assignment on car financing bank al Habib

1. Bank-Al-Habib
Car Financing under diminishing Musharka
Submitted to:
Prof. Muhammad Akram
Submitted by:
Fatima Rahim
Roll no.
BC14-058
Section:
A(morning)
Hailey college of commerce, University of the Punjab, Lahore.
Diminishing Musharka-Introduction
Musharka:
“Shirkah” means “Sharing” in the terminology of Islamic Fiqh.
• Musharakah is basically a kind of partnership in which the partners join together with
their contributions for the common objective of undertaking business and trade in
accordance with the principles of Shari’ah
Types of Shirkat
• It has been divided into two kinds:
• SHIRKAT-UL-MILK
• It means joint ownership of two or more persons in a particular property.
• SHIRKAT-UL-’AQD
• Which means “a partnership effected by a mutual contract”.

2. Diminishing Musharka
 Based on Shirkat-ul-Milk
 Means joint ownership in a property
 Three components
 Joint ownership of the Bank and customer
 Customer as a lessee uses the share of the bank
 Redemption of the share of the Bank by the customer
Modeof Fixed Assets Financing
• Diminishing Musharakah is commonly used for the purpose of financing of fixed assets
by various Islamic banks.
• House financing
• Car Financing
• Plant and machinery financing
• Factory/Building financing
• Agriculture land financing
• All other fixed Assets
Basic Transaction Structure
 The customer approaches the Bank with the request for Project/Machinery/House
financing
 The Bank enters into a Musharakah (Joint Ownership) agreement with the customer and
both of them pay their respective shares to the seller of the asset.
 Customer pays rent for the use of banks share in the property
 The customer approaches the Bank with the request for Project/Machinery financing
 The Bank enters into a Musharakah (Joint Ownership) agreement with the customer and
both of them pay their respective shares to the seller of the asset
 Customer pays rent for the use of banks share in the property
 Ownership of the asset is gradually transferred to the customer upon payment of asset
price.
 The value of Bank’s share in Musharakah property is divided into units, which it sells to
the customer. Units will be worked out by dividing Bank’s financed amount by number
of months for which finance to be allowed.

3.  With each purchase of unit by the customer, the Bank’s share in the Musharakah
property starts diminishing, whereas customer’s share starts increasing,
correspondingly.
Finally, the customer becomes the sole owner of the property after having purchased all
units from the Bank, along with the rentals thereon.
Shariah principles
 To create joint ownership in property is called Shirkat-ul-Milk and is expressly
allowed by all schools of Islamic Jurisprudence.
 All Muslim Jurists agree on the permissibility of the Financier leasing his share in
property to client and charging him rent i.e. the permissibility of leasing one’s
share to his partner.
 There is difference of opinion among leasing one’s share to a third part, but there is no
difference on permissibility on leasing to a partner
 Promise of client to purchase units of share of financier is also allowed.
 The Transactions cannot be combined in a single arrangements and they have to be
executed independently. This is because it is a well settled rule of Islamic Jurisprudence
that one transaction cannot be made a condition for another.
 Instead of making the transactions a pre-condition for one another there can be one-sided
promises from one party to another.
AssetFinancingbasedonDiminishingMusharka
 The arrangement is composed of the following transactions
1. To create joint ownership in property
2. Giving share of financier to client on rent
3. Promise of client to purchase units of share of financier
4. Purchase of financier’s units
5. Adjustment of rental according of share of financier in property

4. Conditions
• The agreements of joint purchase, Lease and selling of units should not be tied-up
together
• At the time of purchase, sale should be effected through offer and acceptance
• Preferable to purchase each unit on market value, but permissible to purchase at agreed
price
Legaldocumentation
• 1.Diminishing Musharakah Agreement – Islamic Asset Finance Agreement
Purpose:
This is the main agreement that establishes Bank’s share in the Musharakah Property.
Components:
- Both parties share
- Musharakah Property detail
2. Monthly Payment Agreement (Rent Agreement)
Purpose: This agreement is signed after Main Musharakah Agreement. Bank gives out
its share to the customer via this agreement.
Components:
- Rent Schedule
- Formula of calculation
3.Undertaking to PurchaseMusharakah Units
Purpose:
This is an undertaking by the customer to purchase Bank’s Musharakah units.
Components:
- Normal Sale Price
- Additional Unit Purchase Price
4.Undertaking to Sell Musharakah Units

5. Purpose:
This is an undertaking by the Bank to sell Bank’s Musharakah units from time to time.
Components:
- Normal Sale Price
- Additional Unit Purchase Price
Required Documents
Salariedindividual:
 Two recent photographs.
 Copy of Computerized National Identity Card.
 Proof of employment, salary and work experience of minimum 1 year (Salary
Slip/Employment Certificate)
 Bank statement of last 6 months
Self-employedIndividual
 Two recent photographs
 Copy of Computerized National Identity Card.
 Acceptable proof of business
 Bank Statement of last 6 months

6. Apni-CarEligibility
 You can get a car loan from Bank AL Habib to purchase the car of your choice if you are:
 Pakistani National.
 Account holder of any Bank
 Salaried person, Businessman or Self-employed.
Type of cars to applyfor:
• Following Categories are being offered in Car Financing:
 Brand New Cars for personal use
 Light-Commercial Vehicles for personal use
 Imported Cars (Unregistered, not older than 05 years) for personal use

7. Features of diminishingMusharka for Car Financing
The Client in the approved area of the bank makes
the choice of the car.
2. Bank & client enter into Musharakah agreement.
 In this agreement it is decided to purchase the car jointly in the
ratio of investment by each one.
3.The asset will be in the name of the client.
 This is Shirkat-ul-Milk.
5. According to the ratio of ownership, each one is responsible for the loss.
6. Bank divides its own part of asset into units, which is promised by the client to purchase on
pre-agreed price.
 After taking possession of car, bank rent out its share to the client
by execution of Ijarah Agreement.
8. Rent may be fixed on prevailing market rate or with mutual consent.
9. Bank’s monthly profit may also be decided, as monthly rent of the asset and principal
amount will be recovered in the unit price
Illustration
1. Customerrequestfinancing forafixedAssetcostingRs.300 million.
2. IslamicBankagreesto provide financingupto90% of the cost.
3. JointOwnershipAgreementisexecutedbetweenthe bankandthe Customer
. 4. Bank will purchase 90% share inthe asset bypayingRs. 270 milliontosupplier.
5. Customerspaysitsshare of Rs. 30 million.
6.Bank’sshare is dividedintofiveunits.
7. CustomeragreestobuyoutBank’sshare (units) onyearlybasisandthe Undertakingisexecutedby
the customer.

8. 8. Customerpaysthe rentfor the usage of the Bank’s units.
9. Rental reducesafterpurchase of each unitbythe customer.
10.Afterfive years'ownershipof the assetis completelytransferredtothe customer.
Step-by-StepGuide
Step1: ApplicationForm
Submit the filled & signed application form & cheque for Processing Fee & External Agency cost
Step2: RequiredDocuments
Attach all the required document
Step3: Address Verification
Bank will verify the Applicant Residential & Office Addresses and Addresses of the References
submitted
Step 4: Income Estimation
For Businessman / Self Employed Individuals
Bank's External Consultant may determine customer’s monthly income.
For Salaried Individuals
Bank will verify the Income with customer’s employer
Step5: Legal opinion
A legal opinion will be obtained on the property documents
Step6: Property Valuation
Appointed Valuation Agency will evaluate the property to determine its market value.

9. Step7: Credit Approval &SanctionLetter
After customer have fulfilled all Credit requirement satisfactorily, bank will give a conditional
Sanction letter
Step8: Account Opening
Customer will be required to open an account in bank by submitting a filled account opening
form
Step9: Signing of Car Finance Agreement
Customer sign Islamic House Finance Agreement and other legal documents for purchasing car.
Step10:Transfer of Property &Disbursement
Original Property documents will be handed over to the Lawyer who, after verification of the
document, will hand over the Pay Order to the Seller and will complete the legal formalities on
Bank's behalf