bai', some take it for HPSM, but it is just as translation word-meaning of hire purchase only. There is no Shirkatul Melk in hire purchase at the time of agreement. Or, at least Ijara - bil - bai does never compel joint purchase or co-ownership on the 'day one' of acquisition of the concerned asset. Recently in the Guidelines for Islamic Banking, Bangladesh Bank has named a mode as Ijara Muntahia Bittamlik which is also an alternative name of hire purchase. Ijara means hire, Muntahia means to culminate, Tamlik refers to melk or ownership. So Ijara Muntahia Bittamlik means an initial hire (no co-ownership) to culminate in ownership of the hirer. So it is as good as hire purchase or Ijara - bil - bai. But on the plea of wording by Bangladesh Bank, without going into detail, some islamic bankers are terming their HPSM as Ijara Muntahia Bittamlik although Shirkat or co-ownership is not available in Ijara Muntahia Bittamlik from the day of acquisition of the asset, which is a must in HPSM. It is worth mentioning that in some standard reference book it is also clearly stated that under Ijara Muntahia Bittamlik, the option to purchase cannot be enforced. On the other hand, in HPSM, gradual purchase is automatically in effect on each payment of price culminating the absolute ownership of the client hirer on full payment of price. Payment of contract price with other dues, if any, automatically enforces transfer of title or ownership. So Ijara Muntahia Bittamlik differs from HPSM. As such, HPSM is HPSM and nothing else. HPSM vs loss sharing by the bank: Under islamic banking there is an investment mode called Musharaka. Under this mode client runs business with his own and bank's capital. Profit is divided according to predetermined ratio proportion. Genuine loss, if any, is borne by the client and the bank according to the ratio of respective equity capital. So under Musharaka, it is true that the bank bears the risk of business loss. The term Musharaka originates from Shirkat or Sharika. For this reason, existence of the word 'Shirkat' in the HPSM (Hire Purchase Shirkatul Melk) often raises confusion among the stakeholders. Shirkat (partnership, participation, sharing or to believe to have sharing etc), among other things, may lead to Musharaka or partnership business wherein the question of sharing profit and loss is vital. Of course, 'Shirkat' means sharing but in all cases it does not necessarily mean sharing of profit and loss. Shirkat in HPSM is used for Shairkatul Melk i.e. sharing in ownership. If X, Y & Z own a house by virtue of inheritance, it will not be a partnership business Musharaka, because there is no business associated with them. They are simply co-owner of the property (Shirkatul Melk. In HPSM, sharing of benefit primarily refers to 'who to use the asset andor for what consideration' etc. Unlike usual Musharaka or partnership business, this is never sharing of profit of the overall business of the client; even not sharing the profit of the specific unit where the HPSM asset is used. Similarly, bearing the loss in HPSM is not like that of usual Musharaka business. Musharaka business contract automatically enforces sharers to share genuine business loss, if any. But in case of HPSM, the question of sharing or bearing loss rather arises only from ownership risk, the inherent concept of 'Risk and Reward of ownership'. Yes, in HPSM this ownership risk compels the Bank to share loss under Force Majeure as discussed below. HPSM and Force Majeure: As already discussed HPSM includes distinct characteristics of Shirkatul Melk i.e. sharing in ownership or co-ownership. Risk is inherent in ownership. There are wise bankers who as prescribed by their lawyers stipulate in the HPSM contract that under any circumstances, for destruction of the HPSM asset; the client shall be solely responsible. Being guided by a misconception they also think to insist the client on his sole bearing of the loss arising from force majeure. This is obviously a wrong concept. Whatever might be written in the agreement, in case of HPSM, the bank does neither share the profit of the business of the client nor does it bear his business loss. But if the HPSM asset is lost destroyed, on the ground of force majeure an act of Allah the Almighty, war, or for any other reason beyond the control of the client, the loss must be borne according to the ratio of co-ownership. This provision cannot be overruled by dint of any contradictory clause in the agreement. We would rather say that a contract containing contradictory condition against fundamental law of risk of ownership may cause the entire contract to become void, jeopardising the interest of the bank. Coverage of loss, full or partial, through insurance is, however, a different issue. Two agreements in a single deed: There prevails an opinion that dual contract or attempt to join more than one thing in a single contract makes the contract void. This inference leads some people to think the HPSM contract as a void one, for covering rent and sale in a single deed of HPSM. In fact, the question of illegality of more than one (thing) in a single contract does not arise in case of HPSM, because, as already stated, this mode of investment is, by definition, a hybrid of different transactions hire, purchase and Shirkatul Melk. Even Malekis who consider dual contract corrupt, permit joining sale and rent in a single contract. It goes without saying that Hanafi School of thought considers such contract valid. Even scholars of Hambli School of thought opine that any contract which does not go against the teachings and morals of Islam are to be considered valid. Every mode of investment under Islamic banking must be distinctly known so that the essential features thereof are fairly followed in general, and Shariah rules are strictly complied with in particular. Clear line of demarcation and standardization of Islamic banking practices, at least in the national level would help us get rid of even misnomers and malpractices. The writer is the First Vice President and Head of Islamic Banking of Bank Asia Ltd. He can be reached through email afzal@bankasia.com.bd Opinions expressed in the article are of the writer's own and not necessarily of the organization he is working for