Understanding Islamic Finance - Doha Academy of Tertiary Studies

302 Understanding Islamic FinanceBox 11.3:(Continued)Issue # 2One year after leasing the looms for his factory, ABC reports to the bank that fiveof the looms have broken down and have to be repaired. The bank asks the evaluatorfrom the Takaful company to calculate the cost of repair and damage. The evaluatorreports, after inspection, that the looms broke down due to poor maintenance on thepart of the client and will take a month to be repaired at a cost of Rs. 20 000 perloom. How should the bank calculate future rentals and the rental for the time whenthe looms are being repaired?Issue # 3ABC has already leased 20 cars from the bank for a tenure of five years and hasused them to varying degrees. Two years down the line, ABC requests the bank tosell him ten vehicles at a price of Rs. 400 000 each. Should the bank accept his offerand what consideration should determine the decision? Prepaid expenses, includingTakaful outstanding, are Rs. 20 000 per vehicle. The outstanding Ijarah investment isRs. 350 000 per vehicle.Issue # 4In the same year, one of the cars is destroyed in an accident without any negligence onthe part of the client. The remaining outstanding Ijarah investment is the same as given inIssue # 3 above. The Takaful amount recovered by the bank is Rs. 450 000 and the clientdeposited a security deposit of Rs. 50 000. What amount is the bank legally bound underthe Ijarah agreement to give to the client? In view of the satisfactory payment behaviour,in what ways can the bank accommodate the client without burdening itself?Answers to the above Issues:Answer 1Direct lease/IjarahThe assets that can be financed under directlease are trucks, because the bank has topurchase the same from the market.Documentation required• Agency agreement and letter of agency• Undertaking to Ijarah• Ijarah agreement— description of the Ijarah asset— schedule of Ijarah rentals— receipt of asset— demand promissory note• Ijarah rental schedule• Unilateral promise to sell/purchase Ijarahasset• Sale deed at the end.Sale and Lease-backThe assets that can be financed under a saleand lease-back arrangement are the dyeingplant, looms and company cars (alreadyowned by the client).Documentation required• Sale deed of cars and plant• Undertaking to Ijarah• Ijarah agreement• Description of Ijarah assets• Ijarah rental schedule• Demand promissory note• Promise to sell/purchase Ijarah assets.For sale and lease-back, an IFI must considerthe need and willingness of the client toavoid interest and work with an Islamic bank.Further, it will add the condition that ABCTextile will not ask for early retirementbefore one year.