Hire Purchase Under Shirkah al-Milk (HPSM) in Islamic Banking and Finance

The Hire Purchase under Shirkah al-Milk (HPSM) in the Islamic banking and finance industry plays a significant role in facilitating financing arrangements. HPSM, which is widely practised by both conventional and Islamic banks, has found particular prominence in several jurisdictions. Despite some procedural and conditional variations, the overall practice of HPSM in both types of institutions demonstrates noteworthy similarities. This financing arrangement is structured as a combination of three distinct contracts: shirkah, ijarah, and sale. Under the HPSM framework, the bank finance or supplies the required types of equipment or goods on a rental basis. Crucially, the ownership of the leased property or equipment is jointly held by the bank and the client. The transfer of ownership takes place at the final stage of the contract, adhering to the customary practices aligned with Shari’ah principles. This chapter aims to delve into the historical evolution of HPSM, sheds light on its Shari’ah permissibility, and provides insights into the practical implementation of this financing arrangement in the IBF industry.

Shirkah as the first essential contract in the HPSM arrangement sets the foundation for the subsequent contracts of hire and sale. It explores the principles of mutual participation, shared profits and losses. This chapter delves into the specifics of shirkah implementation within the context of financing the acquisition of goods or assets. It analyses the different types of shirkah contracts employed in HPSM and highlights the importance of defining the scopes of the partnership, the allocation of profits and losses, and the roles and responsibilities of the parties involved. In addressing the Shari’ah implications, the chapter examines the compatibility of shirkah contracts in HPSM with the Shari’ah principles. It explores the views of scholars and jurists regarding the permissibility of such contracts and compliance with Shari’ah requirements. The discussion also delves into the potential pitfalls and challenges that may arise in the execution of shirkah contracts within the HPSM framework, offering insights into how these can be mitigated. It deepens the understanding of the conceptual framework of shirkah, its practical implementation within HPSM, and its compliance with Shari’ah principles, significances, mechanisms, and Shari’ah implications, shedding light on its role as a fundamental element of this hybrid financing contract.

Ijarah plays a vital role in the HPSM contract. It refers to Islamic leasing, which involves the transfer of the right to use an asset or property from the lessor to the lessee for a specified period in exchange for rental payments. This chapter will delve into the fundamental principles and key elements of the ijarah contract and examine the conditions that must be fulfilled by the contracting parties. It will explore the requirements pertaining to the property or asset, ensuring its ownership, readiness for use, and specification. Moreover, it will explore the concept of benefit in the context of ijarah, emphasising the importance of adhering to Shari’ah guidelines regarding permissible usage and the distinction between the material part of the property and the usufruct derived from it. Furthermore, it will highlight the necessity of specifying the currency and the absolute amounts in accordance with Shari’ah principles. It will also address practical issues and challenges that may arise in its implementation by examining scenarios where ambiguity or inadequate provisions may lead to disputes and suggest solutions to overcome these challenges while ensuring Shari’ah compliance.

The role of the sale contract within HPSM is vital, serving as the conclusive and pivotal element that facilitates lawful economic transactions in adherence to Islamic law. This chapter intricately explores the essential aspects, principles, and conditions inherent in the sale contract within Islamic finance. It sheds light on the multifaceted dimensions governing its execution—legal, ethical, and economic. Understanding the complexities of the sale contract empowers individuals and businesses to ensure Shari’ah compliance, fostering ethical and equitable transactions that uphold justice and mutual benefit. This chapter provides insights into the philosophical underpinnings of sales in Islamic finance, enabling readers to navigate modern economic complexities while adhering to Islamic teachings. Furthermore, the chapter serves as a comprehensive guide to the diverse types of sale contracts within HPSM. By delving into the intricacies of this vital contract, readers gain a deeper understanding of the ethical and legal foundations that form the bedrock of commercial activities in the realm of Islamic banking and finance.

This chapter addresses the challenge of consolidating diverse HPSM procedures across global banks by focusing on the illustrative example of Islami Bank Bangladesh Limited (IBBL) and the Malaysian Hire Purchase Act 1967. By examining these practical implementations, the chapter aims to enhance transparency, strengthen stakeholder confidence, and mitigate deficiencies in contract execution procedures that may impact customer satisfaction. The core objective is to illuminate the practical application of HPSM in Islamic banking and finance, unravelling its key aspects and procedures. The chapter explores the operational dynamics of HPSM, elucidating the contractual framework and roles of stakeholders such as buyers, sellers, and financial institutions. Emphasising mutual consent, transparency, and risk-sharing, it underscores the significance of these principles in HPSM transactions. The chapter systematically guides through the execution of Shari’ah-compliant HPSM contracts, encompassing procedures and documentation from application to ownership transfer. It underscores the necessity of due diligence and contractual obligations. Finally, this chapter equips readers with valuable insights to navigate HPSM transactions in the Islamic banking and finance context. Catering to individuals, professionals, and researchers, it provides a comprehensive understanding of real-world implications of HPSM.

This chapter provides an inclusive analysis of the accounting treatment of HPSM contract, drawing a comprehensive comparison between the accounting treatment of Islamic and conventional hire purchase investments. The focus is on elucidating the various stages and approaches employed in managing hire purchase accounts, shedding light on several essential methods. It is crucial to acknowledge that these methods might not have universal applicability across all jurisdictions, as different regions often utilise distinct approaches. Since the chapter offers a comparative accounting entry of hire purchase, through this in-depth exploration, readers will be equipped with valuable insights into the accounting entries associated with both Islamic and conventional hire purchase transactions, thereby enhancing the overall value of this study.

Islamic home financing serves as a means of financial support for those seeking to purchase their home. Bay’ bithaman ajil (BBA), musharakah mutanaqisah partnership (MMP), and ijarah mawsufah fi al dimmah (IMD) are designed to serve for the necessity of infrastructures. Typically, MMP is a form of diminishing partnership in which both the customer and the bank enter into a joint ownership agreement, while BBA is a deferred payment sale model where the bank purchases the house at an agreed price and subsequently sells it back to the customer at a higher price, including a profit margin, over a financing period and the IMD is a sale of future usufruct in exchange of immediate cash. In addition, in the present day, sukuk has become widely utilised by both Islamic corporations and government entities. It has gradually captured a growing portion of the global fixed-income market. Unlike traditional bonds, sukuk investors do not hold a debt obligation from the issuer. Instead, they own a proportionate share of the underlying asset linked to the investment. Among many types of sukuk, ijarah and musharakah sukuk are two of them. This chapter will discuss the above-mentioned financial products and their underlying issues.

The rapid growth of the IBF industry inevitably requires constant product innovation in line with Shari’ah principles to fulfil the diverse demand of its multi-facet customers, taking into consideration technological advancement, digital inclusion, and electronic accessibility. As per the changing nature of the market and the customers, the Islamic financial system cannot solely rely on the core classical financial contracts; instead, it must introduce newly devised products in order to maintain steady progress and sustainability as well as to align with market dynamics and customer preferences. Hybrid contracts are the end solution in this regard. Over the decades since IFS’s inception, it has shown the aptitude to devise many hybrid products, with some gaining wide acceptance while others stirring controversies. A hybrid contract evolves from a single contract into a versatile structure. It is grouped from several contracts or products. In the contemporary Islamic financial spectrum, there are a considerable number of hybrid products in practice in various jurisdictions. Since the HPSM, MMP, BBA, IMD, ijarah sukuk, and musharakh sukuk are hybrid products, this chapter will highlight the permissibility of a hybrid contract and its underlying issues.

In this concluding stage, this chapter consolidates the key findings from the preceding chapters of the study, offering readers a comprehensive overview of the entire study. Emphasising the significance of the findings, it puts forth substantial recommendations derived from the study’s insights. These recommendations are designed to enhance the transparency of the application of HPSM in modern financial contexts in various jurisdictions, concerning its legality, religious adherence, and economic considerations. Indeed, the fundamental objective of this chapter is to underscore the importance of scrutinising HPSM with a focus on stakeholders’ interests, all while maintaining the integrity of Shari’ah obligations.