Islamic Mode of Finanace
Q. What is Financial Lease?
A. A lease wherein the user can acquire the use of the asset for most of its useful life and pay rentals to the lessor is called a financial lease. The user will be responsible for maintenance of the equipment and the payment of taxes and insurance
Q. Is finance lease an Islamic instrument?
A. Yes, leasing is an Islamic mode of financing and is approved by Islamic ideology council of Pakistan .
Q. What is OLP’s competitive edge over other leasing companies?
A. OLP offers wide range of financial services with competitive pricing and flexible terms. OLP marketing team is customer friendly and the lease process moves at fast speed. OLP offers Finance Lease, Auto & Consumer Lease, Operating Lease, Working Capital, Factoring, Agriculture & Micro Loans. OLP has presence in over 26 cities of Pakistan which gives a much wider coverage and service to its customers.
Q. What are the criteria for inducting customers in OLP portfolio?
A. OLP niche market is Small Medium Enterprises (SME). Commercial entities are evaluated as per prescribed regulations of Security Exchange Commission of Pakistan (SECP) and internal guide lines of OLP. These regulations and guide lines are user friendly and compatible with the local practices and laws. ORIX normally deals only with organizations which have a successful track record of three years of operations.
Q. What is the rental?
A. Rent is an amount which is paid by the lessee for the leasing of equipment through out the entire lease term. The rent can be monthly or quarterly and can be paid at the beginning or end of month or quarter. Rent paid is allowed to be charged as a tax deductible expense in the profit and loss statement of the lessee.
Q. What is the Security Deposit?
A. The security deposit refers to equity contributed by lessee in lease transactions. The security deposit is adjusted towards Residual value at the end of lease term.
Q. What is Residual value?
A. Residual value is an approximate fair future market value of the equipment determined at the start of the lease term.
Q. What are the terms and conditions offered by OLP?
A. OLP offers highly competitive terms with a very rapid response and superior quality service to its customers. The lease period ranges from 3, 4 and 5 years. The payment mode is monthly and quarterly. Further details can be obtained from our staff on telephone or through personal visit.
Q. Can balloon payments be made during the lease to entail the seasonal affect? Similarly, can payments be lowered in the off-season?
A. OLP offers a flexible repayment schedule and can incorporate balloon payments and off-season payments in the scheduled repayment plan.
Q. Can second-hand assets also be leased?
A. OLP leases brand new equipments as well as those which are reconditioned and imported for use in Pakistan for the first time. OLP would require independent survey for price verification.
Q. Can a lessee cancel or terminate the lease contract early?
A. A finance lease is non-cancelable but may be terminated early subject to a tax compensation payment to the lessor if the remaining lease term is less than 36 months.
Q. What is the interest rate?
A. The interest rate varies according to the leasing terms and conditions. The offered rate will be fix for the entire leasing term and will base on prevailing KIBOR (Karachi Inter Bank Offer Rate)
Q. What is rate of insurance and through which company it is covered?
A. Insurance is covered through the well-reputed companies of Pakistan . Insurance policy is fully comprehensive and non-deductible. The insurance rates vary between 4% to 5%. Instead of annual lump sum payment, the premium is payable in the shape of monthly rents.
Q. Can ORIX lease recondition cars, if yes then till what model?
A. ORIX does provide an option for leasing out reconditioned vehicles. The vehicle should just only be first owner and, if registered then, registration should not be older than five years.
Q. What is the difference between leasing and financing via banks?
A. In financing the vehicle is registered in the name of borrower and is hypothecated in the name of bank while incase of leasing the vehicle is solely registered in the name of leasing companies. Financing can be done for as low as for one year but leasing has to be of minimum for three years.
Q. What are the benefits of availing the leasing facility through ORIX?
A. ORIX Leasing Pakistan Limited offers an extensive array of benefits to the prospect clients. We provide lease with satellite tracking device option and monitoring charges for the entire leasing term. Lessee will also be benefited with the complementary life insurance coverage. The lease contract will be based on the fix rate, which will not be revised till the contrac t expiry.
Benefits of Islamic banking
By K.H.Azam Ahamed
Islamic banking and the finance industry is growing at an annual rate of 20%. Many international as well as local institutions have stepped into this multi-billion dollar booming industry by establishing its Islamic wings and units. International giant banks such as HSBC (HSBC Amanah), Citi Bank (Citi Islamic) and Standard Chartered have already established their Islamic units and functioning in the Middle East region.
In Sri Lanka , despite the Muslim population being just 8% of the total population, a considerable growth is reported in the past few years with the establishment of Amana, Ceylinco Profit Sharing, First Global and a new comer ABC Barakah. Recently it is reported that the largest state owned commercial bank, Bank of Ceylon intends to commence its Islamic banking unit in early 2008. All these new entries imply that this alternative banking system has drawn the attention of Muslims as well as non-Muslims due to its unique developmental characteristics.
The underlying principle of Islamic banks is the principle of justice which is an essential requirement for all kinds of Islamic financing. In profit sharing of a financed project, the financier and the beneficiary share the actual or net profit/loss rather than throwing the risk burden only to the entrepreneur. The principle of fairness and justice requires that the actual output of such a project should be fairly distributed among the two parties. If a financier is expecting a claim on profits of a project, he should also carry a proportional share of the loss of that project.
In contrast with conventional finance methods, Islamic financing is not centered only on credit worthiness and ability to repay the loans and interest; instead the worthiness and profitability of a project are the most important criteria of Islamic financing while the ability to repay the loan is sub-segmented under profitability.
One of the unique and salient characteristics of Islamic banks is that the integration of ethical and moral values with its banking operation. The ethical and moral consideration of Islamic banks cannot be detached and their behavior should be consistent with the moral and ethical standards laid down by the Islamic Shari’ah.
Unlike the conventional banks, the financing of Islamic banks are restricted to useful goods and services and refrain from financing alcoholic beverages and tobacco or morally unacceptable services such as casinos and pornography, irrespective of whether or not such goods and services are legal or not in a given country.
In contrast with conventional banks, Islamic banks do not consider only the credit worthiness and interest rate as standards; instead they must apply Islamic moral/ethical criteria in their provision of financing. This adds another merit for Islamic banks since there is a benefiticial impact on the productivity in the economy as it reduces the social and economic cost of such harmful products and activities.
Another important characteristic which forms the basis for the development of Islamic banks is the relationship with depositors. They deal with their customers on investment grounds rather than a pre-determined fixed interest rate. They invest the money of their depositors on high profitable projects after going through a strategic analysis in order to give a substantial return to their depositors.
Thus in Islamic banking industry, each bank will attempt to out-perform other banks if it wants to attract funds from investors. And the ultimate result is that a high return on investments for the investors, which is unlikely in a conventional bank where it deals with their depositors on a pre-determined fixed interest rate.
Furthermore Islamic banks eliminate the barrier between those who save and those who invest, and bring them closer to the real market. The nature of the financial intermediation of Islamic banks significantly defers from conventional banks and it is in harmony with real market and developmental changes in it.
It is important to highlight some of the challenges faced by the Sri Lankan Islamic banks. Although there are many, the most important challenges are the lack of Islamic banking professionals and the lack of Shari’ah scholars who have specialized in Islamic economics. Further the Shari’ah board should have a fair influence on the bank’s operational and strategic planning. For this process to be successful, the Shari’ah boards of our Islamic banks should absorb Islamic scholars based on their technical expertise rather than their popularity.
-------------------
Can Banks Survive without Interest?
Before discussing the hypothesis that banks can survive without the institution of interest it is pertinent to mention that the Shariah does not prohibit all gains on
capital. It is only the increase stipulated or sought over the principal of a loan or debtthat is prohibited. Islamic principles simply require that performance of capital should also be considered while rewarding the capital. The prohibition of a risk free return and permission of trading, as enshrined in the Verse 2:275 of the Holy Quran, makesthe financial activities in an Islamic set-up real asset-backed with ability to cause ‘value addition’. The forms of businesses allowed by Islam at the time the Holy Quran was revealed included joint ventures based on sharing of risks & profits andprovision of services through trading, both cash and credit, and leasing activities. Allah the Almighty did not deny the apparent similarity between trade profit in credit
sale and Riba in loaning, but resolutely informed that Allah has permitted trade and prohibited Riba.
Besides trading, Islam allows leasing of assets and thus taking rentals againstthe usufruct taken by the lessee. The contracts of loans are different from the lease
contracts on the basis that ownership in leased assets remains with the lessor whoassumes risks and gets rewards of his ownership. In loans, on the other hand,ownership of loaned goods/assets is also transferred to the loanee/borrower who isobliged to repay its similar. All such things/assets corpus of which is not consumed with their use can be leased out against fixed rentals, while money cannot be leased
