Islamic Hire-Purchase in Malaysian Financial Institutions: A Comparative Analytical Study

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Islamic hire-purchase in
Malaysian financial
institutions: a comparative
analytical study
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c Nurdianawati Irwani Abdullah
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ISLAMIC HIRE-PURCHASE
IN MALAYSIAN FINANCIAL INSTITUTIONS:
A Comparative Analytical Study
By:
NURDIANAWATI IRWANI ABDULLAH
A DoctoralThesis submittedin partialfulfilmentof the requirementsfor the award of

Doctorof Philosophy
Departmentof Economics,
Loug66roddh'UnNersity,
I- Adgust'2005
@ Nurdianawati Irwani Abdullah

Ja gfw Nanw af qM,
9G Atw t &mWco,3ion, 9G Atw t AtmiW
Dedications:
To my beloved husband,
Asyraf WajdiDusuki
Our dearest son,
'Ammar
and
Our newborn daughter,
'Affaf
Fxq"4-z[*l7fR-*llcj-4T, IA bcl
First and foremost, it is a pleasureto acknowledgethe considerabledebt of gratitude which I

owe to my supervisor,Dr. Seif el-Din Ibrahim Tag el-Din. This work could have never been
achieved without his invaluable guidance and constant encouragement.His insightful
observation and meticulous accuracy were instrumental in shaping this work into its final
form. Professor John R. Presley as my secondacademicsupervisor also deservesthe same
appreciationand gratitude for his help, guidance,encouragementand constructivesuggestions
for improving the present work. Their advice and criticism have been of great value,
sustainingthis work during its preparation.
Acknowledgementsare also due to ProfessorTom Weyman-Jones,the Head of Economics

Department,ProfessorDavid Llewellyn, the Director of Researchand Mrs. Sue Spencer,the
secretary of the Department. My gratitude is also deservedby Dr. Ataullah Siddiqui, the
Director of Markfield Institute of Higher Education, Mr. Nizam. Mohammed, the Registrar
and Mrs. Maja Tompkins, the Administrative Assistant for their assistanceand kindness
throughout the period of my study in Loughborough.
I would like to record my special debt of gratitude to the International Islamic University
Malaysia whose financial support has enabled me to undertake this
study. I owe a great
appreciation to Assoc. Professor Dr. Mohd. Azmi Omar, the Deputy Rector, Professor Dr.
Mansor Ibrahim, the Dean of Kulliyyah of Economicsand ManagementSciences
and Assoc.
Prof. Dr. Ahamad Kameel Mydin Meera, the then Head
of Business Administration
Departmentfor their help and encouragementthroughout my study.
My thanks also go to our fhends in the United Kingdom and Malaysia

who have provided me
and my family with an enjoyable social life. Without their brotherhood and prayers our
experiencein this academicjourney would have beenmore difficult.
This work is dedicatedto my parents-in-law, Dato' Haji Dusuld HaJi Ahmad and Datin Nik
Nooraini Yahya for their support and prayersthroughout my study, especially for my mother-
in-law, whose short visit at the end of my study has given the inner strength that I needed
most. My endlessgratitude is also extendedto my parents, Tuan HaJi Abdullah Samanand
Hajah Rokiah Hassanwhose vision, commitment, love and prayers have contributed to
my
academicsuccess.I wish to expressmy profound appreciationto all my brothers, in-laws and
their families for the enormousmoral supportand encouragementwhich they have afforded to
me and my family, especially to Farah Amani who has lent her hand in entertaining my son
during the final days of my researchwork.
Last but certainly not least, I owe a deep debt of thankfulnessto my beloved husband,Asyraf
Wajdi Dusuki who is also doing a Pb.D in the EconomicsDepartment,for his continuous and
direct assistancein my work, his unfailing love, patience and support
and keeping my spirit
high. Indeed, as a husband,father and studentconcurrently,he has demonstratedan
excellent
example of soul mate, fatherhoodand researchpartner. My son, 'Ammar also deservesa deep
appreciation, who is, though still young, understandsand appreciatesthe nature of my work,
and most importantly has kept my life pleasant and meaningful throughout my academic
sojourn in Loughborough.
May Allah bless you and graceall of you in due coursein the Hereafter.
Nurdianawati Irwani Abdullah

Loughborough, 8h August 2005
ABSTRACT
Islamic hire-purchase(Ydrah wa-iqtind) is one of the latest innovative products of Islamic

banks designed to meet the current demand and avoid certain risks in the financing of
consumerdurables and motor vehicles. No wonder, this transactionis not acknowledgedin

the classicaljurisprudence,but contemporaryscholarshave developedits structure through a
careful combination of Yarah and sale contracts.In Malaysia, this conceptrefers to AI-Ijdrah
ThummaAl-Bay'(AITAB) and it has in
grown popularity and continuously expandedpartly
due to the heighteneddemandby customers. Since its first inception more than 10 years ago,
AITAB has been governed by the Hire-PurchaseAct 1967 (HPA), but HPA has received
much criticism amongstthe practitioners and Shadah experts,who assertthe insufficiency of

HPA to govern the AITAB transaction when dealing with Shadah issues. Consequently,
Mu'amalah Hire-PurchaseBill has been proposedto the Malaysian governmentto overcome
certain limitations of HPA.
This study aims to examinethe Islamic hire-purchaseoperation and its framework

regulatory
in Malaysia. Thorough examination and analysis would help identifying
potential strengths
and weaknessesinherent in the HPA and how the proposed Bill could provide remedies to
various impediments, and offer an alternative regulation to govern the Islamic hire-purchase
transaction.To illuminate our understandingof the actual operation of Islamic hire-purchase,
this study incorporatesin-depth interviews togetherwith a questionnairesurvey. A total of 46
in-depth interviews have been conducted on Islamic bankers, SharVah advisors, Shadah
scholars,economists,legal expertsand governmentofficers. This is further complementedby

a country-wide questionnaire survey successfully obtained from 203 customers, aiming at
eliciting their perceptions and expectations towards Islamic hire-purchase products. The
combination of theoretical discussion on Islamic hire-purchasetogether with the empirical
surveys using both qualitative and quantitative methodology have proved to yield a valuable
insight into the revaluation of the Malaysian regulatory systemof AITAB.
The findings of this study reveal the need to incorporateSharTah principles into the existing
Hire-PurchaseAct 1967, instead of establishingan independentSharTah law to govern the
Islamic hire-purchaseoperation. It also revealsthat customersof Islamic financial institutions
in Malaysia have positive views of ArFAB.
ii
TABLE OF CONTENTS
ACKNOWLEDGEMENTS i
ABSTRACT ii
TABLE OF CONTENTS iii
LIST OF TABLES viii
LIST OF FIGURES x
LIST OF CASES xi
ABBREVIATIONS xii
TRANSLITERATION TABLE xiii
CHAPTER 1: INTRODUCTION
1.1 BackgroundResearch 1
1.2 Statementof Problem 2
1.3 ResearchHypotheses 3
1.4 Objectives of the Study 4
1.5 Scopeof the Study 5
1.6 Significance of the Study 5
1.7 A Preview of ResearchMethodology 5
1.8 Structureof Thesis 6
CHAPTER 2: ISLAMIC HIRE-PURCHASE (AITAB) IN MALAYSIA

2.1 Introduction 8
2.2 Background and Developmentof ArFAB 8
2.3 Mode of Operation 11
2.4 Banks and FinanceCompaniesProviding AITAB Facility 12
2.5 A Comparisonof AITAB and ConventionalHire-Purchase 23
2.6 Summary 28
CHAPTER 3: CONCEPT AND OPERATION OF

3.1 Introduction 29
3.2 Developmentof Islamic Hire-Purchase 29
3.3 Nature of Islamic Hire-Purchase 31
3.3.1 Definition of Leasing (1jirah) 32
3.3.2 Definition of Sale(Bay) 35
3.3.3 Definition of Islamic Hire-Purchase 36
3.4 Legitimacy of Islamic Hire-Purchase 37
3.4.1 Legitimacy of Ij,5rah 37
3.4.2 Legitimacy of Sale (Bay) 43
iii
3.4.3 Legitimacy of Islamic Hire-Purchase 48
3.5 Islamic Hire-Purchaseas A Mode of Financing 53
3.6 Summary 59
CHAPTER 4: REGULATION OF ISLAMIC HIRE-PURCHASE
4.1 Introduction 60
4.2 The Malaysian Legal System 60
4.2.1 Application of English Law 61
4.2.2 Citation of Casesand Statutes 62
4.3 Hire-PurchaseAct 1967 63
4.3.1 Scopeand Content of Hire-PurchaseAct 1967 63
4.3.2 Definition of Hire-PurchaseAgreement 64
4.3.3 SubjectMatter of Hire-Purchase 65
4.3.4 Formation of the Agreement 69
4.3.5 Contentsof the Agreement 74
4.3.6 Partiesto Hire-PurchaseAgreement 75
4.3.7 Protection of Hirers and Guarantors 87
4.3.8 Repossession 92
4.4 Muamalah Hire-PurchaseBill 97
4.4.1 Developmentof Muamalah Hire-PurchaseBill 97
4.4.2 Contentsof Muamalah Hire-PurchaseBill 99
4.5 Comparisonof Muamalah Hire-PurchaseBill and 101
Hire-PurchaseAct 1967
4.6 Summary 110
CHAPTER 5: RESEARCH METHODOLOGY

5.1 Introduction ill,
5.2 Quantitative and Qualitative Methods 113
5.2.1 Quantitative ResearchMethods 113
5.2.2 Qualitative ResearchMethods 113
5.2.3 A Comparisonof ResearchMethods 114
5.3 Selection of Data Collection Methods 115
5.3.1 Selectionof ResearchInstruments 116
5.3.2 Semi-StructuredInterview 117
5.3.3 Questionnaire 119
5.4 Design of ResearchInstruments 120
5.4.1 Design and Content of Interview Questions 120
5.4.2 Developing A Questionnaire 121
5.4.3 Reliability and Validity 125
5.5 Sampling 126
iv
5.5.1 SamplingDesign 126
5.5.2 SampleSize and Composition 127
5.6 Pilot Study 129
5.6.1 Objective of Pilot Study 129
5.6.2 Modus Operandi 130
5.6.3 Pre-TestingInterview Questions 130
5.6.4 Target Group in Administration of Pre-Tested 131
Questionnaires
5.6.5 Result of Testing the Questionnaires 131
5.6.6 Alterations to Questionnaires 133
5.6.7 Conclusion of the Pilot Study 134
5.7 Distribution of ResearchInstruments 135
5.7.1 Administering Interviews 135
5.7.2 Administering Questionnaires 136
5.8 Data Analysis Techniques 138
5.9 Summary 139
CHAPTER 6: PROFILE ANALYSIS

6.1 Introduction 140
6.2 Profile of Interviewees 140
6.2.1 Classification of Intervieweesby Groups 140
6.2.2 Profile of Bank Officers 142
6.2.3 Profile of SharFah Advisors 143
6.5.4 Profile of Sharl'ah Scholars 144
6.2.5 ComparativeProfile Analysis of Shadah Advisors and 145
Shad'ah Scholars
6.2.6 Profile of Economists 148
6.2.7 Profile of Legal Experts 149
6.2.8 Profile of GovernmentOfficers 150
6.2.9 Classification of Intervieweesby Working Experience 150
6.3 Profile of QuestionnaireRespondents 155
6.3.1 Classification of Respondentsby Regions 156
6.3.2 Classification of Respondentsby Gender,Age and 158
Marital Status
6.3.3 Classification of Respondentsby Level of Education and 159
Occupation
6.4 Summary 161
V
CHAPTER 7: CUSTOMERS' PERCEPTION OF ISLAMIC HIRE-
PURCHASE: ANALYSIS OF QUESTIONNAIRE DATA
7.2 Customers' Satisfactionwith Islamic Hire-Purchase(AITAB)Facility 162
7.2.1 ComparativeAnalysis acrossDifferent Respondents' 163
Characteristics
7.2.2 Sourcesof Information on AITAB 165
7.2.3 Reasonsfor Satisfactionwith AITAB 166
7.2.4 Reasonsfor Dissatisfactionwith AITAB 168
7.3 Customers' Satisfactionwith ConventionalHire-PurchaseFacility 170
7.3.1 ComparativeAnalysis acrossDifferent Respondents' 171
Characteristics
7.3.2 Reasonsfor Satisfactionwith ConventionalHire-Purchase 173
7.3.3 Reasonsfor Dissatisfactionwith ConventionalHire- 174
Purchase
7.4 ComparativeAnalysis of Islamic and ConventionalHire-Purchase 176
7.4.1 Benefits of AITAB 177
7.4.2 Benefits of ConventionalHire-Purchase 179
7.5 GeneralPerceptionTowards Islamic Hire-Purchase 181
7.5.1 Customers' GeneralPerceptionof AITAB 181
7.5.2 Mann-Whitney U-Test 184
7.5.3 Respondents'Choice in the Future 186
7.6 Summary 187
CHAPTER 8: OPERATIONAL AND REGULATORY FRAMEWORK OF

ISLAMIC HIRE-PURCHASE IN MALAYSIA: ANALYSIS
OF INTERVIEW DATA
8.2 Interviewees' Characteristic 189
8.3 The Structureof Interview Data 191
8.4 Operation of Islamic Hire-Purchase(AITAB) 195
8.4.1 From Practitioners' Perspectives 195
8.4.2 From Non-Practitioners' Perspectives 197
8.5 Customers' Acceptanceto AITAB Facility 199
8.6 Problemsand Issuesin Implementing AITAB Facility 201
8.6.1 Customers' Attitude 202
8.6.2 Lack of ExperienceamongBank Officers 202
8.6.3 Lack of Awarenessand CooperationamongDealers 202
8.6.4 Documentation 203
8.6.5 Competition in the Market 203
8.6.6 Ownership 204
vi
8.6.7 Transfer of Ownership 206
8.6.8 Deposit Payment 206
8.6.9 Penalty in caseof Default 207
8.7 Governing Law for AITAB Transactions 210
8.8 Strengthsand Deficienciesof Hire-PurchaseAct 1967 212
8.8.1 Strengthsof Hire-PurchaseAct 1967 215
8.8.2 Provisions of Hire-PurchaseAct 1967which are in 218
Conformity to Sharl'ah
8.8.3 Deficiencies within Shariah and Legal Applications 223
8.9 The ProposedMuamalah Hire-PurchaseBill 228
8.9.1 Interviewees' Opinion of Muamalah Hire-PurchaseBill 228
8.9.2 Advantagesand Positive Impacts of Muamalah Hire- 231
PurchaseBill
8.9.3 Interviewees' Suggestionsto Muamalah Hire-PurchaseBill 233
8.9.4 Impact on Malaysian Legal Framework 236

8.9.5 Impedimentsof Implementationof Muamalah Hire- 237
PurchaseBill
8.9.6 Current Position of Muamalah Hire-PurchaseBill 239
8.10 Future of AITAB 240
8.11 Summary 241
CHAPTER 8: CONCLUSIONS AND RECOMMENDATIONS
9.1 Summaryof the Study 243

9.2 Major Findings of the Study 244
9.2.1 Shadah Framework of Islamic Hire-Purchase(AITAB) in 244
Malaysia
9.2.2 Prospectof AITAB in Malaysia 246
9.2.3 Problemsof AITAB in Malaysia 247
9.3 Recommendationsfrom the Findings of the Study 247
9.4 Limitations and Future Research 250
BIBLIOGRAPHY 252
GLOSARRY 265
APPENDICES 268
vii
LIST OF TABLES
Page
2.1 Margin and Period of Financingoffered by AmFinance 14
2.2 Margin and Period of Financingoffered by Hong Leong Finance 18
2.3 Margin and Period of Financing offered by Public Finance 21
2.4 Malaysian Financial Institutions providing AITAB 22
2.5 DifferencesbetweenAITAB and ConventionalHire-Purchase 25
4.1 Comparisonof Muamalah Hire-PurchaseBill and Hire-PurchaseAct 1967 108
5.1 A Comparisonof Quantitative and Qualitative Research 114
5.2 Lists of Financial Institutions involved in the Study 128
5.3 List of Expert Groups involved in Interview 128
5.4 Number of Responsesfrom Pilot Study 132
5.5 List of Interviewees 136
5.6 Distribution of Questionnaires(Regional) 137
6.1 Distribution of Intervieweesby Groups 141
6.2 Details of Bank Officers 142
6.3 Details of Shadah Advisors 143
6.4 Details of Shadah Scholars 145
6.5 Details of Economists 148
6.6 Details of Legal Experts 149
6.7 Details of GovernmentOfficers 150
6.8 Distribution of Intervieweesby Years in the PresentInstitutions 151
6.9 Distribution of Intervieweesby Years in the PresentPositions 152
6.10 Cross-Tabulationof Years in the PresentPosition by Years in the Present 152
Institutions
6.11 Cross-Tabulationof Interviewees' Experiencein PresentPositionsby Years 154
in the PresentInstitutions
6.12 Distribution of ResponseRate from Five RespondentGroups 155
6.13 Distribution of Respondents'ResponseRate basedon Regions 157
6.14 Distribution of Respondentsby Gender,Age and Marital Status 158
6.15 Cross-Tabulationof Respondents'Age by Occupation 159
6.16 Distribution of Respondentsby Level of Education and Occupation 160
6.17 Cross-Tabulationof RespondenfsEducationalBackgroundby Occupation 161
7.1 K-W Test and U-Test ResultsComparingthe Mean Ranks of the Degreeof 164
Satisfactiontowards AITAB in terms of Age, Education, Income and Gender
7.2 Cross-Tabulationof Reasonsfor Satisfactionby Banks 167
7.3 Cross-Tabulationof Reasonsfor Dissatisfactionby Banks 169
7.4 K-W Test and U-Test ResultsComparingthe Mean Ranksof the Degreeof 172
Satisfactiontowards ConventionalHire-Purchasein terms of Age, Education,
Income and Gender
7.5 Cross-Tabulationof Reasonsof Satisfactionwith ConventionalHire- 173
PurchaseBy Banks
viii
Page
7.6 Cross-Tabulationof Reasonsof Dissatisfactionwith ConventionalHire- 175
PurchaseBy Banks
7.7 Friedman's Test Statistics:Benefits of Islamic Hire-Purchase 177
7.8 Friedman Test to Rank the Various Reasonsof Benefits Gained From Using 177
Islamic Hire Purchase
7.9 Friedman's Test Statistics:Benefits of ConventionalHire-Purchase 179
7.10 FriedmanTest to Rank the Various Reasonsof Benefits GainedFrom Using 180
ConventionalHire Purchase
7.11 GeneralPerceptionstowards Islamic Hire-Purchase(AITAB) 181
7.12 Mann-Whitney U-Test of Association betweeneachstatementand 184
Preferencefor AITAB
7.13 Cross-Tabulationof Preferenceto Use AITAB or ConventionalHire- 186
Purchaseby Experienceof Using ConventionalHire-Purchase
8.1 Profile of Interviewees 189
8.2 Cross-Tabulationof Customers'Acceptanceby Interviewees' Profile 199
8.3 Cross-Tabulationof AITAB Operationby RespondentsProfile 210
8.4 Cross-Tabulationof Adequacyof Hire-PurchaseAct 1967by Respondent's 213
Profile
8.5 Cross-Tabulationof Whether AITAB shouldbe governedby ShaWah Law 228
by Respondent'sProfile
ix
LIST OF FIGURES
Page
1.1 Structureof the Thesis 7
2.1 Developmentof AITAB 10
2.2 Operation of AITAB 11
3.1 Mechanismof Islamic Hire-Purchase 32
3.2 Models of Islamic Hire-PurchaseContract 52
4.1 Hire-PurchaseAct 1967 68
4.2 Procedureof Repossession 96
4.3 Developmentof Wamalah Hire-PurchaseBill 98
5.1 Outline of ResearchDesign 112
5.2 Collection of ResearchInstrumentsin Malaysia 137
6.1 Overview of Interviewees' Profile 141
6.2 Relation of SharVahadvisorsand Shadah scholars 147
6.3 Overview of Respondentsin Four Regions 157
7.1 Customers' Satisfactionwith AITAB 163
7.2 Customers' Sourcesof Information about AITAB 166
7.3 Customers' Satisfactionwith ConventionalHire-Purchase 171
7.4 Comparisonof Benefits betweenAITAB and ConventionalHire-Purchase 176
8.1 Flow of Analysis Discussion 194
8.2 Strengthsof Hire-PurchaseAct 1967 217
x
LIST OF CASES
Page
Hong Leong Finance v. Thamilchelevenslo Palinesamy& Anor [ 1996] 1 85
MIJ 351
Hong Leong Leasing Sdn.Bhd. v. Tan Kim Cheong[ 1994] 1 AMR 159 67
Ka Yin Credit & Leasing Sdn.Bhd. v. Pang Kim Cha & Bros Development 78
Sdn.Bhd. [1989] 2 MLJ 61
Lau Hee Yeahv. Hargill Engineering Sdn.Bhd. & Anor [ 1980] 1 MLJ 145 90
MBfFinance Bhd. v. Ting Kah Kuong & Anor. [ 1993] 3 MLJ 73 66,226
Public Finance Bhd. v. Ehwan Bin Saring [1996] 1 MLJ 331 90
SupremeLeasing Sdn.Bhd. v. Lee Gee & Ors [ 1989] 1 MLJ 129 67
Tinta Press Sdn.Bhd v. Bank Islam Malaysia Berhad [1987] 2 MLJ 192 62
xi
ABBREVIATIONS
Abbreviations Meaning
AG : Attorney General
AITAB : Al-Ijarah Thumma Al-Bay' (Islamic Hire-Purchase)
AMR : Annual Malay Report
ANGKASA : National Co-operativeOrganisationof Malaysia
BAFIA : Banking and Financial Institutions Act
BBMB : Bank Burniputra Malaysia Berhad
BIMB : Bank Islam Malaysia Berhad
BMM13 : Bank Muamalat Malaysia Berhad
BNM : Bank NegaraMalaysia
CELPAD : Centrefor Languagesand Pre-AcademicDevelopment
CIMB : CommerceInternationalMerchant BankersLimited
CLJ : Current Law Journal
EON National Automobile Distributor
HPA Hire-PurchaseAct 1967
IBD Islamic Banking Division
IBFIM Islamic Banking and FinanceInstitute of Malaysia
IBS Islamic Banking Scheme
IFSB Islamic Financial ServicesBoard
HUM International Islamic University Malaysia
JabatanKemajuan Islam Malaysia (Islamic
JAKIM
DevelopmentDepartmentof Malaysia)
KementerianDalam Negeri dan Hal Ehwal Pengguna
KPDN
(Ministry of Domestic Trade and Consumerism)
LWOP Leasewith an option to purchase
MARA : Majlis AmanahRakyat (National Trust Council)
MLJ : Malayan Law Journal
RM : Ringgit Malaysia (Malaysian currency)
Sdn. Bhd. : SendirianBerhad (Private Limited)
UiTM : Technology University of MARA
UK : United Kingdom
UKM : National University of Malaysia
UM : University of Malaya
UPM : Putra University of Malaysia
UTM : Technology University of Malaysia
xii
TRANSLITERATION TABLE
Consonants.Arabic
Initial: unexpressedmedial and final:
d d k
L;a
b 1 dh J, t I
0
L:., t r z M
L th z n
L>l s gh A h
JA sh f W
kh LS y
L).= S L3 q
Vowels,diphthongs,etc.
Short: au
Long: U
Diphthongs: aw
ay
xiii
Chapter1
INTRODUCTION
1.1 BACKGROUND OF RESEARCH
Islamic banking and finance has emerged as an important financial system with
worldwide acceptance, as it offers a wide range of products and facilities to
accommodate users' needs. The hallmark of Islamic banking is its prohibition of the
interest rate (riba) on money capital. This essentially implies that the fixing in
advance of a positive return on a loan as a reward for waiting is not permitted by the
SharVah. Since this is strictly prohibited, Islamic banking has deliberately developed
alternative financial instruments which are compatible with Shariah. These
alternative instruments include various contractual arrangements such as cost-plus

(mur5bahah), profit-sharing (mudhdrabah), leasing (ijarah), partnership
(mush5rakah), deferred payment sale (bqy'muqjja1), benevolent loan (qadul hasan)
and many more. Hence, the operation of Islamic banking activities is necessarily
governed by the SharVah audit for the purpose of ensuring the legitimacy of financial
services for the suppliers and users of Islamic banking operation.
In Malaysia, the first Islamic banking law was codified in 1983 by virtue of Islamic
Banking Act 1983. A year later, the Takaful Act 1984was passedby the government.
The Interest-FreeBanking Schemewas introduced in 1993, whereby a fully-fledged
Islamic banking system operateson a parallel basis with a sophisticatedconventional
banking system. In this dual system, Islamic banking products are believed to be
much more sophisticatedand cover a wider range of servicesthan products offered in
a single Islamic system. The stiff competition with sophisticatedand long-standing

conventional instruments in the dual-banking system makes it imperative for the
Islamic banking to be sufficiently innovative in order to satisfy the needs of
sophisticatedcustomers.Hence, more diversified and sophisticatedfinancial products

seem to be offered by the Islamic banking windows operating in the dual system to
sustainits competitivenessand survivability. Yet, unless such innovative activities are
clearly guided by the Islamic principles, the result might turn out to be in conflict with
SharVah.
1
Chapter 1 Introduction
One of the latest innovative approachesis the Islamic hire-purchase instrument,
commonly known as yarah wa-iqtind. In general, ijilrah wa-iqtind' resemblesthe

conventional' hire-purchase contract, which combines leasing with purchase in a
single contract. Under this contract, a tenant or customer pays lease rent
simultaneously with sums towards the purchaseof the property. Today, ijdrah wa-
iqtind' turns out to be a popular mode of financing. Amongst the prominent Islamic
banks which offer Islamic hire-purchase as a mode of financing are Islamic
Development Bank, Bank Mudmalat of Malaysia, Kuwait Finance House and
commercial banks in Pakistan. Different countries use different terminology in

referring to the concept of Ydrah wa-iqtind', but the mechanism used is not much
different from one another.
Malaysia is among the countries which undertake special efforts to distinguish the
Islamic concept of ijdrah wa-iqtind' from its conventional counterpart. In Malaysia,
ijdrah wa-iqtina' is commonly known as al-ijilrah thumma al-bay, which is
abbreviatedin the commercial practice as AITAB. It combinesleasecontract and sale

contract in one trading document. Under the first contract, the hirer leasesthe goods
from the owner at an agreedrental over a specified period. Upon expiry of the leasing
or rental period, the hirer entersinto a secondcontract to purchasethe goods from the
owner at an agreed price. Due to the popularity it gains from customers' demand,
AITAB is currently limited to finance certain items such as motor vehicles.
1.2 STATEMENT OF PROBLEM
AITAB is currently implemented in the light of Hire-PurchaseAct 1967 (hereinafter
referred to as HPA), since there is no independentIslamic law governing the practice

of hire-purchasein Malaysia. In general,HPA provides adequaterules for regulating
basic proceduresfor affecting a hire-purchasecontract. However, the legal effect and
approach enunciatedby HPA seemsto be in conflict with the SharVah principle of

contract in somebasic aspects.The clearestexample can be seenin respectof an offer
and acceptance(or 'aqd) during the formation of the hire-purchasecontract. HPA puts
a condition that offer and acceptancemust be exercised once and for all at the
1The term "conventional" is

generallyusedto representall non-Islamic mode of financing.
2
beginning of the transaction. But, Shadah requires the parties to exercise two aqd
(offer and acceptance)at two different points of time, i. e. 'aqd to lease at the first
stage and then 'aqd to purchasethe property at the latter stage.Another issue relates
to the extent of maintenanceresponsibility that should be bome by the parties. During
the ij,5rah contract, the owner is required to bear basic and structural maintenanceof
the asset;while the hirer is made responsibleto operational and routine maintenance
since he constantly uses the asset.This is contrary to the establishedpractice where
the customer alone is usually required to maintain the asset.This practice contradicts
the principle of maintenanceresponsibility in a lease(Ydrah) contract which must be
bome by the owner (finance company); not the hirer. There are several other issues
pertaining to the practice of AITAB which need to be discussed thoroughly.

Therefore, it is generally believed that the inadequacyof HPA can only be remedied
by having a Shadah regulation providing a complete set of rules to regulate the
leasing (Ydrah) and sale (bay) at different stagesof the transaction in the light of
Shad'ah.
Subsequentlyin the recent years, a new Islamic hire-purchaselaw has been proposed
to the attention of the Malaysian government. The proposed law, Muamalah Hire-
PurchaseBill is designedto overcome certain limitations in the HPA in dealing with
Sharl'ah issuesarising from the Islamic hire-purchasetransaction.In order to evaluate
the new law, a thorough examination of the HPA and the Bill is neededto find out
their respective strengths,weaknessesand other features.The present situation of the
Malaysian legal system and the possible impact of the proposedIslamic Bill will also
be discussed.Legal analysis will further be supported by empirical evidence from
intensive interviews and a country-wide questionnaire survey. It is hoped that, this
study will give a clear picture of Islamic hire-purchasepractice in the Malaysian

financial institutions and proposea practicableSharVah framework of AITAB.
1.3 RESEARCH HYPOTHESES
The primary interest of the study lies in identifying the weaknessesof the Hire-
Purchase Act 1967 in governing an Islamic hire-purchase transaction, and the
possibility of implementing an Islamic hire-purchaselaw to remedy the loopholes in
3
the existing law (HPA). Therefore, three research hypotheses are fonnulated and
statedas follows:
(a) The Hire-PurchaseAct 1967 is inadequateto regulate an Islamic hire-
purchasetransaction.
(b) The operationof Islamic hire-purchasetransactionin Malaysia is lacking
in a Sharl'ah-basedregulatory framework.
(c) The Malaysian AITAB can be developed more closely along the
SharVah injunction of a combined ijarah and sale contract if an Islamic
hire-purchaselaw is successfullyimplemented.
These hypothesesare best addressedin tenn of well-defined objectives as they are
now given below.
1.4 OBJECTIVE OF THE STUDY
The research aims to examine the current concept and application of Islamic hire-
purchase transaction (AITAB) in Malaysia from legal, practical and social
perspectives.The specific objectives of this study are:

(a) To obtain a clear insight of AITAB practices from the financial service
providers (financial institutions), users (customers) and experts in

Islamic hire-purchasebusinessin Malaysia.
(b) To critically analyse the practices and implementation of AITAB in
respectof procedural and legal issues.

(c) To examine the extent of customers' awarenessabout AITAB facility
provided by the financial institutions.

(d) To inquire about the expectations of providers, users and experts as
regardsthe financial serviceprovided by AITAB.

(e) To identify problems faced by the banks and customersin the provision
of AITAB transaction.
To compare the nature and legal effect of AITAB with those of
conventional hire purchase.

(g) To show the inadequacyof the Malaysian Hire-PurchaseAct 1967 as a
mean to regulate a fully legitimate AITAB transaction.
4
(h) To suggesta practical Shadah framework of AITAB transaction to be
properly implementedin the Malaysian financial system.
1.5 SCOPE OF THE STUDY
The study will concentrateon the operation of AITAB in the Malaysian financial
institutions and issuesarising from its practice. Views from the providers and usersof
the facility about the actual practice of AITAB businessare deliberately screenedand
analysed. Experts' opinions are considered in respect of procedural, legal and
Shad'ah issues.As a basic background,the Hire-PurchaseAct 1967 and Wamalah
Hire-PurchaseBill are examinedin order to comprehendthe strengthand limitation of
each legal document. This focus should make it possible for this study to achieve its
objectives.
1.6 SIGNIFICANCE OF THE STUDY
This study aims at providing reasonablesolutions and suggestionsto help the parties
involved in the Islamic hire-purchasetransaction,be it the contracting parties or legal
practitioners who are dealing with issuesand technicalities arising from this contract.
It may serve as a material reference for structuring a comprehensivelaw governing
Islamic hire-purchasein Malaysia.
1.7 A PREVIEW OF RESEARCH METHODOLOGY
Qualitative and quantitative approaches are adopted. Data collection has been
conducted by semi-structured interviews and a questionnaire survey. The most

significant data in this study can be obtained by interviewing the providers and
in
experts Islamic hire-purchase transaction. Interviewing techniques are used as a
main instrument becauseof its capability of obtaining significant data and topics of
interest to the study (Stone 1984; Kvale 1996). This data is further supported by
questionnaires survey which aims to find out the perceptions of the Islamic hire-
purchase users. As such, a balanced data is gained from each group of parties
5
Chapter I Introduction
involved in the transaction. A 'non-probability' sampline method is employed in
collecting the intended data. Data collected by way of interviews is transcribed and
analysedmanually (Stone and Harris 1984; Finch 1990; Kvale 1996; Gilchrist 1999;
Gillharn 2000; Silverman 2001). The quantitative data collected via questionnaire
survey is analysedusing the Statistical Packagefor Social Sciences(SPSS).
1.8 STRUCTURE OF THE THESIS
The thesis consistsof nine chapterswhich are structuredin two separateparts. Part*1
which consists of Chapter 2,3 and 4 is mainly theoretical discussion, while Part 2
which comprisesChapter5,6,7 and 8 representsthe empirical part of the thesis.
Following this introductory part of Chapter 1, Chapter 2 discusses the current
operation of Islamic hire-purchase(AITAB) in Malaysia comprising its development

in Malaysian financial system, mode of operation, list of financial institutions
providing AITAB facility and a comparison of AITAB and conventional hire-

purchase.
Chapter 3 presentsa critical review of the literature in key areasof relevanceto the
presentthesis. The chapterlooks at the previous studiesin respectof the basic concept
of Ydrah and sale; the legitimacy from the main sources of Shadah; and the
developmentand role of Islamic hirc-purchaseas a mode of financing.
Chapter 4 demonstratesthe regulatory framework of AITAB businessin Malaysia;

the Hire-Purchase Act 1967 and the proposed Muamalah Hire-Purchase Bill. A
comparative study of thesetwo regulations is presentedin the later part of the chapter.
Chapter 5 expounds the research methods and design adopted for this study. In
particular, the chapter presents the research approach, selection of data-collection

methods, design of research instruments, sampling strategies, testing the research
instruments in pilot study, distribution of researchinstruments and mode of analyzing
data.
2 In 'non-probability'
sampling, members are selected from the population in some non-random
manner. These include convenience sampling, judgment sampling, quota sampling, and snowball
sampling.
6
Chapter 6 provides profiles of the target population who have participated in the
interviews and questionnairesurveys.
Chapter 7 presentsthe results of the quantitative analysisof the questionnairesurvey
which has been conducted among bank customers who have experienced AITAB
facility.
Chapter 8 puts forward results of the qualitative analysis of the semi-structured

interviews in respect of the implementation and legal framework of AITAB in the
Malaysian financial institutions.
Chapter 9 summarisesthe main findings, makes recommendationsand discussesthe
conclusionof the study.It also statessomelimitationsof the researchandpoints out

areaswhich will be directly and indirectly affected by the outcome of this research.
FIGURE 1.1:
Structure of the Thesis
Chapter1
INTRODUCTION
F_ I I- -
Chapter 2 Chapter 3 Chapter 4 --i
=r
(D
Islamic Hire- The Concept and Regulatory 0
Purchase (AITAB) in Operation of Islamic Framework of Islamic "M>
(D
- 9.
Malaysia Hire-Purchase Hire-Purchase 'm
cf)
Chapter5
Research Methodology
7- M
S
Chapter6I Chapter7 Chapter8 V.
Profile Analysis of Analysis of
Analysis Questionnaire Da Interview Data CL
F Chapter 9 _j
CONCLUSION
7
Chapter 2
ISLAMIC HIRE-PURCHASE (AITAB) IN MALAYSIA
2.1 INTRODUCTION
This chapter aims to provide background information relating to the operation of

Islamic hire-purchase(AITAB 3) in the Malaysian financial institutions. It begins with
a background and developmentof AITAB in the Malaysian financial system.Next, it

proceedsto explain how AITAB works, who are involved in the transactionand some
of its basic requirements. This is followed by a brief description of financial
institutions that offer the AITAB facility. A comparison AITAB and conventional
hire-purchase is presented in the subsequentsection. Finally the summary of the
chapteris presentedin the last section.
2.2 BACKGROUND AND DEVELOPMENT OF AITAB,
In Malaysia, Islamic banking was formally set up in 1983 by virtue of Islamic

Banking Act 1983.The idea to establishan interest-freebanking developedas early as
in 1970s4;only ten years later it became a reality. Subsequently,the Interest-Free
Banking Scheme was introduced in 1993, to accommodatea fully-fledged Islamic
banking system on a parallel basis with a conventional banking system. In terms of
products and services,there are more than 40 Islamic financial products and services
that may be offered by the banks using various Islamic conceptssuch as profit-sharing
(Mudrabah), partnership (Mushdrakah), cost plus (Murdbalah), deferred payment
sale (BayBithamanjjil or Bay'Mua&O, leasing (Ijarah), benevolent loan (Qaq-al

#asan), manufacturing
contract (Istisnd ) and leasing and subsequently purchase
Qjdrah ThummaAI-Bay
During the first ten years of Islamic banking system in Malaysia (1983-1994), while
Ydrah facility has been introduced in the market, Islamic hire-purchasehad not been
3 AITAB is an
abbreviationof AI-Ijdrah ThummaA I-Bay'.
4 The idea was
explored by some Shadah scholars,including Dr. Hailani in his B.A. thesis (1974);
while Dr. Ali Baharum.proposedcertain solutionsto housing problemsin 1980sbefore the existenceof
Bank Islam. He proposed alternativesto interest-basedproducts
which are welfare-based,combined
with cooperative elements,thus, suggesteddiminishing partnership (mushdrakah mutandqisah) and
Islamic hire-purchase(AITAB).
8
Chapter 2 Islamic Hire-Purchase In Malaysia
fully developedyet. Consequently,ijarah has been developedthrough scholar's effort
and reasoning (Utffidd) into Islamic hire-purchase(al-ydrah thumma al-bay' or al-

ijdrah al-muntahiyyah bittamlfk) and has been accepted as a mode of financing.
Islamic hire-purchase is known in Malaysia as al-yarah thumma al-bay(AITAB).
Under AITAB mechanism, bank has an authority over the leased asset. If the
customerdefaulted, bank can take an action againsthim and repossessthe asset.If the
customer constantly pays and then satisfies all required payments,the bank will sell
the asset to him at the end of the agreement.However, AITAB receives criticism
which questionsthe validity of AITAB on two grounds:
(a) purchaseprice of the leased is
asset not a real price, taking into account
the valueof the asset,the marketconditionetc.
(b) AITAB appearsto be similar to a conditional sale, in which the owner
has to sell the leasedassetto the hirer, no matter what happens.
In this respect,Malaysian Shadah scholarsarguedthat AITAB structure is basedon
sale and purchase concept made on mutual consent between owner and hirer. The
main purposeof AITAB is to let the owner holds the title of assetuntil a full payment
is made by the hirer. This is to protect the owner from risk of default. As an owner, he
can use and disposethe assetas he wishes, thus, he can also promise to sell it to the
hirer under certain circumstances.
The operation of AITAB has undergoneseveralphases.Bank Islam was the first bank
that initiated AITAB facility. Its operation was then extendedto conventional banks
under Islamic Banking Scheme(IBS), which were pioneered by three anchor banks;
Maybank, Bank Burniputera Malaysia Berhad and Bank Rakyat. Consequently,Bank
Islam set up a consultant to assist other banks and finance companiesto operate IBS
thus expandedAITAB operation to finance companiesand cooperative societies. By
this time, AITAB has been received very well to the extent that, the government
adoptedit in their dealings.
Hire-purchase business in Malaysia is a unique arrangement,in which it calls for

involvement of few ministries. The most significant role is by Ministry of
played
Domestic Trade and Consumerism which has exclusive jurisdiction over hire-
purchasebusinesses.Any substantialissue should be referred to the ministry. Finance
9
Ministry hold a power to grant license to finance company that wishes to offer
AITAB. Since motor vehicles are the most demandedgoods under AITAB financing,
the transaction will certainly involve Ministry of Transportation which handles
approval of vehicle's grant and license.
Despite having been successfully operated and accepted by the industry and
government,AITAB is lacking in SharVah regulatory framework that leads it to refer

to conventional law. Due to this reason, Bank Islam refused to carry on operating
AITAB and resorted to other Shadah concept in their financing activities. Efforts
have been taken to regulate a specific law for AITAB but the matter is still pending.
Although the law has not been passed yet, the industry has implemented AITAB
without any rejection, either by the Central Bank, SharT'ah advisors and even the
public at large.
FIGURE 2.1:
Development of AITAB
Ijarah becomeone of earliestfinancing facilities 1983-1994:

Bank Islam was
the key player in
Bank Islam introducedAITAB Islamic banking
AITAB was extendedto 3 Anchor Banks 1994:

Islamic Banking
Schemewas
AITAB was expandedto Financecompanies& CooperativeSocieties introduced and
operation of AITAB
was expanded.
AITAB adoptedby Govemment
2000:
Draft of Muamalah Hire-PurchaseBill The Bill was passed
to AG Chambersfor
examination
10
2.3 MODE OF OPERATION
AITAB combinesleasecontract and salecontract in one trading document. Under the

first contract, hirer leases goods from owner at an agreed rental over a specified
period. Upon expiry of the leasing or rental period, the hirer enters into a second
contract to purchase the goods from the owner at an agreed price. Hence, AITAB
involves three main parties: customer,financing company, and vendor. Using, for the
sake of illustration, the common example of car financing, AITAB operates as

follows:
(a) Finance Companybuys the vehicle from Vendor or car dealer,to the order
of Customer.
(b) Finance Company rents the vehicle to the Customer at a rate agreedupon
for a specifiedperiodof time.
(c) The Customer (hirer) agreesto pay for road tax and insurance coverage.
He also will be responsiblefor its maintenance.
(d) At the endof the periodthe FinanceCompanyandthe Customerwill sign
the sale and purchaseagreement.
FIGURE 2.2:
Operation of AITAB
DEALER/SELLER
(1)Ijarah
Contract
- agreed
rentalforspecified
period
Owner hires goods to Hirer
OWNER HIRER
(Finance Company)
Hirerpurchases
goodsat to endof hirkigperiod
(2)Purchase
Contract
- agreed
price
11
The monthly amount to be paid in this scheme is estimated using the following
formula (2001):
Total amountPayable= Financingamount+ (Financingamountx Profit rate x Period)

(amountborrowed) (year)
Monthly Instalment= Total Amount Payable

Period (years)x 12
The minimum period of financing is I year or 12 months, while the maximum period
is up to 7 years. The determinationof period is basedon severalfactors, for instance,
type of car (new or second-hand),age of the car, customer'sprofile, income exposure
and market condition. The maximum margin of financing is up to 90% (certain banks
provide 100% financing), but will be consideredaccording to the above-mentioned

factors.
AITAB facility is not limited to Muslim applicantsas non-Muslims could also apply
for the scheme and be treated equally. Rebate or ibria' can be given for early
to
settlement,according a standardformula provided by the Hire-PurchaseAct 1967.
However, rebate is not given in cash. It merely reduces the balance outstanding.
Currently, AITAB is limited to the financing of certain items such as motor vehicles,
due to their popularity in the presentcustomers'demand.
2.4 BANKS AND FINANCE COMPANIES PROVIDING AITAB FACILITY
There are currently 31 financial institutions in Malaysia offering Islamic banking
services.They comprise 2 Islamic banks, 13 commercial banks, 3 finance companies,

4 merchant banks, 7 discount houses,I saving institution and I developmentfinance
institution. From these institutions, about 13 of them providing AITAB facility for
individual and corporate customers.List of financial institutions offering AITAB are
as follows:
2.4.1 Affin-ACF Finance Berhad
As a licensed finance company, Affin Finance's principal activities cover the
acceptanceof deposits from the public and the provision of loans including housing
loans, bridging loans, term loans, share-margin financing, revolving credit facility,
12
Chapter 2 Islamic Hire-Purchase in Malaysia
hire-purchase,block discounting, industrial hire purchaseand floor stocking facility.

Affin Finance also provides Islamic financial products including saving account (Al-
WadVah), profit-sharing (Al-MtWdrabah), and deferred payment sale (Al-Bay'
Bithaman AjiO facilities. In 1999, Affin Finance introduced Islamic hire-purchasein
order to cater for consumerneedsin vehicle financing. Initially, the proposed name
for Islamic hire-purchasewas al-ydrah al-muntahiyyahbittamlTk,but then one of the
SharVah advisors suggestedit to be al-ydrah thumma al-bay'(AITAB). AITAB has
been overwhelmingly acceptedby the customers,that until May 2004, there were
more than 12,000 AITAB accountsbeing held by Affin Finance. The mechanismof
AITAB transaction as provided by Affin Finance is similar to that of other finance
companies and banks. The dealer or seller sells the goods to the finance company,
which becomesthe owner of the goods. Upon settlementof the rentals, the purchase
agreementwill be executed automatically, thus, transferring the ownership of the
vehicle from the finance companyto the hirer. In respectof eligibility, application for
AITAB car financing is open to Muslim and non-Muslim individual aged 18 years
and above. Sole to

proprietor or partnership,and companiesare also eligible apply for
this facility.
(1) Alliance Bank Berhad
Alliance Bank is the latest financial institution that offers AITAB, facility. The bank
had their AITAB facility launched on the 2ndAugust 2004. Its commercial name is
Alliance Hire Purchase-iand is available to Muslims and non-Muslims alike. Besides
vehicle financing, Alliance Bank employs this facility for financing port equipment as
the bank has been the main financier of the West Port. The bank also offers financing
for construction equipment.
(2) AmFinance Berhad
AmFinanceis a subsidiaryof AmBank Groupwhich is a leadingfinancial services

provider in Malaysia,offering an extensiverangeof bankingand financial services,
including investmentbanking,commercialbanking,retail financing,leasing,stock-
broking, insurance,asset or fund management,futures and options trading, and
offshore banking. AMFinance started to offer AITAB in 1993. The institution
providestwo forms of Ijdrah financing,that are Islamic ART Hire-Purchaseunder
13
personal banking and Al-Ijdrah ThummaAl-Bay' (AITAB) Industrial Hire-Purchase

under enterprisebanking (2003). Islamic ARIF Hire-Purchase(personal banking) is
basedon Sharl'ah principle of. Al-Ijarah ThummaAl-Bay'(AITAB). AmFinance will
purchase the vehicle of the customer's choice up to 90% (subject to applicant's
qualification with reference to Bank Negara,Malaysia!

s and AmFinance's financing
guidelines) of the purchaseprice, and later hire the vehicle to the customerat the pre-
agreedrental amount and hiring period. The customerwill then enter into a purchase
agreementwith AmFinance and the ownership of the vehicle will be handed over to
him when he has settled all rentals in full by the time the hiring period expires. The
customer is guaranteed the following benefits; free processing, free hire-purchase
consultation and enquiries,speedyprocessingand approval,attractive financing terms

and conditions, friendly customer service and easy instalment payments at over 100
branchesnationwide
Eligible customers range from individuals aged 18 years and above, sole
proprietorships, partnerships,private limited and public listed companiesand other

commercial organisation can apply this facility. For the purpose of application,
AMBank requires certain documents to be enclosed together with the application
form. The mostimportantdocumentsaredealer'sinvoiceandregistrationcard.Other
supporting documents are also necessary,including proof of identification, salary
slips, supplier quotation, a copy of registration card, confirmation of employment etc.
Eligible guarantor(s)may be required to support the applicant who does not meet the
credit standard. The margin and period of financing are usually determined in
considerationof the type of the car. This is illustrated as follows:
TABLE 2.1:
Margin and Period of Financing offered by AmFinance
Type Of Vehicle Margin Of Finance* Repayment Period
New passengervehicle Max 85% of suppliers invoice Max 84 months
New commercialvehicle Max 75% of suppliers invoice Max 84 months
Used passengervehicle Max 70% of suppliers invoice Max 60 months
Used commercialvehicle Max 60% of suppliers invoice Max 60 months
Reconditionedvehicle Max 70% of suppliers invoice Max 60 months
avuulub. WWIV.d[IIL)_,.
UUm.mY
* Subject to applicant's qualification with reference to Bank Negara Malaysia
and AmFinance's
financing Guidelines
14
The secondYarah facility provided by the AmFinance is Al-Ijarah ThummaAI-Bay'

(AITAB) Industrial Hire-Purchase.It is a financing arrangementof leasing or hire-
purchase and subsequentpurchase for industrial vehicles based on the SharVah
concept of Al-Ijjrah ThummaAl-Bay' (AITAB). This facility usually attracts the

industries, thus all Malaysian-controlled companies and non-resident controlled
companies (subject to Bank Negara Malaysia and the banlesapproval) are eligible to
apply for this facility. The margin of financing is up to 100% (subject to Bank Negara
Malaysia and the bank's financing guidelines).The period of financing is to be agreed

by customer and the bank on a case-to-casebasis. AMBank will also require a
security, which is usually the industrial vehicle or equipment. In addition, the
registered companies must provide a guaranteeof directors or shareholders,while

holding companiesis expectedto furnish its corporateguarantee.
(3) Bank Muamalat
Bank Muamalat Malaysia Berhad started its operations on October 1,1999 with
combined assetsand liabilities brought over from the Islamic banking windows of the
then Bank Bumiputra Malaysia Berhad, Bank of Commerce(M) Berhad and BBM13
Kewangan.As the secondfull-fledge Islamic bank being establishedin Malaysia after
Bank Islam Malaysia Berhad, it is poisedto play its role in providing Islamic banking
productsand servicesto Malaysians, irrespectiveof race or religious beliefs.
Since its establishment,Bank Muamalat has undergonedrastic achievements(2003).

Although it has a limited capital, variety of products has been successfully offered;
one of them is AITAB. This facility provides customers with short to medium term
financing by way of leasing and finally acquiring items such as plant and machinery,
property, computers and information technology equipment, motor vehicles, heavy
machinery and other fixed In

assets. other aspect,this facility is also designedto meet
working capital requirement for customerswho already own the In

assets. this case,
the customer will -first sell the asset to the Bank, which constitutes the financing
amount, with the understanding that the Bank will leaseit back to the customer.This
is also known as Sale and Leasebacktransaction. Potential customers are usually
businessorganisations.Perhapsone of the attractive benefits of this facility is that it
15
provides a sourceof fund to meet working capital requirement,as in the caseof Sale
andLeaseback.
(4) Bank Pembangunan and Infrastruktur Malaysia Berhad
AITAB as offered by Bank Pembangunan(DevelopmentBank) involves leasing and

then purchasing an asset covering machinery, equipmentsand vehicles. Under this
scheme,Bank Pembangunanpurchasesan assetaccording to specifications given by
the customer for the purposeof leasing it out for an agreedrental payment within an
agreedperiod of time. The assetswill be sold to the customerat an agreedprice when
the leasing period has elapsed.Detail mechanismsof AITAB as operatedby Bank
Pembangunanare:
(a) Bank authorisescustomer to find an assetsupplier
(b) The customergets quotation in the bank's name
(c) He submits application to the bank
(d) Bank evaluates the application from management, technical, market and
investment matter. For example, whether asset is clear from illegitimate
elements,such as uncertainty (ghardr), charge,prohibited unit trust, gambling,

and liquors (like hotel or chalet business).
(e) If the applicationinvolvesa machine,bank'stechnicalsectionwill examinethe
machinewhether it is fit for purpose
(f) If the bank satisfieswith the application and its purpose,Bank offers and gives
quotation to the customer.

(g) Assetsare purchasedand invoice is madein the bank's name
(h) Collection is constantly monitored so that repayment comes from legal
utilisationof the asset
Most customers come to Bank Pernbangunanto purchasemachinery using AITAB

facility. They prefers to use AITAB becausethey do not need to provide capital since
Bank, Pembangunan usually provides 100% financing, depending on result of
evaluation as statedabove.
16
Bank Rakyat
Bank Rakyat startedto offer AITAB facility (AITAB Car Hire-PurchaseFinancing-i)

in October 2001. In May 2004 AITAB customersreachedmore than 10,000. Initially,
Bank Rakyat provided financing for national cars only, but it widened its scope of
financing in December2003 to include non-national cars. Today, AITAB facility is
offered at a flexible and affordable repaymentschemein purchasingall new national

and non-national cars (excluding continental cars) available in the market. The bank
provides financing up to 90% of the car value. In term of eligibility for application,
Bank Rakyat gives preferenceto governmentemployeesand its subsidiariesthat have
been in service for a minimum of 6 months, with a minimum salary of RM1000.
Employeesof companiesor co-operativeswith a minimum of 2 years'service are also
considered.Payment for AITAB financing will be made through salary deduction.

The maximum repaymentperiod is up to 10 years(Arshad 2003).
(6) EON Finance Berhad
EON Finance is one of the leading financial institutions offering AITAB. It launched
AITAB facility in 1998 and until May 2004, the institution managedto gain profit
from one billion AITAB volumes. EON Financeoffers motor vehicle financing under
AUTO AITAB. The scheme allows a customer to own a motor vehicle with fixed
chargeson his financing. It becomesan attractive facility becauseit offers a low fixed
rate in the market, guaranteesfreedom from interest (ribii) element and fast approval
(subject to complete documentsand no records).
Customer can apply for financing a purchase of new cars, vans, four-wheel drive
(4WD) and multi-purpose vehicle (MPV); or used vehicle but must not be more than
10 years. As the financing scheme is based on Shadah principles, the monthly
instalments are fixed. A customerwill only pay the sameamount of repaymentevery
month until the end of the repaymentperiod. The financing will be up to 90% (new
vehicles) and 85% (used vehicles). The eligibility for applying this facility will be
based on the assessmentof satisfactory financial standing and monthly income
(2003).
17
(7) Hong Leong Finance
Hong Leong Finance Berhad beganto offer AITAB or known as Hong Leong Hire-
PurchaseFinancing-i in 1997.By April 2004, its customerreachedabout 49,800. The
schemeprovides a total car financing package.It possesses

the following featuresand
benefits: speedyapproval whereby the approval will be given a day upon submission
of an application with all the necessarydocuments;highly competitive rental rate;

rental payment can be easily conductedon-line through all of Hong Leong branches
nationwide or Standing Instruction (SI) facility from current and savings account;
insuranceand road tax renewal servicesrelief the hassleof customershaving to go to
Road Transport Department (JPJ) and this service is provided free of charge for
customer's convenience. The margin and period of financing are determined

accordingto the following aspects:
TABLE 2.2:
Margin and Period of Financing offered by Hong Leong Finance
I I
Type of Vehicle/Age of Vehicle Margin of Financing Financing Duration
Passenger (cars), MPV &4X4 vehicles

New national vehicles Up to 70% Up to 60 months
New non-national vehicles Up to 80% Up to 84 months
1 to 5 years Up to 80% Up to 84 months
Van Vehicles
(Van for all goods carrying vans with GVM/BDM up to 2540kg and passenger carrying vans private
registered)
4X4 Pick Up Vehicles
Commercial Vehicles
(Goods carrying vans above 2540kg up to 5000kg, pick-ups and lorries
up to 5000kg)
New Up to 80% Up to 60 months
I to 3 years Up to 70% Up to 36 months
fll t. _,U11L. lily
18
Eligibility of application covers Muslim and Non-Muslim. Applicant can be an

individual aged 21 years old to 70 years old; sole proprietorship; partnership; or
company. It is emphasisedthat the purpose of financing must be legal under the

Shad'ah principle.
(8) HSBC Bank (Malaysia) Berhad
HSBC started leasing-basedQjdrah) assetfinancing options in 2000. At first, HSBC
offered leasing Qjdrah) in 1999; a year later, the bank introduced Islamic hire-
purchase, or known as lease with an option to purchase (LwOP) (Sujak and Ang
2001). The facility is mainly provided for corporatecustomerto finance the non-Act
goods5such as machinery, plant and other capital assetsfor hiring with an option to
purchaseat the end of the hiring period. It covers the following terms and features:
higher margin of financing; competitive pricing; option to purchasethe goods at the
end of the lease period at nominal value; early redemption is permitted without
incurring high penalty cost and rebate; able to claim capital allowance on top of
profit; and better utilization of funds. The bank determines how many percent of
financing to be granted after taking into consideration of several factors, such as,
whether the product is flexible and degreeof risk arising from the transaction.
(9) Mayban Finance Berhad
Mayban Finance Berhad is one of the largest finance companiesin Malaysia in terms
of assets,loans and deposits.As a wholly-owned subsidiary of Maybank, the largest

commercial bank in Malaysia, it operates87 branches,9 Service Centresand 9 Loan
Management Centres nationwide. Mayban Finance started to offer competitive
AITAB in 1994 when participating as pioneers in Islamic Banking Scheme.In April
2004, ten year after the launching of AITAB, its customerhas reached2.0 billion in
total, where 90,000 of them are non-Muslims (Aziz 2003). The facility is to part-
finance purchasesof any type of brand new or second-handmotor vehicles such as
saloon and four-wheel drive. Mayban also finance the purchase of equipment and
machinery either for private or commercial purpose.Mayban Finance plans to be all-
3 Non-Act goods are goods

which are not listed in the First Scheduleof Hire-PurchaseAct 1967.The
goodsinclude machinery,industrial equipment,plant and other capital asset.
19
out in AITAB operationbecauseof benefits it has to offer, such as overdue interest of

only 1% and Islamic default rate is only 2%.
(10) OCBC Bank (Malaysia) Berhad
OCBC Bank (Malaysia) Berhad is an institution that is wholly-owned by OCBC

Singapore.The bank introduced Islamic industrial hire-purchasescheme,known as
IHP-i in June 2002, in support of the Government'scall to make Malaysia a regional
Islamic financial centre (2002). The product is the third Islamic financial facility
offered by OCBC apart from leasing-i Qjdrah) and Equipment Financing-i (Bay'
Bithaman jjiO. Since it's launching, Islamic hire-purchase has marked an
encouraging progress in the business.At April 2004, there were about 121 million
Islamic hire-purchasevolumes from 277 applications. The bank aims to reach 300
million volumes in the future. Currently, the bank offers the facility to corporate
customerssuch as manufacturers,printing companies,small and medium enterprises
(SME) for financing industrial equipments,heavy machinery and many other non-Act
goods. Financing could reach up to RM 200,000 per application. Conditions and

eligibility of application are similar to those by
prescribed other financial institutions.
AITAB is also to be listed in SecuritiesCommissionIslamic index which exposesit to
the secondarymarket.
(11) Public Finance Berhad
Public Finance commencedIslamic Banking operationson 21 August 1993 and was

the first finance companyto introduce Islamic Banking Scheme.The Islamic Banking
products and services are currently available at all 68 branchesnationwide. AITAB
was introduced in 1996 but its volume started to increasein 2000 and over. In April
2004, there were about 4.5 billions of AITAB volumes (Piow 2003). Public Finance
offers the following features and benefits of AITAB scheme: competitive rate of
financing; high margin of financing of up to 85%; flexible tenure of financing of up to
7 years; fast approval; and InterServebanking serviceswhere AITAB application can
be made at both Public Financeand Public Bank branches.
Public Finance requires several conditions relating to certain aspectsto be fulfilled

before applying for AITAB scheme.Theseinclude the following matters:
20
(a) Eligible applicant can be individuals, sole-proprietorshipor partnership,or
companies.For individuals, he must be 18 yearsof ageand above,and his

monthly income must be of at least 3 times the monthly instalments.
(b) Type of goodsis motor vehicles,either for private or commercialuse.
(c) Profit margin of financing rangesfrom 5.90% to 10.0%p.a. fiat depending
on the type and ageof vehicle and applicant's qualification.
The margin and period of financing are basically determinedaccording to the age of
the vehicle. They are illustrated as follows:
TABLE 2.3:
Margin and Period of Financing offered by Public Finance

Age Of Vehicle Margin Period
New Up to 85% Up to 84 months
1-5 years Up to 80% Up to 60 months
Source: wxvw.publictinance. com.my
Public Finance receivesa good cooperationfrom some dealerswho are supportive to

Islamic banking. They will first suggestIslamic product to a customerunless he opts
to use conventional facility. AITAB also brings benefits to the bank that its default
non-performanceloan (NPL) is less than 1%. This is due to religious element and
consciousness,particularly among Muslim customerswho usually pay on time and
satisfy all debt due before performing pilgrimage (fajj).
(12) Southern Finance Berhad
AITAB is known as ASFAR in SouthernFinance (SFB). ASFAR provides financing
of passengervehicles and light commercial vehicles. Its mechanism is not very

different from other institutions. The customeridentifies the car or vehicle to be hired
and appliesfor financing from SFB. SFB will purchasethe vehicle identified and
subsequentlyhire to the customerat an agreedmonthly rental over a specified period.
At the expiry of the hiring period, the customer will be given the option to purchase
the vehicle under hire. SouthernFinance provides certain guidelines to be adheredto
covering the following: the goods can be either new or used vehicles; maximum
margin of financing of up to 85%; up to 84 months repayment or 60 years of age
21
whichever is earlier; and fixed and competitive profit rate. All type of eligible
customer can apply for ASFAR. It opensto Muslims and Non-Muslims, individuals
aged 18 years and above, sole proprietorship, partnership, companies and other
businessenterprises(2003).
For the purposeof clearer illustration of financial institutions offering AITAB, Table
2.4 below lists down somepoints:
TABLE 2.4:
Malaysian Financial Institutions providing AITAB
Institution Year Product Volume
Affin-ACF Finance Berhad 1999 AITAB 12,000 (May 2004)
Alliance Bank 2 August 2004 Alliance Hire Purchase-i N.A.
AmFinance 1993 - Islamic ARIF Hire- N.A.
Purchase
s AITAB Industrial Hire-
Purchase
Bank Muamalat 1 October 1999 AITAB N.A.
Bank Pembangunan N.A. AITAB N.A.
Bank Rakyat October 2001 AITAB Car Hire 10,000 customers
Purchase Financing-! (May 2004)
EON Finance 1998 Auto AITAB 1 billion
Hong Leong Finance 1997 Hong Leong Hire- 49,800 customers
Purchase Financing-i (April 2004)
HSBC 2000 Lease with an option to N.A.
purchase (IwOP)
Mayban Finance 1994 AITAB a 90,000 non-Muslims
w 2.0 billion in total (April 2004)
OCBC June 2002 Islamic Industrial Hire- At April 2004,
Purchase (IHP-1) 121 million
(277 applications)
Public Finance 1996 AITAB 4.5 billions
(April 2004)
Southern Finance N.A. AITAB N.A.
From the above discussion,all financial institutions providing AITAB facility impose
quite similar guidelines for purpose of application. Almost all financial institutions
provide AITAB for vehicle financing, except Bank Pernbangunan,HSBC and OCBC.
Anchor banks like Mayfinance, AmFinance, Alliance Bank and Bank Muarnalah
offers AITAB for individual and corporatecustomers.Institutions like Affin Finance,

Bank Rakyat, EON Finance, Hong Leong Finance, Public Finance and Southern
Finance put sole concentration on vehicle financing due to increasing demandsfrom
the public and corporatecustomers.
22
2.5 A COMPARISON OF AITAB AND CONVENTIONAL HIRE-PURCHASE
AITAB is developedon the basisof SharVahprinciples of Ydrah and salewhich must

be adhered to by the parties involved in the transaction. Many Islamic finance
practitioners found that certain Shadah guidelines restrict the operation of AITAB
and make it almost impossible to be implemented although the facility promises a
very bright future in banking and finance sector. Realizing its potential, Islamic
financial engineershave attemptedto develop the facility in a way to make it more
flexible, competitive and at the sametime comply with minimum standardsprescribed
by Shadah. Such developmentand modification, in fact, bring AITAB closer to the
conventionalpractice.
In practice, AITAB and conventional hire-purchaseare seen relatively identical in
most aspects.For instance, both are governed by the same law, Hire-PurchaseAct
1967(HPA). The subjectmatter of both transactionsincludes all goodsas specified in
the First Schedule of HPA, comprising consumer goods and motor vehicles. Both
apply to the same group of customers consisting of individual, sole proprietors,
partnership and corporate companies. The same approach is taken in respect of
managementand maintenanceresponsibility whereby these matters are borne by the
hirer as he is the regular user. The owner will bear cost of insurancefor the first year
of agreement;for the subsequentyears,it will be at the hirer's expenses.
Other similarities include term charges, period of financing and early settlement.
Term charges are calculated based on formula set in Hire-PurchaseAct 1967 and
according to prevailing market rate. The minimum period of financing is 12 months,

while the maximum is up to 84 months. In matter of determining early settlement,the
Hire-PurchaseAct* 1967 has specified the mannersof exercising this right. However,
the granting of rebate is the bank's right, thus, it is up to the bank to exercise its
discretionarypower in this matter.
Despite their close similarity, in some basic aspectsthey are comparatively different.
,
To illustrate, conventional hire-purchasetransaction is commonly
perceived as an
ordinary type of loan; AITAB on the other hand is regarded as a financing
23
instruments. The former results in a relationship of debtor and creditor betweenthe
owner (bank) and hirer (customer),whereasin the latter transaction,there is a sale and
purchase executedbetween the bank as seller and customer as buyer. Conventional
hire-purchase is a hiring of goods with an option to purchase at the end of the
AITAB
agreement. involves two transactionsundertakenin Yarah
sequence; (leasing)
in the first phaseand bay' (sale and purchase)in the secondphase.The principles of
each transaction must be observed in its respectivestage.However in practice, these
principles, particularly Udrah principles have been taken little consideration by the
bankers,mostly becausethey are unwilling to hold a responsibility as the owner of the
goods.
AITAB follows SharVah principles as well as the spirit of Hire-PurchaseAct 1967,
while conventional hire-purchasefollows only HPA. The source of fund in AITAB

facility is derived from permissible (Jald funds only. It meansthat the fund should
not come from SharT'ah-prohibited activities such as gambling, prostitution, bar or

club which sell liquor etc. This requirement has been observed by all financial
institutions and monitored by the Central Bank. In contrast,there is no limitation of its
sourcesof funds in conventional hire-purchasefacility.
In respectof the agreement,conventional hire-purchasehas a standardhire-purchase
agreement based on Hire-Purchase Act 1967, which incorporate details of the

transaction, conditions and warranties, parties' rights and obligations, offences and
penalty. While AITAB is
agreement also based on Hire-Purchase Act 1967, it has an
that is 'Aqd letter6 (acceptance letter) to denote an offer and
additional agreement
acceptanceof transactions; while a conventional hire-purchase does not have such
agreement(2001). Local practicesand somemutual arrangements by
made the parties
be in
should clearly specified the agreement.
6 'Aqd letter is a supplementarydocument to the

main Hire-PurchaseAgreement. It contains the
description of assetand undertakingsby the fmance company and customerin the following matters:
(a) that the AITAB transactionwill be bound by the Hire-PurchaseAgreementand Schedule2 of HPA,
(b) that the asseton hire-purchaseshall be usedfor purposeswhich do not contravenethe Shad'ah, (c)
agreethat Hire-PurchaseAct 1967 shall be governedand is applicableto the transaction,(d) that other
provisions in HPA 1967which do not contradictthe Shad'ah will remain in effect for both parties.
24
TABLE 2.5:
Differences between AITAB and Conventional Hire-Purchase
AITAB CONVENTIONAL
(ISLAMIC HIRE-PURCHASE) HIRE-PURCHASE
Definition/ a2 contract ('aqd) in sequence hire then option to purchase
Concept - interest-free I contract; 2 'aqd in one
Eligible 0 those who do not involve in immoral No such limitation as AITAB
Customer activities which against Sharf'ah eg. Individual and non-individual who
Gambling, drug and prostitution. have good credit rating
Type of a similar to conventional hire-purchase 0 refer to 15'Schedule of HPA
Goods - non-Act goods; industrial goods a non-Act goods
Profit Margin/ - flat rate, similar to conventional N Maximum 10%
Term Charges M lower margin for non-Act goods - cost x interest rate
- 3-4% Year
- rental based on profit - based on interest
N cost price + profit
no. of instalments
Period of 0 same with conventional hire-purchase - Maximum: 84 months, Minimum: 12
Financing - Maximum: 7 years, Minimum: 1year months
Calculation of - Fixed rate 0 Fixed rate
Instalment
Ownership Asset purchased in the name of customer Remains with owner (bank)- asset
purchased in bank's name
Transfer of - bank gives release letter after full settlement - After payment of the last instalment or
Ownership 0a document evidencing the transfer upon early settlement
5 gradual retirement
Maintenance 0 similar to conventional hire-purchase - Maintenance responsibility not put on
Responsibili! v - hirer bears the responsibility Owner because it is not p re lease
Documentation w Follows standard hire-purchase but add E Hire-Purchase Act 1967
'Aqd letter. a2 ndSchedule, HP Agreement,
a2 ndSchedule, AITAB Agreement, AITAB Guarantee Agreement, Release letter
Guarantee Agreement, AITAB Purchase
Agreement, 'Aqd Letter (if applicable),
Release letter
Governing Law - Hire-Purchase Act 1967 w Hire-Purchase Act 1967
a SharTah law
- Guidelines from Bank Neqara Malaysia
Taxation 8 treated as leasing expenses - RM10
- Nominal RM10
- In certain circumstances, Government
exempted stamp duty for Islamic products
Early - rule 78 - Rule 78
Settlement w similar to conventional hire-purchase a3 months notice
(Rebate/ Bank's right, looking into current practice 0 Statutory calculation
lbra') - Bank's discretion, cannot declare, if so
obliqed to give
Penalty for v 1% of outstanding amounts 0 impose late charges
Late payment charged on principal, example: 8 8% (Hire-Purchase Act 1967)
lnstalment=$300, next month, must pay - If 2 successive defaults, instalment
$600.30 (300+300+1%) are calculated again and charged.
0 binding by BNM circular Total amount will be different and
0 treatment of penalty after maturity exceed original amount in agreement
a discretion of bank
Insurance 8 Same to conventional in respect of - bank's responsibility during first year
responsibility responsibility to bear insurance cost - hirer's responsibility in subsequent
- Islamic insurance (Takafuo years
- Comprehensive- not 3rd Party 8 Third-party insurance
25
Purchaseprice of goodsin conventionalhire-purchaseis determinedby timing its cost
price with prevailing interest rate. In contrast,purchaseprice in AITAB is calculated

by adding the cost price with an agreed amount of profit based on murdba'h
principle. The profit is determinedbasedon market value or certain benchmarksat the

time of agreement.The profit elementin AITAB is permissible, despite its similarity
to an interest charge,provided it is a fixed chargerelating to tangible asset(Lewis and
Algaoud 2001). Instalments or periodic payments are computed by dividing the
purchaseprice with period of agreementwhich is usually in months (12 months, or

more).
In conventional hire-purchase,goods are purchasedin the name of customer from

dealeror vendor. This is not the casein AITAB where the ownershipremainswith the
bank as an owner, thus, the goods are purchasedin the name of the bank. The reason
is that the foremost condition of leasing Qjdrah) is an object cannot be leased out
unlessit is in possessionof the owner.
Transfer of goods in AITAB can be madeby selling it to the hirer or giving it as a gift
at the end of Ydrah period or when the leaseagreementis terminated. Such a transfer
must be evidenced in a separatedocument (2000). In contrast, there is no clear
indication of how ownership is transferredto the hirer in conventional practice. The
hirer usually regardshe owns the goods absolutely when he settlesthe final payment
without executing any documentevidencingthe transfer.
One of significant difference betweenAITAB and conventional facility is in respect
of imposition of late penalty fee. Defaulters under conventional hire-purchasewill be

charged8.0% per annum; while in AITAB scheme,the penalty for late chargesis only
1%. Yet there are some institutions that do not chargetheir customersfor default as
one of their promotion strategies.In addition, the chargedamount is very small, thus,
they could not benefit much from it. Even if they impose the penalty, such sentence
should confer a positive impact, not oppressionto the customers.
Finally, AITAB requires its user to use Islamic takdful as an insurance coverage,
while conventional user will necessarilysubscribeto a comprehensiveconventional

third-party insurancepolicy.
26
Taxation issue is an interesting one to ponder althoughboth Islamic and conventional

facilities are imposed with the same amount of fees. In documentationsof Islamic
products, stamping charge will only be levied to the first or main agreementonly.
Other contracts will not be charged (Alias 2004). This means execution of AITAB
agreementscomprising the main agreement,ijarah agreement, sale and purchase

agreementand 'aqd letter will not incur more stampingcoststhan that of conventional
facility.
From the above discussion, it is found that the ideas behind AITAB operation are
close to those of conventional hire-purchase in

especially procedural aspect. In fact,
hire-purchasepractices (conventional or Islamic) aim to protect the interest of the
hirer, in particular, and other parties involved such as owner and guarantor,in general.
Thus, it is no surprise to find that most principles in conventional hire-purchaseare
essentially acceptablein SharVah (Collett 1995; Weist 2000). Although AITAB and
conventional hire-purchaseappearedto be in
quite similar practice, AITAB should be
clearly distinguished from the conventional one because both are of different
in
principles some aspects.In fact, there are number of conflicting features between
the two, from Sharl'ah point of view as well as in practical aspects.Most important,
AITAB practice requires the highest ethical standardsincluding fair dealings, full
disclosureand honestwritten contracts.
27
2.6 SUMMARY
This chapterpresentsdevelopmentof Islamic hire-purchase(AITAB) in Malaysia, its
mode of operation, lists of financial institutions offering AITAB facility and

comparison of AITAB and conventionalhire-purchase.Malaysia becomes the leading
player in developing Islamic hire-purchase by launching Islamic banking scheme in

1994 which is participated by major commercial banks in Malaysia. The discussion
reveals that AITAB facility is currently provided by 13 financial institutions which

generally operate the facility using the standard mechanism as illustrated in the
previous section. There are some institutions which adopt different modes of
operation, such as sale and leasebackarrangementand granting an option to the
customers. AITAB is widely applicable to finance motor vehicles, but some
institutions extend its application to industrial and constructiongoods.
Although AITAB has been operatingmore than 10 years ago, it is criticized as failing
to comply with Shadah principles of hire-purchase.The need for a more Shadah-
compliant alternative has been expressedby the Muslim scholars. Accordingly, the
Malaysian governmenthas issueda Shadah Bill in order to overcomethe limitations
in AITAB operation.
Therefore, it is vital to focus on understandingthe Sharl'ah conceptsand legitimacy
of Islamic hire-purchase in order to assessthe current practice of AITAB and the

extent of its compliance to the SharVah requirements.The next chapter will review
relevant classical and contemporaryworks of SharVah scholarsin the area of Islamic
hire-purchase covering its nature and legitimacy in the light of the main SharVah
sourcesand legal rulings of the Muslim jurists. By understandingthe basic concepts

and requirements 'of Islamic hire-purchase, it is hoped that the current model of
AITAB can be further improved to make it closer to a Sharf'ah-compliant structure.
28
Chapter 3
THE CONCEPT AND OPERATION OF

3.1 INTRODUCTION
The previous chapter has revealed that Islamic hire-purchase(AITAB) facility has
been acceptedby bank customersin Malaysia especially in financing of consumer
products and motor vehicles. Realizing the facility's potential, the Malaysian financial
institutions becomevery keen to promote the facility by providing the best service and
most convenient financing arrangementsto attract prospectivecustomersto apply for

the facility offered by respectivefinancial institutions. The eagernessto offer the best
and competitive AITAB servicesto the customers' convenienceand satisfaction has
resulted in a real concern about whether or not such facility really complies with the
SharVah requirements in its procedure and documentation. To determine the
legitimacy of the current operation of AITAB, reference should be made to the
SharVah sourcesandjuristic works in this area.
It is worth noting that most current works in the area of Islamic hire-purchasehave
concentrated on the experience of Malaysia, Saudi Arabia, Egypt and United

Kingdom. Classical literature on Islamic hire-purchaseis very scanty. Most studies
refer to Ydrah and sale transactions separately,but they hardly make headway to
define Islamic hire-purchaseas a specialproduct. This chapterreviews relevant works
in the area of study covering developmentof Islamic hire-purchase,its concept from
Ydrah and sale aspects,its legitimacy from the main sourcesof Islamic law basedon
leasing (Yarah) and sale contracts; and its development and role as a mode of
financing.
3.2 DEVELOPMENT OF ISLAMIC HIRE-PURCHASE
The practice of hire-purchasedates back to England in I 9th century in which it is
commonly known as leasepurchase(aI-bqyaI-: YdrjI or leaseending with ownership

(al-Ydrah a1-tam1Fkiyyah)(AI-Zuhayli 2002). It became
greatly appealing to
consumerswho wished to own a property but were unable to pay its cashprice. Under
29
Chapter 3 The Concept and Operation of Islamic Hire-Purchase
a hire-purchase scheme, a consumer is given the possession of the goods in

consideration of an initial payment and a promise to make regular payments or
instalmentsover certain period of time. During this period the consumeris granted a
complete possessionand enjoyment in the goods without having to bear any risk of
ownership until he has completed paying all the instalments. It was hardly
remarkablethat hire-purchasebecamevery popular as a method of acquiring property,
particularly the consumergoods.
As such, the concept of hire-purchasewas unsurprisingly unknown by the classical

Muslim scholarsas there was no authoritative written work or indication in reference
to it. The Muslim scholars were inclined to discuss hire and purchase separately
under different headingslike 'The Book of Sale' (Kifilb AI-Bay) and 'The Book of
Letting' (Ki0b Al-Ijdrah)7. Interestingly, thesetwo headingswere put in sequencein
most Islamic jurisprudence (fiqh) books, probably becauseboth contracts, being the
most important contracts in commercial activities, are closely related. While
classifying various types in
of contracts the Islamic commercial activities, Bakar
(2000) admits that the basic contract in many cases and situations are contract of
exchangeand contract of utilization of usufruct. The former is a contract of sale or

bay' which implies the transfer of ownership of a property from one party to another;
while the latter is a leasing contract or yarah which affects the transfer of usufruct of
a property from one to another. According to Bakar, both contracts of sale and hire
constitute the main commercial activities becausethe remaining contracts are largely
dependenton thesetwo contracts(Bakar 2000).
It was only in 1980's when contemporaryMuslim scholarsstartedto widely highlight

Islamic hire-purchaseas one of the main instrumentsof Islamic banking. In fact, it has
been well-recognised as a potential instrument in promoting the development of
Islamic banking and finance, which took place mainly in that era. The potential of
Islamic hire-purchasefacility was mentionedby some early writings on the subject of
Islamic banking and finance. For example, Componentof Islamic Banking (Sadeque
1982), Money and Banking in Islam (Ziauddin Ahmed 1983), Interest-FreeBanking
7 For example in Bidayatul Mujtahid (Ibn Rusyd)

and Majallah AI-Aikam Al-Adliyyah, a Code of
Islamic Civil Law.
30
in Pakistan(1983), Islamic Banking and Finance (Hassan1985),Leasing: An Islamic

Financial Instrument (Allawi 1986), The Experienceof Islamic Banks in the Middle
East (Al-Tamimi 1986), Principles of Islamic Banking Massraf Faysal Al-Islami and
Islamic Banking Contract (Shirazi 1988). According to these works, the concept of
lease and purchase appearsto be well acceptedin Islamic commercial transaction,
becauseit is operatedin the spirit of Shariah, and doesnot violate the principles of
Islamic commercial contract. Among well-known Islamic banks which were
established during that period included, Albaraka Investment and Development

Company, Jeddah (1982), Faysal Islamic Bank of Bahrain (1982), Bank Islam
Malaysia Berhad (1983), Dar al Mal al Islami Trust, Geneva (1984) and Al Rajhi
Banking and InvestmentCorporation (1988)[(Lewis and Algaoud 2001)].
Today, Islamic hire-purchasehas been widely acceptedand recognisedworldwide. It

is labelled with various namesby different Islamic financial institutions in the world,
for instance, 'lease ending with ownership' (Iqbal 1988), 'Islamic lease finance',
'lease-purchasefinancing' (Salleh 1986; Iqbal and Mirakhor 1987; Ahmed 2000) and
'Islamic finance lease'. In Arabic writings, it is variably described as Ijdrah Wa-
IqUnX8 (lease-purchase),AI-Bay' al-Tayiri (leasing culminating in ownership), Al-
Ijdrah Al-Muntahiyyah Bit-Taml& (Lease ending with ownership) or AI-Ijdrah
ThummaAl-Bay' (Lease and then purchase)9.Among these terms, Ijilrah Wa-Iqtind'
has been frequently used by many contemporary scholars of Islamic banking and
finance in their academicwritings and discussions.Whatever name is given, it is the
Islamic alternative of conventional hire-purchaseor financial leaseas it is commonly
known.
3.3 NATURE OF ISLAMIC HIRE-PURCHASE
The notion of Islamic hire-purchasecomprisestwo basic elements,i. e. lease and sale
or purchase.Basically, it is a contractwhich bind an individual at two different stages;

firstly leasing or ijdrah stage,and secondly a stagein which the transfer of ownership
8 In the earlier
writings on Islamic hire-purchase, the facility was labelled Uarah wa iqtina' in Money
and Banking in Islam Ziauddin Ahmed (1983).
9 In Malaysia,
most finance and leasing companiesadoptA I-Ijjjrah ThummaA I-Bay' or AITAB, while
there are a few companiesaddressthe sameinstrumentasAI-Ijdrah AI-Muntahiyyah Bit-TamlTk.
31
of an asset is affected by way of sale"'. Its mechanism is largely concerned with

jav-ah,thus the whole Islamic hire-purchase shall mainly be governed by principles of
il.Cirtth.The mechanism of Islamic hire-purchasc is illustrated as follows:
FIGURE 3.1:
Mechanism of Islamic Hire-Purchase
4 Islamic Hire-Purchase 10
jJrah Ba.v'
pliase I phase 2
In the next section, tile concept of Islamic hire-purchase will be analysed from two
angles, i. e. leasing or jCirahaspect, and sale or purchase aspects. The aspect of jjrclh
will be thoroughly discussed since jCirahrepresents the most important contract In the
Islamic hire-purchase transaction. It will be followed by analysing relevant principles
ofbay' or contract of sale, but this will be restricted to certain aspects because bay' or
sale is a very wide subject.
3.3.1 Definition of Ijarah (Leasing)
Leasing and hiring are used interchangeably in the literature (Bakar 2000), which in
Arabic terminology denote jirah. The term j5rtih originates in the Arabic verb
-qjal-a' which denotes 'rewarding' or 'recompensing' (Sulainlan 1992). Literally,

j5iwh is derived from the noun 'al-qjr' which means compensation, reward,
consideration, return or counter value (al-Vivad) against the use of all object(Hassan
1992; Harni-nad, Al-Tiwajini et al. 1998). From a Juristic (liqh) definition, j5i-ah
refers to a contract to Litilize a lawful benefit against a consideration (Al-ZLillayli
2002). In i5i-ah, tile right to use the object is transferred to the hirer, not its
ownership. I lence, jCit-ahis a sale ofusufruct not of a physical entity.
The ownership can also be transferred by

way of simple g (hikih) Rahnian (2001).
gift
32
Technically, ijdrah is an agreementbetweentwo parties, one being the owner of the
asset,who gives possessionof the assetsfor the use of the other party, the hirer, on an
agreedrental over a mutually agreedperiod (Uz-Zaman 1993). It is also defined as
transferring the usufruct of a particular property to anotherperson in exchangefor a
rent claimed from him (Usmani 2002).
In general, Muslim scholars define Ydrah as owning a specific benefit of an asset
against a consideration (Al-Sanhuri undated). In particular, there are various

definitions of Yarah cited by the Muslim scholars as the four schools of jurisprudence
have given different explanations to the meaning of ijdrah, which are illustrated as
follow:
(a) The Malikill School defines ijdrah as a transfer of ownership of permitted
usufruct for a known in for

period exchange compensation(price) (Kharofa
1997; AI-Zuhayli 2003; AI-Jaziri undated;AI-Sanhuri undated).
12
(b) The Hanbali School has describedYdrah as a contract where the subject
matter is lawful and for defined use (manfaah); corporeal object (ayn) is
also lawful and determined;and for a specific period of time (ibid).

(c) The Hanafis13define iji5rah as a contract intended to give ownership of a
determinedand legitimate usufruct (manfaah) of a rented corporeal object
('ayn) againsta consideration(ibid).
(d) The Shafi' iS14view ydrah as a contract where the subject matter is the
determined,legitimate, assignableand lawful usufruct of an object againsta
fixed consideration(ibid).
The above definitions vary in their wordings but they are actually unanimous in the
substantialmeaning of ijdrah. All four schools of jurisprudence are in that

agreement
yarah is a contract for utilising the usufructs (manfaah) of a defined object against a
determinedconsideration.According to Kharofa (1997), the scholarsof jurisprudence
11This is the opinion Al-Dard-ir and AI-Qardfllfrom the Maliki School

of
12This definition is given by 'Ibn Quddmah,Al-Buh5t-I
and 'Ibn Qayyim Al-Jawziyyah from the
Hanbali School
" 'Ibn Al-Humam, Al-KdsfinT
and 'Ibn 'Abid-m from the Hanafi Schoolprovide this definition.
14This is the definition
provided by A-Khatib At-Shirbin-I from the Shafi'i School
33
schools have unanimously agreedthat ijarah is a contract on using the benefits or

in
services return for 15
compensation.
Al-Sanhuri(undated)assertsthatthe abovejuristic definitionsleadto threesignificant

aspectsof Ydrahcontract.Firstly, ijdrah contractis well-understoodas a contractto
give the ownershipof particularusufruct.In this instance,the hirer has a complete
freedomto utilise the usufructof an assetwithin an agreedperiodof time. Secondly,
the definitionscomprisethreeessentialpillars of Udrahcontract,namely,consentof
the contractingparties,a specificassetto be leasedout andrentalpayments.Thirdly,
the usufructwhich is the subjectof ijdrah contractmustbe identifiedandcapableof
beinglegally andreasonablyutilised.
In the Islamic commercial context, ijdrah refers to a contractualrelationship between
an owner of a property and a person who wishes to leasethe property. Both parties
will enter into a leasecontract or is also referred to as a hire contract. For example,
Al-Rajhi Bank (2001) defines Ydrah as a processby which usufruct of a particular
property is transferredto in for

anotherperson exchange a rent claimed from him (Al-
RajhiBank 2001). In the context of Islamic banking, Salleh (1986) views it as a lease
contract under which the bank or financial institution leasesequipment or a building

to one of its clients against a fixed charge.The bank will usually put the property up
for rent every time the lease period terminates, so the property will not remain
unutilised for long period of time. The title of the property remains with the bank;
henceit assumesthe risk of recessionand other risk associatedwith ownership.
From the above-given definitions, Ydrah has been well understood as a contract in
which the owner of a property transfers a legal right to use and derive profit from the
property, to another person, for an agreedperiod, at an agreedconsideration. In this
instance, the owner is called a lessor (mu'ajir); the person who uses the property is
known as a lessee or hirer (mustajir); the subject matter is the usufruct of the
property (manfaah); and the considerationrefers to a rent (ujrah).
'5 He has referred the definitions

given by the four schools of jurisprudence (madhdhib) from Ibn
Qudamah,Al-Mughni, vol. 5, p. 433.
34
Chapter3 The Conceptand Operationof IslamicHire-Purchase
3.3.2 Definition of Sale (Bayl
Sale or bay' presents the main contract of exchange in Islamic commercial
transaction.Accordingto it
Schacht forms the coreof the Islamic law of obligations
(Rahman 2001) due to its importance over other kinds of contracts. Sale involves an
exchange of a commodity for another commodity (barter trading), or of a*commodity

for money (ordinary sale), or of money for money (sarj) (Bakar 2000).
Bay' is the gerund of the Arabic verb Ma which means "to sell". Therefore, bay'
being the gerund of ba'a literally means "sale" (Amin 1975; Ismail 1995). Bay' or
is defined as an exchangeof one item for another on mutual consent (AI-Zuhayli
sale
2003). For the Hanafis, it means the exchange of an owned commodity (miio for
another in a specified manner. The Shafi'Is define sale as the exchange of an owned
for another with the exchange of ownership, and taking possessionby the
commodity
new owner (AI-Zuhayli 2003; AI-Jaziri undated).
in
Bay' practical sensedenotesboth sale and purchase.It is a contract which stipulates
the reciprocal exchange of a given quantity of a commodity (mal) or service
(manfa'ah) against a given quantity of a commodity or service (Hammad, Al-Tiwajini
1998; Ismail 1998). The commodity or service in sale contract is deliverable
et al.
the spot or deferred. It is also noted that the commodity includes any
either on
i. 16
acceptablemedium of exchange e. money.
Bay'is also referred to as a contract of exchangebetween two properties on the basis
of ownership of the price and commodity (Moustapha 2001). This means there is an
exchange of property between the seller and buyer, whereby the seller's property
(commodity) is transferred to the buyer, and conversely the buyer's property (in cash
or in kind) is passedto the seller. Ibn Rushd further explains the nature of sale as an
exchange of two properties. The exchange can be made between two corporeal
properties or exchange of corporeal property for a corresponding liability or of a
16In the practical sense, bay' is commonly understood as a contract whereby the seller agrees to
transfer the goods to the buyer in return of a money consideration called price. This definition is closely
similar to that provided in the Malaysian Sale of Goods Act 1957 which defines a contract of sale of
goods as a contract whereby the seller transfers or agreesto transfer the property in goods to the buyer
for a price.
35
liability for another liability. Each of these three forms of exchange is delayed or
immediate (Rushd 1996).
The Majallah in Article 105definesbaV as changeof propertyfor propertyand it is

either munaqid (by a concludedbargain) or ghayr munaqid (not by concluded
bargain).Article 106furtherstatesthat bqy'munaqid refersto a salebeingconcluded
to showmutual intention of the
in proper legal formalitiesi.e. offer and acceptance
parties;while Article 107 clarifies bay'ghayr munaqid as unlawful sale(bay' batio
(1880).
3.3.3 Definition of Islamic Hire-Purchase
Most literatures refer Islamic hire-purchase to Ydrah wa iqtind' or al-ydrah al-
muntahiyyah bit-Tamllk. According to Wahbah al-Zuhayli, it refers to owning the

benefit of certain assets for a specific period of time, by paying an agreed sums of
rental, with an agreement that the owner will transfer the rented asset to the hirer at
the end of the agreed period or during the period, provided all rental payments or
instalments have been made in entirety. The transfer of ownership is affected by a
new and independent contract, either by giving the asset as a gift, or selling it at an
agreed price (Al-Zuhayli 2002). This definition is agreed by Elahi who refers to yarah
wa iqtinil' as a lease agreement combined with an obligation of the hirer to purchase
the asset under lease during the lease term or at the termination of the lease (Elahi
2000).
Ij5rah wa iqtind' also means an arrangementto be made by the owner in which he
promises to gift the leasedassetto the hirer at the end of Ydrah period, subject to the
hirer paying all periodic payments regularly (Sattar, Hasan et al. 2002). Al-Sanhuri
further asserts that this arrangement comprises an U'Irah contract which is then
followed by contract of sale, thus, each contract is independentand not combined in
one agreement(Al-Sanhuri undated).
In a commercial context, Udrah wa iqtinil' is a mode of financing adoptedby Islamic

banks and other financial institutions offering Islamic products. It is a contract under
which the bank finances an assetsuch as equipment, building or other facilities for the
36
customer against an agreedrental together with an undertaking from the customer to

make additional paymentsin an accountwhich will eventually enablehim to purchase
the asset.The rental and the purchase price are fixed so that the bank gets back its
principal sum along with some profit which is usually determined in advance (Al-
Omar and Abdel-Haq 1996).
The AAOFI1 SharVah Rules for Investment and Financing Instruments describes
Islamic hire-purchase as a form of leasing contract which includes a promise by the
lessor to transfer the ownership in the leasedproperty to the lessee,either at the end of
the term of Y&ah period or by stagesduring the term of the contract. Article 11/2
rules that the transfer cannot be made by executing, along with the Ydrah, a sale
contract that will become effective on a future date, becausethis is not permissible by
SharVah.
3.4 LEGITIMACY OF ISLAMIC HIRE-PURCHASE
Islamic hire-purchaseis a new product, thus, there is unsurprisingly lacking in direct
authority of its legitimacy from the main sources.Referenceshall then be made to the
two components of Islamic hire-purchase; leasing (Ydrah) and sale contract whose
legality are outsourced from the Holy Book (al-Qurdn), Prophet's Tradition (Al-
Ahildith) and consensusof scholars(Ijmd ). After that, the legitimacy of Islamic hire-
purchase is discussedusing deduction and analogy based on the three main sources,
supportedby resolutions made by Muslim scholars.
3.4.1 Legitimacy of Ijarah
Muslim jurists agreed that Yarah is a permissible contract in Shadah. Their
approvalsare based on the Qur'dn, the Addi-th and the consensus

of Muslims. The
Qur'anic proofsarederivedfrom thefollowing verseS17:
(a)' The Qur'dn narratesa storyof ProphetMosesandProphetKhaidir where
MosesaskedKhaidir why he didn't askfor any paymentfor repairingan
old andrundownwall. ' 8
17Abdullah Yusuf Ali, The Holy Qur'an; English Translation the Meanings
of and Commentary, King
Fahd Holy Qur'an Printing Complex (undated).
37
(b) The Qur'5n tells a story of Prophet Moses who was hired by his father-
in-law againsta specified considerationfor a certain period of time. 19
(c) The Qur'dn also mentionsthat wet nursesshouldbe given their due for
suckling 20
babies. This verseimposesan obligation onto a husbandto
pay his divorcedwife whensheagreesto breastfeedhis child.
The above verses stressthat it is legal and common to do something in consideration
of a payment. According to al-Sh5fi'T, the above verses show clearly that the Ydrah
contract is lawful in any permissible transactions (Hassan 1992). Even the first and
secondversesindicate that the Ydrah contract had been used in the time of Moses.
The proof from the Sunnahis derived from the Addl-th of the Prophet:
(a) "Give a worker his fee before his sweat dries 21
P, In this hadi-th,the
Up.
to
order pay wages (ajr) is a clear indication of the validity of leasing or
utilising the worker's labour for a period of time (Kharofa 1997; Al-
Zuhayli 2003).
(b) "He who hires should inform him of his fee. ,22(Kharofa 1997;
a person
AI-Zuhayli 2003)
(c) Ibn 'Abbas reported that the Prophet (u-) had cupping performed on him
he the his fee23(AI-Zuhayli 2003).
and gave cupper
(d) It was reported that the Prophet (u-) and Abli Bakr hired 'Abd Alldh ibn
Arqat24from Banfi al-Dayl as their guide, on the road to Madinah, on the
day of their migration from Makkah (Rushd 1996).
18 "So they went on until when they came to the people of a town, they asked themfor food, but they
refused to entertain them as guests. Thentheyfound in it a wall which was on the point offalling, so he
put it into a right state. (Musa) said: Ifyou had pleased,you might certainly have taken a recompense
for it(18: 77).
'9 "Said one of them: 0 my father! employ him, surely the best of those that
you can employ is the
strong man, the faithful one. He said: I desire to marry one of these two daughters of mine to you on
condition that you should serve mefor eight years; but ifyou complete ten, it will be ofyour own free
will, and I do not wish to be hard to you; ifA Ilah please,you willfind me one of the good. "(28: 26-2 7)
20 "If they
suckleyour (offspring), give them their due payment" (65: 6).
21hadith
narratedby Abu Ya'la, Ibnu Majah, At-Tabrani and At-Tirmizi.
22hadith
narratedby 'Abd-ar-Razzaq and al-Baihaqi.
23hadith
narratedby al-Bukhari, Mulim, Ahmad ibn Hanbal.
24At that time he
was a non-Muslim Quraysh Rusyd (1990)
38
(e) Said ibn al-Mussayebnarrated that Sa'id said, "We used to hire land in
return for plants on water canals; the Prophet (u-) disallowed this and
directed us to hire it for gold or silver." (AI-Zuhayli 2003)
The above-mentioned Addi-th provide evidencefor the legitimacy of Yirah. It has

beenpracticedby the Prophet(u-) himselfandhis companions.The Prophet(u-) has
also laid down some guidelines and mannersof conducting Ydrah.
It is also known that the Muslim jurists during the time of the companions of the
Prophet (L.-) reached a consensus on the permissibility of YCIrah (Al-Zuhayli 2003).
The practice of YCzrah has been allowed in the time of Prophet (u-) and his
companion, because there was a need for such transaction. Ijclrah is an important
contract like sale. If sale is permitted for purpose of acquiring a property, thus, Yarah
is necessarily allowed for purpose of using a usufruct of the property (Sulaiman
1992).
A valid Ujrah contract must be formed from required pillars and satisfy several
conditions attached thereof Majority of Muslim scholars have agreed on four
25for the formationof an yCirah (Sulaiman
contract 1992;Rushd 1996;
essentialpillars
AI-Zuhayli 2003):
Two Contracting Parties
There must be at least two parties entering into an ydrah contract; a person giving a
lease or owner; and a person accepting the lease or hirer. Both contracting parties
should be fully qualified and possesslegal capacity to executethe contract. They must
be sane, adult and free, thus, a mentally-incapacitatedperson like a child and insane
person cannot enter into an Ydrah contract. Except when such transaction is
conducted by a legal representative or wali, or guardian in case of a child
(Muhammad 2001), then the contract will render valid. In addition, both contracting
parties must voluntarily consentto enter into the Yarah contract without any coercion.
25However, the Hanafis

affirms on one pillar only, i. e. offer and acceptance.other essentialssuch as
the contracting parties, subject matter and consideration are included in conditions of a valid ijilrah
contract, not its pillars.
39
When one of the parties executesthe contract against his free will, then the contract
become 26
will voidable. The owner must fulfil the following conditions:
e He must have full possessionand legal ownership of the object before an ydrah
contractis madeeffective.
" After the conclusionof the Ydrah contract,he must give the possessionof the
leasedobjector propertyto thehirer, while he still holdsthe title of the property.
" He must deliver the propertyon time, i. e. on the date of commencement of Ydrah
togetherwith all essentialaccessories
which can be fully utilisedby the hirer.
" It is the duty of the to

owner maintain the leased in to
property order retain its
benefitwhich is to be usedby the hirer.
" As he
an owner, will bearall liabilities rising from the For in
ownership. example,
a case of renting a house all taxes concerning the house such as Council tax shall
be bome by him. 27
In the event of any damage occurs to the leased object due to the hirer's
negligence, the owner shall have a right to claim compensation.

The owner must respect the hirer's right for quite possessionand enjoyment in the
leasedproperty.
For the hirer, he must abide the following conditions:
" The hirer shall act as a trustee of the owner in treating the leasedproperty properly.
" He must take reasonablecare of the leasedproperty and cannot use it in a harmful
way.
" If the hirer damagesthe property, he shall be responsible for the repair and putting
the property in a good condition.
In the event of negligence or misuse on part of the hirer, which may have damaged
the leasedobject, he shall be liable to indemnify the owner.
It is the hirer's duty to bear any cost of ordinary routine maintenance, such as in
caseof renting a car, he shall pay for the petrol and engine oil.
26This
rule is basedon surah al-Nisd' (4) verse 29 which means:
"0 ye who believe! Eat not up your property among yourselves in vanities; But let there be
amongstyou traffic and trade by mutual good-will; ... "
27Al-Rajhi Bank (2001)
assertsthat the owner also bears most liabilities attachedto the leased object
such as damageto the object, cost of replacementof durable parts and other costs of basic maintenance.
The owner can authorise the hirer to undertakeall the above liabilities, but the costs must still be bome
by the owner.
40
Unless the contract stipulates otherwise, the hirer can only use the property
to the 28 Thus, if he rents a house he cannot turn it
according prescribedpurposes.
into a shop or school or what more a motor vehicle workshop.
3.4.1.2 Offer and A cceptance
Offer and acceptanceor ab and qabul refer a situation where one party offers to give
an object on lease and another party acceptssuch offer. The general rules of contract
have laid down some guidelines for perfecting a valid offer and acceptance.Firstly, an
be expressedclearly to show the party's intention. Such
offer and acceptancemust
be indicated orally, or by writing, or signal etc. Secondly, a definite
expressionsmay
is in to
response a definite offer in the same session. Thirdly,
acceptance made
For example, a person said, "I lease
acceptancemust correspondexactly with an offer.
this house to you", the other party must pronounce his consentby saying, I accept the
leasedhouse"or I accepf'.
3.4.1.3 Subject Matter
A subject matter of an yarah to or

contract refers a usufruct manfa A derived from a
thus, a usufruct will only exist when the object in which such usufruct
specific object,
is attachedto, is in existence.For example, in caseof renting a house, the house must
because
the benefit of rentingthe housewill not be obtainedif there
physically exist,
is no housein existence.The usufructto be leasedout must satisfycertainconditions,
it
namely, must be legitimatein Shadah; it is known by both owner and hirer; it is a
benefit that is capableto be handedover to the lessee;it has no defectwhich could
make it incompetence to give intendedbenefit to the lessee;
and its use is limited to
certain agreedperiod (Al-Jazairi 1976; Libabidi 1993). The object in which the
is to
usufruct attached must be in the form of tangible assetor property. It must
comply with certain conditions as follows:
* It must havea valuableuse,thus,a thing having be

no usufructat all cannot leased
(Usmani 2002).
It
9 must not be for
perishable the whole period of lease(Sulaiman1992).
28 If is in the contract, the hirer can use it in a reasonableand ordinary

no such purpose specified
manner. If he intends to use it for an uncommon purpose, he must obtain the owner's express
permission in advance.
41
" It must actually and legally attainable, thus, to lease something which cannot be
delivered is not permitted (Al-Sanhuri undated).
" It should be precisely specific.
" It is to
necessary make known the for
purpose which it is rented.
" In commercial sectors, it is not permitted to lease a property to a company that will
use it for Islarnically illegal to

activities, such as convert it into a gambling centre
29
or bar.
The period for it
using must be fixed and agreed upon by both parties. Renewal
terms must also be stated clearly and should not be left to the owner's discretion
(Usmani 2002).
3.4.1.4 Consideration
Ijarah contract is executed between the contracting parties against a consideration
which is known as rent. The conditions of rent are:

The must be specified in order to void deceit and dispute in the '
e amount of rent
future30(Al-Jazairi 1976).
be
There must a clear term stating whether the rent will be flat for the whole period
the agreement, or it will be renewed depending on the prevailing market

of
In the later situation, the renewal terms must be stated as to when such
condition.
action will be taken (i. e. annually or in every 6 months) and the percentageof the
probable increaseor decrease (e.g. 5%) (Usmani 2002).
It should be certain and known to both parties (AI-Zuhayli 2003).

The rent money has to be legal in Shad'ah. Thus, it is not permissible to pay the
rent with Islarnically illegal things such as wine and pork (Kharofa 1997).
The manner of paying the rent has to be agreedby both parties (Sulaiman 1992). It
must be clearly specified whether the payment is to be made on daily, weekly or
monthly basis.
In addition, they must also agree on methods of paying the rent, either by cash, or
cheque, or standing order through the bank account. If there is no such agreement,
be 31
then the local custom that governs such transactionwill referred to
29However, according to Al-Rajhi Bank (2001), it is permissible to lease the property to those whose
major activities arc haIC71
or permissible even they involve some secondaryprohibited activities.
30The Prophet (o-)
commanded, "He who hires a person should inform him of his wages"
42
Chapter3 The Concept and Operation of Islamic H ire-Purchase
" The rent shall fall due from the date of delivery of the leasedobject, not the date of
signing the contract.
" The rent must be paid on an agreed time, failure to do so will amount to a default
which will lead to a termination of drah.
" At the expiry of the lease agreementany new term cannot be pre-determined, but
the parties can enter into a new agreementto this effect. This includes continuation
of the lease, or sale of the leasedassetto the lessee.So if the owner intends to sell
the leased object after the lease period has expired, the price can only be fixed
is 32
under the new agreement.Thus a pre-determinedsaleprice not permitted.
Among all conditions listed above, three principal conditions must be applied to the
U&ah contract; firstly, the nature of the usufruct must be precisely defined; secondly,
the consideration i. e. rental must be of fixed value; and thirdly, the hiring period must
be precisely determined (Coulson 1984; Al-Sanhuri undated).
3.4.2 Legitimacy of Sale (Bay I
Bay' or sale contract, when executedaccording to its rules is made legal and permitted
by Sharl'ah. The legitimacy of bay' is by AI-Qur'dn 33that clearly states its
evident
approval to bay' transaction in the versesbelow:
"Allah has allowed trading andforbidden usury" (2:275)
The above verse states without doubt that bay' or sale activities (trading) are
permitted, but such activities will become prohibited if they contain any element
of riba (usury).
"0 you who believe! do not devour your property among yourselvesfalsely, except that
it be trading by your mutual consent,"(4: 29)
According to the verse, it is permitted to obtain some profits from a sale
transaction, provided it must be made by legal mean. This means the sale must
31For example, in the

caseof renting a house,the local people usually pays in cash at the beginning of
every month, so the parties of an ijarah contract may adopt such practices.
32The
rational is to avoid gharjr or uncertainty in the transaction. The price must be fixed by taking
into account certain factors, i. e. market price, condition of the property and mode of payment (cash or
deferred).
33Abdullah Yusuf Ali, The Holy Qur'dn; English Translation
of the Meanings and Commentary, King
Fahd Holy Qur'Rn Printing Complex
43
be carried out properly and any stipulation (e.g. provision of profit) to be
attachedto the sale contract must be mutually agreedupon by the parties.
"if it be a transaction which ye carry out on the spot among yourselves, there is no
blame on you if ye reduce it not to writing. But take witness whenever ye make a
commercial contract; and let neither scribe nor witnesssuffer harm. "(2: 282)
This verse also evidently permits a sale transaction, and it lays down some
guidelines for carrying out different types of sale. If it is a spot sale, the verse
suggests to the parties to provide a witness, but if it is a deferred sale such

transaction must be reduced to writing, i. e. written contract. The stated
conditions aim to make the sale transaction convenient to the parties, and also to
avoid any misunderstanding, fraud and dispute in the future.
The Prophet (L.-) has given many rules and guidance on methods of conducting a
legal and proper sale transaction. Moreover, the Prophet was sent to mankind while
people traded among themselves, and he acceptedthe practice. There are numerous
Addi-th regulating the transaction,among them are:
(L,
(a) The Prophet -) said, "Sale be by 34
0'. (Ashqar, Rakhiyyah et al.
must consent
1998; AI-Zuhayli 2002; AI-Jaziri undated)
(b) In matter of attitude and behaviour in conducting sale transaction, the Prophet
hasgiven goodnewsto thosewho aresincereandhonestin their dealings
by saying, "A good and honest trader (or whoever involves in trade) will be
,35
positioned amongst the Prophets, the righteous people and the martyrs.
(AI-Zuhayli 2003; AI-Jaziri undated)
(c) The Prophet (. >-) also explained one of the important principles in sale
transaction in a had-ithnarrated by Hak7imbin Hazarn, "Don't buy anything
which you do have. ,36(Amin 1975; AI-Zuhayli 2002)

not
Muslim jurists unanimously agree to approve a sale transaction provided all
conditions are satisfied and the parties adhere to the terms of the sale contract. In
addition, they firmly state that a lawful sale shall avoid elements of interest (ribii),
uncertainty (ghardr) and ignorance Yahdlah) which may cause doubt in the
34reported by Ibn Mdjah

and Ibn Habban
35from Abi Sald Al-Khudri (r. )
a. and reported by At-Tirmifi and Al-Hakim
36reported by Aba Ddwud, At-Tirmifif
and An-Nasd7i
44
transaction, and eventually lead to dispute or mischief among the parties (Amin
1975). Al-Shafl'! assertedthat the general rule for all salesis permissibility as long as
they are concluded by consentof contracting parties, except what has been forbidden
by the Qur'anandthe Prophet(L>-)(AI-Zuhayli2003).
From the given definition and legitimacy aspectsof bay, a sale contract shall consist
of four pillars namely, the contracting parties, offer and acceptance,subject matter,
and consideration. Each of thesepillars is governedby certain conditions (Anas 1989;
Rusyd 1990; Zarqa 1991).
3.4.21 Contracting Parties
Both seller and buyer must possesslegal capacity to enter into a valid sale contract.
They need to fulfil certain conditions, namely, they must be sane, and adult which
means they have reached the age of majority, and they are free without oppression.
These conditions are vital in order to prove that the parties are in mutual consent
(rido) to the contract. The consentis expressedby sighah i. e. offer and acceptance.
3.4.22 Offer and A cceptance
The Qurdn and AhWlth rule that bilateral contractscan only take place by mutual
and free consentof the parties. Thus, a combinationof offer and acceptanceis
importantto signify mutual consentof the contractingparties.Offer and acceptance
mustbe boundby the conditionsasfollows (Al-Zuhayli 2003;Al-Sanhuriundated):
" The acceptanceshould correspondto the offer in respectof its content stating
specificsubjectmatterandconsideration.For example,if a selleroffer to sell a beg
for ;E10,but the buyeragreesto buy it for E5,thenthe contractcannotbe concluded
becausethe acceptance
doesnot correspondwith the offer.
" Acceptancemust be tenderedwhile the offer is still subsisting.The time period is
usually fixed by the offeror but if not it shall be made in a reasonabletime
dependingon the local practice. If the acceptanceis made afterwards,it will
eventuallyturn into an offer, thus,will be subjectto acceptance
by the otherparty
(who was initially the offeror).
45
Chapter3 The Conceptand Operationof IslamicHlre-Purchase
* Offer and acceptancemust not be subject to a particular condition, or time. For

example, a seller says that he will sell something if his father has permitted to do
SO.
Both offer and acceptancemust be made in the samesetting.
The expressionsmust indicate the parties' consentto the saletransaction.
Offer and acceptance can be made orally or by word of mouth; by writing; by
conduct, e.g. exchangingthe commodities; by gestureor known sign of dumb; and by

modem ways of communication like telephone,fax, email, teleconferenceetc. (Niazi
1991)
3.4.Z3 Subject Matter
As mentioned earlier, bay' is defined as an exchangeof property or mdl. It is obvious

that the subject matter of sale must be something which satisfies the characteristic of
property or mdl (Rahman 2001). In SharVah, there are three basic attributes of
it
property, namely, must have it
some value; must be a thing which provides lawful
benefits in Sharl-ah, thus, sale of liquor or casino building is prohibited by SharVah;
it
and must be a lawful property of the seller. Contemporary scholars have also
included future product and money as the subject matter of sale because they are
capable of being owned legally, although they are not considered as "mdr'
(Moustapha 2001; Usmani 2002). The following conditions shall also apply to the
subject matter of sale (Libabidi 1993; AI-Zuhayli 2003):

" The subject matter must be certain and identified by both parties.
" It must be known to the buyer.
" If it is sale by sample, the subject matter must be known by a description of its
qualities.
" It must be in actual existence at the time of making the contract, except in salam
sale,
" It should be deliverable either immediately or at agreed future date, except for
contract of istisnil'.
46
3.4.24 Consideration
The basis of a sale contract involves a transfer of a subject matter against a

The
consideration. considerationmay consistof any valuablethings,like tangibleor
intangible property, money and also it may be something whose delivery is deferred
to the future. However, a consideration is commonly understood in reference to a
is in form (Moustapha 2001). Like
price of the subject matter which a monetary
subject matter of sale, consideration of sale must follow certain similar conditions as
it
to make a good consideration. Such conditions are (Zarqa 1991):
It be in at the time of contract. However, if the consideration is

* must existence
thus it be
can on the spot or deferred to future
money this condition shall not apply,
37
agreedperiod.
It must be a property having value and benefit which are permitted by Sharl-ah.
e It must be legally owned by its owner.

be being delivered the time of contract, except in bay'
* It shall capable of at
niu'ajjal.
9 its quality and quantity must be made known to the parties.
The foregoing discussion presents basic concept and legitimacy of leasing (Ydrah)
(bay) in to
contract order stimulate a general understanding in the subject of
and sale
Islamic hire-purchase. Sale is
contract one of two key in
elements an Islamic hire-
beside Ydrah The importance of sale (bay) and leasing

purchasetransaction contract.
(Ydrah) is inevitable in analysing the legality of Islamic hire-purchase as both are
incorporated in the instrument under study at different phases; firstly Ydrah and
secondly sale contract. To ensure the validity of Islamic hire-purchase contract, the
to
parties shall adhere rules of Ydrah for a certain period of time in the first stage,and
then of sale in the later stage.
37This
rule is provided in surah Al-Baqarah (2) verse 282, "0 ye who believe! Whenye deal with each
other, in transactions involvingfuture obligations in afixed period of time, reduce them to writing Let
a scribe write downfaithfully as betweenthe parties: "
47
3.4.3 Legitimacy of Islamic Hire-Purchase
Islamic hire-purchase, like any other contract, has to fulfil all conditions of a valid
contract stipulated by the SharVah. The contract should be executed by mutual

agreement,responsibilities and benefits of both parties should be clearly spelt out, the
agreementshould be for a known period and against a known price (Ahmad 1994). In
particular, Islamic hire-purchase has to adhere to principle rules of Yarah and sale
contract in respect of conditions imposed onto the contracting parties, offer and
acceptance,subject matter of the contract and the consideration as discussed in the
earlier sections. Based on thesebasic conditions, Islamic hire-purchaseemphasizesits
conformity to the SharVah rules in terms of its characteristicsand operation.
In determining the legitimacy of Islamic hire-purchasecontract, Wahbah Al-Zuhayli

has provided four generalprinciples of allowing such contract (AI-Zuhayli 2002):
(1) Ijarah and sale contractsbeing the basis of the Islamic hire-purchasecontract
do not operate at the same time; otherwise the whole transaction renders
invalid because it signifies an existence of two contracts in one. The two
contracts are independent of each other and operate in sequence, not

simultaneously.
(2) Basedon SharVahruling that "anythingis permissibleuntil there is a clear
prohibition against if'(Zuhrah 1958), there is no reason for disallowing
Islamic hire-purchasecontract. The rule gives a wide opportunity to involve
in any contractual dealing provided it is not prohibited by the Shari'ah due to
its having element of ribil or ghar5r or the like; or violating the basic
principles of the contract involved. According to Izzi Dien, ghardr is

deduced by examining various contracts which are prohibited because of
exchanging that which is not measurablefor that which is measurable.This

prohibition is due to the potential for deception that could result from not
knowing the quantity of one of the exchanged commodities. Once it is
establishedthat deception is the objective that prohibits the contract, then any
similar contract would be prohibited (Dien 2004). Thus, Islamic hire-
purchasecontract is permitted provided that there is no element of deception
48
Chapter 3 The Concept and Operation of Islamic Hlre-Purchase
involving the contracting parties, 'aqd or subject matter of the contract which
would render the contract prohibited.

(3) There is a mutual agreementbetween the parties to Islamic hire-purchase
into ydrah the first stage, and at its
contract that they shall enter contract at
the
expiry onepartywill obtain ownershipof the hired property.
(4) The Malikis clearly approvethe combinationof Ydrah in
and sale one
for
agreement, example buying a cloth with a specificprice with condition
that the seller (tailor) will makeor sew it for the buyer. This illustratesthat
the buyer hires the tailor to make him the cloth and then purchasesit.
In particular, the legitimacy of Islamic hire-purchase contract has been resolved by a

fatwi of Islamic Fiqh Academy (Jeddah)since 1985 38The Academy has allowed the
.
of Ydrah and sale provided the transaction involved the same subject
combination
(Academy 1985). 39 Thus, if a person rents a sedan car for certain period of
matter
time and then later decides to purchase a multi-purpose vehicle (MPV) from the same
he transaction by Islamic hire-purchase contract because
owner, cannot conclude such
it doesnot involve the samesubjectmatter of the contract. Thisfatwil is believed to be
legality Islamic hire-purchase As such, it

one of the earliest rulings on the of contract.
the mechanism in detail.
provides a generalruling without explaining
A rather different stand has been taken by Jordan Islamic Bank in determining the
legitimacy of Islamic hire-purchasecontract. The legal rulings (fatchvil) passedby the
bank has approved the Islamic hire-purchasecontract becauseit is not a combination
of YCIrahand sale contract. Instead, the party is granted an option to purchase the
leasedassetat a certain period of time. Thefatwa rules that Yarah contract can accept
option because it is a contract of exchange, like sale (bay ), but it concerns with
exchanging the usufruct of an asset for a consideration. The period to exercise the
option must be specified; if such right is not exercised, Yarah contract will continue
operating until its agreedperiod has lapsed. All schools of jurisprudence (madz5hib),
exceptthe Shafi'is allowedan option in U11rah

contract(Sulaiman1992).Imam Abu
38The fatwa was passedin the Academy meeting held on 10-16 Rab-I'ul Awwal 1406/28 December
1985.
39The Academy statesan opinion expressedby Ibn Rushd who viewed that Muslim jurists are divided
in the issue of combining the Udrah and sale contract. For instance, the Malikis has allowed the
combination, while the Shafi'Tsdisapprovedit.
49
Hanifah approvesthe exerciseof option within three days; while other Muslim jurists
extend the period up to one month. According to Imam Ahmad, Ab5 Yusuf,
Muhammad ibn al-xasan, Ibn al-Munzir, Ibn Abli Laili, Ishaq and Abu Thur, the
period to exercisethe option dependson the mutual agreementamongthe contracting

parties. It can be a short or long period of time, but the agreedperiod must be clearly
specified and known to the parties (Bank 1984). Hence, when the hirer exercisesan
option within the agreed period of time, the ownership of the leased asset is
transferredto him and Ydrah contractis automaticallyterminatedat this point.
About four years after the abovefatwd of Jordan Islamic Bank has been passed,the
40has approved a resolution
44'h International Convention of Islamic Jurisprudence
that the Islamic hire-purchase can be in either of instalment sale with sufficient
security or Udrah contract with an option grantedto the lesseeto be exercisedafter he
has satisfied all Ydrah instalments. In the later form of contract, the hirer has three
options, namely, he can chooseto continue the Ydrah contract; or he has a right to
bring the Ydrah contract to an end and return the leasedproperty to its owner; or
alternatively, he can purchasethe property with the prevailing market price after the
expiration of Yarah period.
In addition to the above rulings, a fatwil passedby the International Association of

Muslim Scholars41 has ruled that a valid Islamic hire-purchase should consist of
Yarah contract and gift (hibah), which shall follow three conditions; firstly, the period
of Ujrah must be precisely specified and its rules must be observed during that
I period; secondly, the amount of periodic payment must be fixed; and thirdly, transfer
of ownership from the owner to the lesseeis made effective by way of hibah (gift) at
the end of Yarah period (Delorenzo 2000).
In the subsequentyears, Kuwait Finance House in its legal rulings affirms two
significant rules to approve the operation of Islamic hire-purchase. Firstly, in the

issue of a promise to sell the leasedassetat the beginning of the Islamic hire-purchase
contract; whether or not it is permissible for the hirer to agreefrom the very beginning
40The Convention
was held in Kuwait on 10-150'December1988.
41It was
passedin Kuwait on 7-11 March 1987.
50
to buy the assetfrom the owner at a particular time of ij,5rah period. In this respect,
thefatwa approvesthe contract becauseit is actually concludedby a contract of sale
which is independent from U5rah contract, not the promise (al-Kuwaiti 1990).
Secondly, the validity of a sale by an unreal price which does not reflect the real
market value of the Thefatwd

asset. allows a saleof a leased by
asset a real or symbol
price provided the is
price agreedand known to the parties (al-Kuwaiti 1990).
In a fatwd regarding the validity of auto finance which is currently practiced on

Islamic hire-purchasecontract, Justice Muhammad Taqi Usmani has approved such
finance. He emphasizesthat the practice should be on the basis of leasing where at
the end of the leasingperiod the owner would be at liberty either to repossessthe asset
or sell it to the lessee himself or to any other party. Usmani appears to be in
agreementwith the earlierfatwd that the price of the sale can be determinedaccording
to the asset'sdepreciatedvalue or a nominal value or whatever price the parties may
agreeupon (Usmani undated).
Al-Sanhuri and Kahf, in supportto the abovefatwd, upholds the legitimacy of Islamic
hire-purchase contract on the basis of its compliance to the Shad'ah principles of
Ydrah and sale which are embodiedin it. In fact, both contractsof Ydrah and sale are
not contradictory and they can go along together (Kahf 2003). However, Al-Sanhuri
emphasizes that the parties must abide the rules of ijdrah in the first stage of the
contract. When the hirer decides to purchase the leased asset, a new contract
stipulating principles of sale will be As
executed. a result, the Ydrah in
contract the
earlier stageis automatically terminated(Al-Sanhuri undated).
The above rulings generally have provided methodsof operating a legitimate Islamic
hire-purchasecontract by three ways of transferring the ownership in the leasedasset.
Firstly, by means of a promise to sell for a token or other consideration, or by
acceleratingthe payment of the remaining instalments,or by paying the market value

of the leasedgoods. Secondly,by granting to the hirer an option to purchasethe asset
in a specified and agreed time. Thirdly, by way of a promise to give it as a gift
without any consideration or contingent upon the payment of the remaining

instalments. The first and the third methods are also provided by the AAOIFI
51
Shad'ah Rules for Investment and Financing Instruments which rules that such
transfers must be evidenced in a document separate from Ydrah contract.
Figure3.2 below illustratesthreemodelsof Islamichire-purchase

contractwhich are
allowed by the aboverulings.
FIGURE 3.2:
Models of Islamic Hire-Purchase Contract
A1-1jJrah Wa 1qtinJ' (Lease and then acquisition)
Stages LEASE 0 SALE LEASE 0 OPTION LEASE HIBAH
1j5rah @Hireracts as trustee a Hireracts as trustee wHireracts as trustee

(leasing) - Hirer pays rentals n Hirerpays rentals wHirerpays rentals
n Hirerhas intentionto - Decisionto purchasehas s Hirer has intentionto
purchasethe asset not beenmadeyet purchasethe asset
1qtinJ' Asset is sold at an agreed Hirerhas 3 options: Asset is given as hibah:
(Acquisition) price; nominalamountor - Continueto lease eWithoutany consideration,
marketprice 0Terminatethe lease or;
a Buythe assetat an agreed wUponpaymentof final
price instalment
In view of the above authorities, Islamic hire-purchaseis a lawful contract which can
be operated unless it involves in unlawful elements which are forbidden by the
Shad'ah. The contract must follow principles of Y5rah until the transfer of ownership
in
takesplace, which principlesof sale(bay), option (khiydr) andgift (hibah) must be
Under
adheredto at eachstage. the terms of the hire-purchase contract, the hirer will
benefitfrom the goodsfor a specifiedamountof rent to be paid in a fixed numberof
instalmentsover a certain period of time. In the areaof financing today, it is common
to have an understandingbetweenthe parties that the goodswill becomethe property
of the hirer at the end of the contract, it

hence, that
seems the first andthird models
are widely applied by many financial institutions. Accordingly, the next section will
look into a practical aspectof Islamic hire-purchasecontract when it is operatedas a
modeof financingin the Islamic

current bankingsystem.
52
3.5 ISLAMIC HIRE-PURCHASE AS A MODE OF FINANCING
The previous sections illustrate that SharVah has laid down certain rules and
principles for contractual and commercial dealings which include how to conduct
hire-purchasetransaction. Besides having to adhere to basic principles of contract
such as, sufficient legal capacity of parties, offer and acceptance,consent and
existence of subject matter; the parties must also observe the ethical aspect when
conducting a transaction. Indeed, SharVah puts strict guidelines to Islamic hire-
purchase transaction in order to ensure complete adherence and compliance to
principles of Islamic transaction(Muamalah).
When Islamic banking system was introduced in the past two decades,Ydrah is
identified as a potential financial product which promises a very bright future, and
most important, it is a lawful transaction in Shadah. Realizing its potential, Islamic

financial engineershave attemptedto develop the facility in a way to make it more
flexible, competitive and at the sametime comply with Shadah principles of ijilrah
and sale The facility is developed from Ydrah which is not originally a mode of
financing but some financial institutions have adopted leasing in interest-based
financing which is known as financial lease. Due to increasing demand from
customers,who want to own particular goods leasing or Ydrah was developed into
leasing ending with ownership or Islamic hire-purchase.
Today, Islamic hire-purchase is viewed as one of project financing and technical
assistance.This facility can be usedto finance many activities, which include those in
trade and commerce, industry, agriculture and fisheries, housing and personal
advancesother than those for businesspurposesand housing. It is significant to note
that this facility has been operatedin severalmannersby different banks and regions.
In fact, it has been one of the most popular modes of allocating funds by almost
Islamicbanks,not only in Malaysia,but alsoin Jordan,Sudan,QatarandevenIslamic
DevelopmentBank (IDB).
The emergenceof Islamic hire-purchaseas a preferred mode of financing for Islamic

financial institutions is believed due to its transaction being
an asset-backedand
53
-
relatively liquid (Hairetdinov 1998). Accordingly, Islamic hire-purchasefinancing is

basedupon value of the capital goodsor equipmentitself and is groundedin tangible
property promoting a sense of security. It does not involve debt or interest-based

lending (Fisher 1993). One of advantagesof being an asset-backedtransactionis that,
if the assetis of high quality, the bank may not have to rely so much on the credit risk
of the customer as on the asset itself. This allows a relatively weaker credit risk
to
customer obtain Ydrah financing (Pervez 1990). The lease Qjdrah) can also be
securitizedor transferredfrom to
one owner another,or the assetcan be It
sub-leased.
offers the possibility of a floating rate basis,whereasother modesof Islamic financing
generally adopt a fixed rate basis (Wohabe 1997).
Other benefits of -Islamic hire-purchase facility are tax incentives by which both
owner and hirer to

are able reducetheir tax liability. Being an owner, he is entitled to
certain tax benefits; while the hirer can treat rental paymentsas expense. In addition,
Islamic hire-purchaseis highly equitable and fully protects the equity rights of owner
and hirer (Elahi 2000). For the owner, lease payment is a fair price for the use of
asset;and investment deposit provides addedcomfort against early termination due to

default. As for the hirer, he is guaranteedof becomingthe owner of assetat the end of
the contract.
In international context, the facility provides a good opportunity for an Islamic

financial institution to work with leading international companies. For Islamic
financial institutions, Ydrah transactionsprovide less risk, ensurethe security of the
underlying assetsdue to retention of title by the owner and offer the prospectsof an
attractive rate of return (Fisher 1993).For the hirer or customer,the product is already
well-known and understandable.Other advantagesare avoidance of a huge initial
capital outlay, and positive tax benefits in many countries(Uz-Zaman 1993).
Islamic hire-purchasefacility can be utilised to finance a wide range of assets,either

for individual or corporatecustomers.In the current operation,Islamic bank generally
offers Islamic hire-purchasefinancing in addition to cost-plus sale (murdbakh) and

deferred payment sale (Bay' bithaman djio (Bakar 2000). It generally involves the
purchaseby the bank of a specific assetand then it leasesto the customerfor a long or
intermediate plan on the basis of an agreementunder
which the bank receives, in
54
addition to payment of principal, a share in the nature of rental for the use of the
goods. As soon purchaseprice of the assetand the rental is paid off within the lease
period, the ownership automatically transfers to the customer as agreedupon in the
contract (Hassan1985;Ahmed 2000).
Salleh explains in more detail about the mechanismof Islamic hire-purchasefinancing
whereby financial institution will rent a movable or immovable property to its client
who will pay an agreedsum by instalment over an agreedperiod into savingsaccount
held with the samefinancial institution. Theseinstalmentsare invested in muIdrabah
ventures for the client's account.Capital and profit will allow the client to offset the
rental cost and to purchase the rented property. If he decides not to acquire the
property, the remaining profit (after rental cost and expensesare deducted)is given to
the client, and the property is taken back by the financial institution (Salleh 1986).
The operation of hire-purchaseas illustrated above adopts an option to acquire the
property. The exercise of option in Islamic hire-purchase contract is approved

provided it is exercisedwithin a specified and agreedperiod of time (refer tofatclwa
of Kuwait Finance House in the previous section). When a customer is granted an

it
option, signifies that there is no condition or obligation imposed on the customerto
purchase the property, avoiding a pre-conditioned contract, which is forbidden by
Shad'ah. The customer has a complete choice either to purchasethe property at the
end of the leaseperiod or return it to the bank.
Ahmad, Iqbal and Khan illustrate another form of Islamic hire-purchase operation
whereby a bank financesthe purchaseof an assetunder a joint ownership arrangement

subject to provision of security or surety. The bank will receive repayment of
principal and a share in the net rental value of these items in proportion to their
outstanding share in total investment (Ahmad, Iqbal et al. 1983). Islamic hire-
purchasefinancing is a relatively new type of long-term financing method. During its
primary period, the customer pays an agreed amount of rentals that are sufficient to
recover the capital and provide an element of profit. Primary period relates to
55
estimated useful life of the asset and the customer is normally responsible for all
operatingcosts such asmaintenanceand 42
insurance.
The Sharl'ah principlesof Ydrah requirethe owner to bear both maintenanceand

insurance responsibilities, not the hirer. This issue has been long debated by the
43 have for their views.44To resolve
scholars and practitionerswho conflicting grounds
this issue, Islamic Development Bank and Kuwait FinanceHouse have ruled that the
maintenanceand repair responsibility should not be imposed on the hirer above the
standardsrequired for normal operation; while the insuranceburden may be shared
between the owner and hirer according to their mutual agreement(al-Kuwaiti 1985;
Parker and Dawood 1995).
Islamic hire-purchaseis growing in importance in the world of Islamic banking and

finance, as it is operatedby many financial institutions in various countries.In fact, it
is one of the instruments most used in cooperation with international financial
institutions, along with commodity financing (Al-Tamimi 1986).A study by Iqbal and
Mirakhor reported about Islamic banking in Iran and Pakistan. In lease purchase
transactionsin Iran, the period cannot exceedthe useful life of the property, which
will be determined by Bank Markazi. Bank however cannot engage in transaction in
which the useful life of the property is less than two years. Laws and Regulations
governing Islamic banks in Islamic Republic of Iran are discussed. Part 10 of

Regulationsrelating to the granting of banking facilities, governsthe operation of hire
purchase (Art. 57-65). Shirazi (1993) further explains that Islamic hire-purchase is
used for medium and long term financing which may be used for the expansion of
production facilities and housing. The production facilities include area of
agricultural, industrial and mining. In caseof housing facilities, hire-purchasemay be

used for low price housing units constructeddirectly by the bank (Shirazi 1993).
42The customer has also

option for a secondaryperiod in which rentals are reduced to a nominal
amount.
43The scholars include Abdul Wahab Ibrahim Abu Sulaiman, Justice Muhammad Taqi Usmani
and
Mahmud Sanusi(Malaysia).
44The scholars
emphasizeon the owner's responsibility in both respects in order to maintain the
legitimacy of Ydrah contract; while the practitioner view that
such requirementshould be modified in
order to make Islamic hire-purchasefacility more practical.
56
In Pakistan,the leasedassetis entirely owned by the financier or in joint ownership
with the client. The bank will receivethe repaymentof principal and rent or a shareof
profits earnedon the assets.After the amountof the acquisition value and agreedrent
is paid in full the ownership is passedon to the client (Iqbal and Mirakhor 1987).
Islamic hire-purchase has been used extensively in financing of ships, aircraft,
containersand other equipment and assetsof substantialvalue (Afzal 2000). Ahmad

(1994) further elaborates the operation of Islamic hire-purchase whereby a hire-
purchaseaccount is openedin the customer'sname. The value of the assetas well as

the amount of profit over cost payable by the customer to the bank is recorded as
debits. The instalment payable by the customerhas two distinct components:agreed
rental and a part of amount of profit. The assetremains in the ownership of the bank
and the ownership title is transferredupon receipt of full payment(Ahmad 1994).
In Malaysia, Islamic hire-purchasefacility is widely applied to consumer goods and
motor vehicles. There are numbers of financial institutions which offer the facility to
finance industrial goods like equipment, machinery, building, transport and other
durable article. The facility has been actively promoted by the banks in view of the
low risk involved, high return on the investment and tax benefits derived (Kamil
1993).
A report by New Horizon (1993) reveals that Islamic Development Bank (IDB) and
commercial Islamic banks such as London-basedAl RaJhi Investment Corporation

provide leasefinance for EmiratesAir, Thai Air and others for the purchaseof aircraft
and a number of tanking leasing arrangementsfor Gulf customers. In addition,
Western banks such as Citibank (London), Kleinwort Benson and ANZ Grindlays
admitted that leasing or ijarah is a major growth area,hence,they undertaketo further

develop their leasing activities in the future.
Furthermore, Al Barakah Investment Company uses Ydrah wa iqtina' to finance the
purchase of large capital items such as property, industrial plants and heavy
machinery. It involves direct leasing where investors in the schemereceive regular
monthly payment, which representsan agreedrental. At expiry of leasing, the lessee
purchasesthe equipment (Ahmed 1993). Dar Al-Mal Al-Isldm! (DMI) Group also
offers Islamic hire-purchaseto its clients. In the event of transferring ownership, the
57
client may elect to purchasethe goods on any due date at the optional purchaseprice
attributable to that due date by giving notice to the institution at least 3 days prior to
such date. In this event, client naturally pays all taxes or similar governmentcharges
incident to the transfer of title to him (Ali 2000).
Khan and Wilson bring forward the operation of Islamic Development Bank (IDB)
whereby lease finance being one of two main sources of medium term financing.
Leasing provides finance for development projects, which are sufficiently
remunerative to meet market criteria. At present, it is available for middle and high-
income member countries (Khan and Wilson 1995). Wilson then brings up the
practice of the Kuwait Finance House which engagesin financing a purchaseof car,
and also the Jordan Islamic Bank financing the purchase of equipment by
professionalssuch as dentists, but does not involve in consumercredit for household

According
purchases. to him, in small businessfinance, leasing or Ydrah is the second
most popular method of financing for many Islamic banks, but this has also become
more significant for conventional banks. Conventional banks provide leasing through
specialised subsidiaries but for Islamic banks, leasing is a mainstream activity and
part of their core business.It is also stated that there is a little risk involved, as the
goodsor equipmentbeing leasedservesas collateral for the financing (Wilson 2000).
From the above discussion, it is observed that Islamic hire-purchase has spread
rapidly as a financial tool throughout the Arab world, Europe and Asia countries such
as, Pakistan, Bangladesh,Malaysia and India. The facility has been used to finance
various types of assetsincluding consumer goods, industrial assets,motor vehicles

and even houses.The growth of Islamic hire-purchasefacility is believed due to three
main reasons. First, its acceptability and legality by the SharVah (refer to the
legitimacy of Islamic hire-purchase).Second,there is a huge demand for the facility
in the market, many who welcome the 100 per cent financing which Islamic hire-
purchase offers them. Third, as compared to other facilities, Islamic hire-purchase

offers attractive returns with fairly moderaterisks (Allawi 1986).
58
3.6 SUMMARY
The review of literature reveals that there has been no direct discussion of Islamic
hire-purchase in the classical jurisprudence; instead, they mainly discuss rules of
leasing (Ydrah) and sale in separateheadings. During the emergenceof Islamic
banking system in 1980s, there were few ideas of Islamic hire-purchasetransaction
being brought up by contemporary scholars; but they discuss the concept and
operation of leasing Qjdrah) in greater detail than Islamic hire-purchasewhich was

still very much over-shadowedby the conventional practice. Islamic hire-purchase
was only properly defined in the literatures during 1990s.There has been very little
thorough discussionof issuesarising from its operation, comparisonto conventional
hire-purchase and its role in conventional financial institutions. Theoretical and
empirical works concerning its regulatory framework and perception of public and
actual userstowards Islamic hire-purchase facility are almost lacking.
Fortunately, some Islamic banks and prominent Muslim scholars provide important
legal rulings on the practice of Islamic hire-purchase which throw light on the
legitimacy of the facility. Therefore, it is important to ensure that the operation of
Islamic hire-purchasecontinuesto be Sharl'ah-compliant. For this purpose, a specific
Shad'ah regulation for Islamic hire-purchaseis neededto control the transaction and
prescribe the mannersof its practitioners. In the Malaysian context, efforts have been
undertakenby the Government to establish a proper Sharl'ah framework for Islamic
hire-purchase in order to ensure the transaction and its practitioners adhere to the
Sharl'ah principles. The next chapterwill discussthe regulatory framework of Islamic
hire-purchase in Malaysia comprising a conventional law as well as the proposed
SharVah regulation.
59
Chapter 4
REGULATION OF ISLAMIC HIRE-PURCHASE (AITAB)
4.1 INTRODUCTION
The previous chaptershas presenteda literature review encompassingthe operation of

Islamic hire-purchasein Malaysia, the developmentof Islamic hire-purchase,concept
of Islamic hire-purchase, legitimacy of Islamic hire-purchase, and Islamic hire-

purchase as a mode of financing. The literature reveals that Islamic hire-purchasc
facility or AITAB is one of latest innovation of Islamic banking which calls for
special rule to govern every aspect of the transaction and determine rights and
liabilities of parties involve in it. Theserules are compressedinto Hire-PurchaseAct
1967 (HPA) which firmly controls hire-purchasebusiness and protect the parties
involved in the transaction. However, HPA is not exhaustive in providing rules to
matters relating most particularly to Sharf'ah injunctions. For this reason, the
Malaysian government has drafted a special regulation for Islamic hire-purchase
transaction,known asMuamalah Hire-PurchaseBill.
This chapter aims to discuss two main regulations of Islamic hire-purchase in
Malaysia; Hire-Purchase Act 1967 and Muamalah Hire-Purchase Bill. The chapter is
divided into three major sections; first, description of the Malaysian legal system;
second, examination of the Hire-Purchase Act 1967 as, currently, the main governing
law for hire-purchase business in Malaysia; and third, analysis of the proposed
Mu'amalah Hire-Purchase Bill. The final section summarises the chapter.
4.2 THE MALAYSIAN LEGAL SYTEM
Malaysian legal system is highly influenced by the English law due to a long period of
British colonization45 in the country. Before the coming of the British, Malay legal
codes have been in presence with customary and Islamic law. These laws have a
strong impact on the local laws due to the established customary and Islamic practices
of local inhabitants. Since the attainment of independence inl957, the Malaysian legal
45 Malaysia had been

under British rule for 171 years, starting from the year of 1726 until
IndependenceDay on August31,1957.
60
Chapter 4 Regulation of Islamic Hire-Purchase
system has gone through several restructuring and changesas to accommodatethe

interestsof its citizens comprising various ethnic groups.In order to maintain the law
in
and order a newly independentcountry, various laws have been passed.Certainly,
the main references were English law and laws enacted in other commonwealth
countries like Australia and India. The drafters of the Malaysian laws, even though
most of them were British or British-trained officers; they had put the interest and
opinions of the local citizens into consideration (Hamzah and Bulan 2003).
4.2.1 Application of English Law
English law is applied in Malaysia by the virtue of section 3 and 5 of the Civil Law
Act 1956, unless other provision has been or shall be made by any written law.
Section 3 provides:
"Save so far as other provision has been made or may hereafter be made by any
written law in force in Malaysia, the Court shall-

(a) in West Malaysia or any part thereof, apply the common law of England and
the rules of equity as administeredin Englandon the 7th day of April 1956;
(b) in Sabah,apply the common law of England and the rules of equity, together
with statutesof general application, as administeredor in force in England on

the I st day of December1951;
(c) in Sarawak,apply the commonlaw of England and the rules of equity, together
with statutesof generalapplication, as administeredor in force in England on

the 12th day of December1949,subjecthowever to subsection(3)(ii):
Provided always that the said common law, rules of equity and
statutes of general application shall be applied so far only as the
circumstances of the States of Malaysia and their respective
inhabitants permit and subject to such qualifications as local
"
circumstancesrendernecessary.
"Subject to the expressprovisions of this Act or any other written law in force in
Malaysia or any part thereof, in the event of conflict or variancebetweenthe connnon
law and the rules of equity with referenceto the samematter, the rules of equity shall
prevail."
Section 5 of the sameAct further provides:

"In all questionsor issueswhich ariseor which haveto be decidedin the Statesof
West Malaysia other than Malacca and Penang with respect to the law of
61
partnerships,corporations,banks and banking, principals and agents,carriersby air,

land and sea,marine insurance,average,life and fire insurance,and with respect to
mercantile law generally, the law to be administeredshall be the sameas would be

administeredin England in the like caseat the date of the coming into force of this
Act, if such question or issue had arisen or had to be decided in England, unless in
any caseother provision is or shall be madeby any written law."
From the above provisions, it is clear that matters of banking, mercantile law and
other related areasare to be governedby the English legal jurisprudence. However,

this issue doesnot seemto be much of practical important as most mercantile matters
in
are now contained respective local legislations. The application of English law is
still possible by virtue of the 'saving' provisions in the statutes.Such provisions are
to
wide enough permit the importation of English in
principles certain circumstances,
such an instance as the local law does not provide a sufficient explanation to a
particular issue. If this continues to happen it may give an unnecessary impact
to
especially mattersrelating to Islamic banking. In fact, this has happenedin one case
by
decided the Supreme Court Malaysia.46
of
4.2.2 Citation of Casesand Statutes
Legal writings are incomplete without citing relevant cases and statutes. Both
authorities are mainly referred to in the text becausestatementsof law are largely
contained within them. Cases can be found in various law reports of which the
Malayan Law Journal (MLJ) and Current Law Journal (CIJ) are the most extensivein
the reporting of the Malaysian cases.A case is usually cited in support of a legal
statementor argument.For example:
Low Ping Ming v. MBfFinance Bhd. [2000] 2 CLJ 307
This citation meansthat the name of the caseis Low Ping Ming, the plaintiff, against
MBf Finance Bhd., the defendant.This caseis reported in the Current Law Journal of
2000, Volume 2 at page 307.
Statutesmay be cited in three ways, but the most common one is by a short title, for
example, 'Hire-Purchase Act 1967'. It can also be cited by reference to the number
46Tinta PressSdn. Bhd. Bank Islam Malaysia

v. Berhad[1987] 2 MLJ 192.
62
given to the Act and the year in which it was passed,for instance, 'Act No. 212 of
1967' or '1967 Act' in reference to the Hire-PurchaseAct 1967. In this research,
Hire-PurchaseAct 1967will be constantlyreferred asHPA.
From the above discussion, it is admitted that the Malaysian legal system has been
affected in many ways by the English law due to its historical background.Therefore,
it is not surprisingly statedthat in many areasincluding commercial sectorwhich have
no governing rule, the main reference is English law and other conventional
regulations. However, application of English law will be limited if there is specific
regulations governing a particular area.
4.3 HIRE-PURCHASE ACT 196747
The law on hire-purchase in Malaysia is contained in the Hire-Purchase Act (1967).

HPA came into force on 11'h April 1968 (Rosly 2004). Prior to HPA there was no
specific legislation to control and regulate hire-purchase activities in Malaysia. Beside
HPA, reference must also be made to the following regulations and orders passed
under the HPA:
(a) Hire-Purchase(Term Charges)Regulations1968;

(b) Hire-Purchase(Recovery of Possessionand Maintenanceof Recordsby
Owners) Regulations 1976; and
(c) Hire-PurchaseOrder 1980.
Theselaws have strengthenedthe hire-purchaseand practice to protect transactionsin
consumergoods and specified items. Protection includes the imposition of sanctions
such as fines and imprisonment and the establishment

of in
an enforcementagency the
form of the office of the Controller of Hire-Purchase.
4.3.1 SCOPE AND CONTENT OF THE HIRE-PURCHASE ACT 1967
The Hire-PurchaseAct 1967 does not cover all hire-purchasetransactions.For those
commercial transactions that are not covered by the Hire Purchase Act 1967, the
common law and the Contract Act 1950 shall apply. The HPA regulates only hire-
purchaseagreementsin respectof the goodsspecified in the First Schedulewhich can
47The latest
amendmenthascome into force on 15 April 2005.
63
be amendedby the Minister from time to time (Vohrah and Aun 2000). A discussion
on list of goodswill be provided later under the title 'Hire-PurchaseAgreement'.
The HPA comprises 58 sections, and is divided into 9 parts in which the last one
consistsof interrelated regulations and schedules.Part I is a preliminary part that is

followed by Part 2 underlining the formation and contents of hire-purchase
agreements,and Part 2A providing option to the hirer. Then, HPA turns to regulate
rules for protection of hirers and guarantorsin Part 3. Part 4 and Part 5 govern
exclusively matters relating to the hirers and guarantors respectively. Matters
regarding insuranceare dealt with in Part 6, while Part 7 being the longest one caters
the general matters which are related to the earlier parts. Next, Part 8 explains the
powers of enforcement involving the law enforcer such as the prosecution, controller
and the Court. Finally, Part 9 provides Regulationsand Scheduleswhich are enforced
under the HPA.
4.3.2 DEFINITION OF HIRE-PURCHASE AGREEMENT
The precisemeaning of a hire-purchaseagreementis expresslystipulated in the HPA.

Hire-PurchaseAct 1967 in section 2(l) provides the definition of a 'hire-purchase
agreement',which includes;
"... a letting of goods with an option to purchaseand an agreementfor the purchase
of the goodsby instalments(whether the agreementdescribesthe instalmentsas rent

of hire or otherwise),but doesnot include any agreement-
(a) whereby the property in the goods comprisedtherein passesat the time of the
agreementor upon or at any time before delivery of the goods; or
(b) under which the person by whom the goods are being hired or purchasedis a
person who is engagedin the trade or businessof selling goods of the same
nature or descriptionas the goodscomprisedin the agreement."
From the above definition, two forms of hire-purchasetransactionscan be retrieved,
namely 'a letting of goods with an option to purchase' and 'the purchaseof goods by
instalments'. The former is the usual form of hire-purchase transaction,
while the
latter suggeststhat the transactionshould also cover an
agreementfor the purchaseof
goodsby instalments,which is actually practiced nowadays.
64
The definition mentions two types of transactionsthat are excludedfrom the scopeof
HPA. First, where the title of the goods passesat the time of the agreement,this is
is by
called a credit sale, which regulated the Sale Goods Act 195748 The second
of .
type of excluded transactionis one, which is carried out by a personwho is involved
in trade and business of selling goods. According to Vohrah and Aun (2000), the
person concernedis widely known as a 'dealer' (Vohrah and Aun 2000). Thus, any
transactionthat is carried out by a dealer is also outside the scopeof the HPA even
though it may be in the natureof hire-purchase.
4.3.3 SUBJECT MATTER OF HIRE-PURCHASE
Subject matter of the hire-purchasecontract must be in existence and certain when
entering into the contrace9.If the contract is concludedwithout specifying clearly its
subject matter, such a contract will render void ab initio5o.A subject matter of a hire-
purchase contract. refers to goods, asset or property which is to be let and then
purchased by the hirer. The Hire-Purchase Act 1967 has listed down a number of
goods which can be the subject matter of a hire-purchase agreement.Prior to an

amendmentin 1992, the Hire PurchaseAct 1967 only dealt with the following goods
(Buang 2001):
(a) Radio sets, television sets, gramophonesets, tape recordersand any
combinationthereof;
(b) Refrigerators and deep-freeze food preservers and any combination
thereof;
(c) Sewing machinesother than thoseused for industrial purposes;
(d) Washing machines;
(e) Vacuumcleaners;
Air-conditioning units other than thoseused for industrial purposes;
(g) Electric or gascookersand ovens;
(h) Video tapes/cassette
recorders;
Typewriters;
0) Organsand pianos;
48Saleof GoodsAct 1893in

caseof English law.
49This requirementis in
agreementwith Shariah.
50From Latin
word which meansvoid at the very beginning. A void contract has no legal force from
the moment of its making (1994). It occurs due to several factors,
namely breach the essentialsof a
contract,lack of capacity to contract,mistakeand illegality.
65
(k) Photostatmachines/copiers;
(1) Hi/fi systems.
Consequently, HPA was amended in 199251 resulting in broadening the type of

,
goods,which gives wider option to the consumerwho is interestedto enter into a hire-
purchasetransactionin respectof particular goods.Thesegoods are listed in the First
Scheduleof HPA, which are as follows:
1. All consumergoods;and
2. Motor vehicles, namely
(a) Invalid carriages;
(b) Motor cycles;
(c) Motor cars including taxi cabsandhire cars;
(d) Goods vehicles (where the maximum permissible laden weight
doesnot exceed2540 kilogams);
(e) Busses,including stagebuses.
The expression"consumer goods" provided in the new law covers a more extensive
range of goods than those limited under the previous law. For instance, personal
computer, mobile phones and ultra soundmachinesare left out under the old law, but
now included in the recent amendment. Section 2(l) of HPA defines 'consumer
for
goods' as goods purchased personal, family or household purposes.Accordingly,
goods that are normally regarded as consumer goods but purchased for business
purpose are excluded from HPA. By virtue of section 2(l), goods also include any
replacementsor renewals by the hirer of any part or parts and any accessoriesadded
by the hirer during the period of hiring. The secondtype of goods is a motor vehicle,
comprising invalid carriages,motor cycles, motor cars including taxi cabs and hire
cars, goods vehicles and busses. These goods are usually used for transportation,
either for personal or public use. There are few caseswhich raised up an issue of
whether a particular heavy lifting machine, for instance a crane or forklift, can be
regarded as a motor vehicle, and thus subject to the Hire-Purchase Act 1967.
Accordingly, in MBfFinance Bhd. v. Ting Kah Kuong & Anor. 52 the Court held that a
,
51In force
since June 1,1992.
52[1993] 3 MLJ 73
66
forklift was not a motor vehicle and therefore the agreementwas not subject to the
Hire-PurchaseAct 1967.
The subject matter of the hire-purchaseagreementmust be certain and reasonably

identified. The issueof certainty of subjectmatter of the agreementwas put forward in
the case of Supreme Leasing Sdn. Bhd. v. Lee Gee & Ors53 In this case, the
.
defendantsenteredinto a written hire-purchaseagreementwith the plaintiff in respect
of one unit tractor. The tractor was described as a Caterpillar 966C, year of
manufacture 1980.The chassisnumber and the enginenumber of the tractor were not
set down in the agreement.The defendantscontendedthat there was no certainty of
the subjectmatter since the serial number and the enginenumber of the tractor had not
been statedin the agreement.The court held in dismissingthe defendant'scontention,
that there is certainty of the subject matter of the agreement,that is a tractor of a
particular make, of a particular cubic capacity, manufacturedin a particular year and
which was duly delivered.
At the time the agreementis concluded,the subjectmatter must also be existed. If not,
the agreementbecomesvoid. In any event,there is a total failure of consideration,that
the owner could not claim to recover, or retain any sums paid by the hirer in
pursuanceof the agreement(Guest 1966). The requirementthat the goods must exist
was observedto be of a paramountconsiderationin the caseof Hong Leong Leasing
Sdn.Bhd. v. Tan Kim Cheong54.In this case,a hire-purchaseagreementwas signedby
the plaintiff and defendantin respectof certain machines.Subsequently,the plaintiff
issueda notice of repossessionto the defendantupon default in payment on part of the
defendant,The defendant argued that he was under no obligation to pay any of the
instalments since no machines were ever delivered to him. He had informed the
matter to plaintiff when the plaintiff demandedpayment of instalments.The learned

Judge observed that the agreementwas unenforceablebecausethe subject matter of
the agreementwas not in existenceat the time the agreementwas enteredinto, thus,
amount to a failure of consideration.Once there is a total failure of consideration,,the
financier cannot claim any sum by way of instalmentsfrom the hirer.
53
[198911 MLJ 129
54
[1994] 1 AMR 159
67
Chapter 4 Regulation of 's'amic Hire-Purchase
Bel'Orc we go into a deeper discussion of Hire-Purchase Act 1967, the following

FIgUre 4.1 is referred as a clear guide to understanding the law.
FIGURE 4.1:
Hire-l"urchase Act 1967
I I
SCOPE & HIRE-PURCHASE PARTIES PROTECTION OF REPOSSESSION
CONTENTS AGREEMENT HIRERS &
GUARANTORS
Before
Repossession
DEFINITION I SUBJECT CONTENTOF
MATTER AGREEMENT IMPLIED ONSEQUENCES
&
CONDITIONS FORBREACH After
WARRANTIES Repossession
=Goods I
-F-co: nsumer EXCLUS19N L4 -Rights
CLAUSE ofHirer
I
FORMATION Vehicles
-F-M-ot-or
Warranty
for Condition
to L Condition
110 to
Quiet Merchantable Fitnessfor
Pre-Contract II Conclusion II Post-Contract Possession Quality Purpose
of Contract Stage
F
Condition
t Title Warrantyof Encumbrance
Deliveryof Goods Functionas Negotiator Functionas Ag
F-TeE
Title of Goods ler's Re
Fitness& Qualityof Goods

I
II Rightsagainst II Rightsagainst
insurance Owner Hirer
Except(S.22):
Supplyof Information
&v
Paylargeramountthatagreed
Documents
, Performobligation
to unspecified
goods
Acceptance II Payment I Custody& Care II Redelivery

of I bupplyol
of Delivery of Goods Goods Information
68
4.3.4 FORMATION OF THE AGREEMENT
The formation of an agreement is the most vital stage of a transaction. Certain
requirements must be fulfilled at different points of the formation of the agreement, or
otherwise the agreement will have no effect due to the non-compliances. The Hire-
Purchase Act 1967 in Part 2 provides some essential requirements relating to the
formation and contents of the hire-purchase agreement. Breach of these provisions
renders an agreement void, and to some extent, the commission of an offence (Vohrah
and Aun 2000). Part 2 had been substantially amended in 1992 to provide greater
protection to the hirers and ensure that he is aware of his obligations under the
agreement (Pheng and Samen 1997). The procedure for affecting the hire-purchase
agreement is divided into three main stages, namely pre-contract stage, conclusion
stage and post-contract stage. These stages are illustrated as follows;
4.3.4.1 Pre-Contract Stage (Before entering the hire-purchase agreement)
a. Written information
Part 2 imposes certain obligations on the owner, dealer or an agent acting on their
behalf Generally, these obligations consist of providing written information to the
prospective hirer, and these documents must be signed by the prospective owner
or/and dealer. Failure to observe these obligations will render the hire-purchase
agreementvoid. Section 4(l) statestwo in
situations which the provider of the written
statementis either the owner or the dealer.
i Owner serving the written statement

Section 4(l)(a) lays down requirementsfor the owner or his agent to provide
the hirer with a written statementduly completed and signedby him according
to the form set out in Part 1 of the SecondSchedule.It provides a summary of
the hirer's financial obligations under the proposedhire-purchaseagreements.
Basically it provides particulars of goods and the hirer's financial obligations
such as cash price, deposit, freight charges,vehicle registration fee, insurance

and term charges.
69
H. Dealer
Section4(l)(b) imposesthe sameobligation on the dealeror his agent,with an
additional obligation. After the service of the written statement to the

prospectivehirer, he must also serve anotherwritten statementsigned by him
and the prospective owner according to the form set out in Part 2 of the
Second Schedule. This form is actually a statement of consent from the
prospectiveowner that is usually the financier.
b. Service of written statement
Both written statementsunder Part 1 and Part 2 of the Second Schedule must be
55
servedpersonally on the hirer who must then acknowledgereceipt of the documents.
A person served with the above statementsis under no obligation to enter into any
hire-purchaseagreement.If he changeshis mind at this stage,nothing will be imposed
on him. No payment or other considerationwill be required from him in respectof the

or service of such 56
statements. If he is required to make any payment, the
preparation
imposed suchrequirementwill be guilty of an offence.57
personwho
c. Effect ofNon-compliance
The requirements in section 4(l) must be complied, otherwise the hire-purchase
agreementwill become invalid. The owner who entersinto a hire-purchaseagreement

and a dealer who carries out negotiations leading to a hire-purchase agreement
without compliance of section 4(l) shall be guilty of an offence under the Act 58The
.
effect of non-compliance with the above requirement was upheld in Affin Credit
(Malaysia) Sdn. Bhd. v. Yap Yuen Fui59. The court held that the hire-purchase
agreementwas void, as the condition imposed by section 4(l) of the Hire Purchase
Act had not been complied with.
55
Section4(2)
56
Section4(3)
57
Section4(6)
58
Section4(5)
59[1984] 1 MLJ 169
70
4.3.4.2 Conclusion of the hire-purchase agreement
a. Written agreement
By virtue of section4A, a hire-purchaseagreementmust be in writing. 60If not, it shall

be void 61An agreement,which is not clear and legible, is deemednot to be in writing
.
and renderedvoid. For instance, a hand-written agreement, which cannot be read or
is
understood, regardednot to be in writing, thus, void. If the is
agreement printed, the
print must be of a size not smaller than the type known as ten-point Times (Vohrah
and Aun 2000). In addition, the owner who entersinto a hire-purchaseagreementthat

be
doesnot comply with the provision shall guilty of an offence. 62
b. Signature ofparties
Section 4B(l) requires a hire-purchaseagreementto be signed by or on behalf of all
parties to the agreement.However, before the hirer can be required by the owner or
dealer to sign the agreement,the document must have been completed in all its
63Thus, signing of blank forms is illega164,and the owner, dealer or their
particulars.
is 65
agentswho contravenesany of the provisions guilty of an offence.
c. Contents
Section 4C lists down all matters that must be included in a hire-purchaseagreement.

In addition, it must contain all the important information as stated in Part 1 of the
SecondSchedule.
d. Separate hire-purchase agreementfor every item
When there are more than one item of goods being purchased,it must be a separate
hire-purchaseagreementfor every item.66 Any goods,which are essentially similar or
67
complementary to each other and sold as a set, are regarded as an item. A
60
Section4A(l)
61
Section4A(2)
62
Section4A(3)
63
Section4B(2)
64
Section4B(3)
65
Section4B(4)
66
Section4D(l)
67
Section4D(4)
71
Chapter 4
Regulation of Islamic Hire-Purchase
contravention of this requirement renders the agreement void and the owner guilty of
an offence. 68
e. Alteration to a hire-purchase agreement
There should be no addition or alteration to a hire-purchaseagreementor written

documentscontaining the terms and conditions of the agreementin relation to any of
the matters set out in the pre-contractualstatementserved on the prospective hirer.
Any such alteration or addition will have no effect unlessthe hirer has consentedby
signing or initialling in
the agreement the margin oppositethe change. 69
4.3.4.3 Post-Contract Stage (After the making of a hire-purchase agreement)
a. A copy of hire-purchase agreement
Section 5(l) requires the owner to serve on the hirer and the guarantorsa copy of a
hire-purchaseagreementwithin fourteen days after it is made.Failure to comply with
this requirement will render the hire-purchase agreement unenforceable by the
70The agreementis not void.
owner.
b. A copy ofmemorandum or note of the agreement
At any time beforethe final paymenthasbeenmadeundera hire-purchase agreement

the ownermust within fourteendaysafter receivinga written requestfrom the hirer,
supply to the hirer a copy of any memorandumor note of the agreement.For the
purpose of service of document,a fee will be prescribed,but if no fee is prescribed,
onefreecopymustbe supplied.A feewill thenbe prescribedfor the supplyof second
andsubsequent 71
copies.
c. A copy of the insurance policy
If the total amountpayableunderthe agreementincludespaymentfor insurance,the

owner must serve a copy of the insurancepolicy or a statementin writing setting out
the terms, conditions and exclusions of the policy that affect the rights of the hirer.
68
Section4D(2) and (3)
69
Section39
70
Section5(IA)
71
Section5(2)
72
This must be done within seven days of the receipt of such policy by the owner.72
However, the HPA does not provide any penalty in casethe owner fails to comply
with the requirementof section 5(3).
d. Deposit
Section 31(l) provides that an owner must first obtain from the prospective hirer a
depositin cashor in goods,or partly in cashand partly in goods,to a value of not less
than one-tenthof the cashprice of the goods. Section 31(2) further provides that this
requirement does not apply to any agreementthat is enteredinto solely for assigning
or transferring rights and liabilities under an existing hire-purchaseagreementfrom
the hirer to anotherperson.However, section32(l) provides that certain paymentsare
not regarded as depositsthat are;
(a) Cash payment made with money borrowed directly or indirectly from or
through:
i. the owner (if the owner is not a banker);
ii. an agentor servantof the owner; or
iii. any person whose business or part of whose business it is, by
agreementwith the owner or his agent,to advancemoney to enable

deposits to be paid in respect of hire-purchaseagreementswith the
owner.
(b) Where the deposit is in goods or partly in goods, and the amount allowed in
respectof the goods is inflated, the amount given in accessof the true value is
discountedfor the purposeof determiningthe deposit paid.
(c) Rent paid by the hirer to the owner for the goods before he entersinto the hire-
purchaseagreementfor the samegoodsis discounted.
According to Vohrah and Aun (2000), the above section 32(l) is intended to defeat
the practice of over-valuing trade-in goodsor similar schemes.Hence, as a deterrence,
section 32(3) declares that "any person who knowingly enters into, or procures,
arranges,or otherwise assistsor participatesiW' in this kind of transaction is guilty of
an offence. This also includes a hirer who knowingly participates in such a scheme.
72
Section5(3)
73
4.3.5 CONTENTS OF THE AGREEMENT
The hire-purchase agreementmust specify in detail some important particulars in
order to avoid any dispute in the future. These particulars must be brought to the
parties' knowledge and understanding.The Hire-PurchaseAct 1967 stipulates those
particulars, which will constitute the contentsof a hire-purchaseagreement.Section
4C requiresevery hire-purchaseagreementto contain the following information;
(a) a date on which the hiring starts;
(b) the number of instalmentsto be paid by the hirer;
(c) the amountsof eachinstalment,the personto whom and the place at which the
paymentsare to be made;
(d) the time for the paymentof eachof the instalments;
(e) a description of the goodssufficient to identify them; and
(f) the addresswhere the goodsare kept.
Where any part of the consideration is not cash, for instance, a trade-in as part
consideration (Vohrah and Aun 2000), there must be a description of that part of the
73 In addition to the above information, the hire-purchase
consideration. agreement
must also furnish in a table the following information;
(i) the cashprice of the goods;
(ii) the deposit showing separately the amount paid in cash and the amount
provided by considerationother than cash;
(iii) delivery or freight charges,if any;
(iv) vehicle registration fees,if applicable;
(V) insurance;
(vi) the total amountreferred to the abovelessthe deposit;
(vii) term charges;
(viii) the annual percentagerate for term charges (calculated in accordancewith
the formula set out in the SeventhSchedule);
(ix) the total amount in items 6 and 7 above (the balance originally payable under
the agreement);and
(X) the total amountpayable.
73
Section4C(l)(b)
74
Section4C(l)(d) statesthat the agreementmust not contain any particulars, which are
inconsistentin any material way from the particulars containedin the pre-contractual
written statementsservedon the prospectivehirer. The effects of non-complianceare

mentionedin section4C(2) and (3).
4.3.6 PARTIES TO HIRE-PURCHASE AGREEMENT
Hire-purchaseagreementbasically involves the owner of the goods and a hirer, and

then it has expandedgreatly due to its popularity. It is used not only for consumer
goods but also extends to commercial and industrial financing. As its use became
broader, it involved additional parties beside the owner and hirer; that are, dealer,
guarantor and finance companies.Each party has certain rights and liabilities, which
areprovided by the statuteand the common law principles.
4.3.6.1 Owner
The owner as the name implies is a personhaving a legal title to the goods. He holds
the document of title and is fully responsiblefor safeguardingthe goods. He may not
be in possessionof the goods, which he owns, becausethe goods may be in the
custody of anotherentrustedperson.The duties of the owner are illustrated as follows:
a. Delivery of the Goods
The goods to be let on hire must be delivered to the hirer, and the contract of hiring
will only commencewhen the hirer has accepteddelivery. If the owner does not or
fail to deliver the goods accordingto the agreement,the hirer can claim damageS74
for
breach of contract.'The time and place of delivery are nonnally fixed in the contract;
thus, the owner must deliver the goods accordingly. If the time is not specified in the
contract, the delivery must take place within a reasonabletime (Goode 1970). The
expensesof making delivery must be borne by the owner, and the expenses of
collecting the goods from the place of delivery must be borne by the hirer, unless
otherwise stipulated in the agreement(Guest 1966).
74A sum of
money paid in compensationfor loss or injury. The hirer will be entitled to recover back
any sums paid by way of deposit or part payment, and to sue for any loss suffered due to the non-
availability of the goodsagreedto be let on hire.
75
Chapter 4
b. Title of the Goods
The owner must ensurethat he has a good title to the goods,which he wants to let on
hire. This implies that the owner is capableof conferring a good title to the hirer, both
at the time when the hiring commencesand at the time when the hirer wants to
exercise his option to purchase (Vohrah and Aun 2000). If the owner's title is
defective at either of these times, the hirer is entitled to repudiate the contract and
recover all sumspaid (Guest 1966).
c. Fitness and Quality of the Goods
Section 7(3) of the Hire PurchaseAct 1967implies a condition that the goodsmust be
fit for the hirer's purpose. However, the owner can avoid liability by inserting an
exemption clause in the agreement,stating that the owner will not be responsiblefor
any fault or loss connectedto the goods supplied. It is strictly emphasizedthat in this
situation, the owner must prove that the exemption clausewas brought to the hirer's
notice before agreementwas made and its effect made clear to him (Thornely and
Ziegel 1965). Section 7(2) of HPA provides that a condition of merchantablequality
is implied in hire purchaseagreement,unless the hirer has examined the goods or a
sample whereby any defect would be reasonably detected. The condition of

merchantablequality can be excludedin two cases(Vohrah and Aun 2000);
(a) where the hirer has examined the goods or a sample, as regards defects
which the examinationought to have revealed;or

(b) if the goods are second-hand goods and the agreement contains a
statementto the effect that:

i. the goods are second-hand;and
ii. all conditions and warranties as to quality are expressly negative,
and the owner proves that the hirer has acknowledged in writing
thatthe statementwasbroughtto his notice.
In both cases,the owner must prove that the defect and the clauseshave been
notified
to the hirer beforethe agreementis madeandthe effect of the clauseis clearto him
(Guest 1966).
76
d. Insurance of the Goods75
In mattersof insurancecoverageof the goods,the owner is under no duty to insure the

let
goods on hire unless the agreementso provides (Goode 1970). The obligation is
usually borne by the hirer according to the terms in hire-purchase agreement.

However, in relation to hiring a motor vehicle, the owner cannot permit other person
to use a vehicle, which is not covered by an insurancepolicy. If he does so, he has
committed a criminal offence, which renders him liable for penalties, and also
damagesif there is an injury causedby the negligenceof the driver of the vehicle. For
this reason, a clause is inserted into hire-purchaseagreementfor hiring of motor
vehicles, that such vehicle must be coveredby third-party insurancebefore being used
by the hirer (Guest 1966). All amountspayable in respectof insurance form part of
76
the hire-purchaseprice . The hirer is under a duty to insure the vehicle for the second
and all subsequent years. Upon his failure to do so, he shall be guilty of an offence
under HPA (Phengand Samen1997).
e. Supply of Information and Documents
it is important for. the owner to supply necessaryinformation and documentsto the

hirer, such as a copy of agreement and details of the transaction. In certain
circumstances,it is obligatory for the to

owner supply the hirer with a copy of the
hire-purchasedocument before it is to be converted into a bonding agreementas a
result of signatureby the parties. Then the hirer must be supplied with a secondcopy,
that is, a copy of a complete and binding agreement(Goode 1970).
4.3.6.2 Hirer
The hirer is a person who is making use of the goods which he hires from the owner,
and utilizes the goods for his purposes.The goods are in his possession,thus, he is
fully responsiblefor the safekeepingand well being of the goods. In other word, he is
entrusted by the owner to safeguardthe goods, and at the same time he can fully
benefit from the goods accordingly. There are some rules and guidelines that
emphasizeon duties of the hirer. They are outlined as follow;
75Refer to duty hirer insure

of to the goodsat page78.
76Section26(7) Hire PurchaseAct 1967
of
77
a. Acceptance ofDelivery
The hirer must acceptdelivery of the goods,which he has agreedto hire. When he has
taken delivery of such goods, the hiring contract deemsto commenceat this point of
time, and the owner shall have a right to demandfor the rent or instalment agreed.If
the hirer doesnot take delivery within a reasonabletime, he will be liable to the owner
for any loss due to his failure to take delivery, and also for any chargefor the care and
custody of the goods (Goode 1970).However, if the hirer repudiatesthe contract, the
owner cannot take action for the hirer's refusal to take delivery. In case where the
hirer refusesto acceptthe goods,the owner is not entitled to claim for payment since
the hiring does not commence until delivery. His proper remedy is to claim for
damagesfor failure to acceptdelivery (Guest 1966).
b. Payment
It is the duty of the hirer to pay the agreed sums in the manner and at the times
specified in the agreement (Goode 1970). The paymentsnormally consist of an initial
payment upon entering the hire-purchase agreement and the hire-purchase

instalments. An initial payment is usually made before or upon signing the hire-
purchase agreement. Sometimes it is commonly known as 'deposit' or 'advance

payment'. The hirer must understandits purposeand effect if he seeksto withdraw or
terminate the agreement(Guest 1966). The hirer must pay the instalments according
to the manners stated in the agreement.The agreementshould clearly spell out the
amount, period and mode of payment. In the absenceof any specific provision on
matters relating to payment, it should be resorted to the general rules of law on this
77
subject . Upon default by the hirer of two successivepayments or the last payment,
the owner may exercisehis right to repossessthe goods, subject to condition imposed
in the Hire-PurchaseAct 196778(Vohrah and Aun 2000).
The duty to pay rental or instalments cannot be avoided even if the goods are
destroyed. In Ka Yin Credit & Leasing Sdn. Bhd. V Pang Kim Cha & Bros
Development Sdn. Bhd.79(Buang 2001), the bulldozer which the defendant took
on
77For example,Hire PurchaseAct 1965

78Section 16
of the Malaysian Hire Purchase At 1967.
79[1989] 2 MLJ 61
78
chapw 4 ReguWOMci hivric Kmewzha
hirc-purchasewas destroyed by fire. The defendantrefused to pay any further

instalmcntsuntil their claim againstinsurerswas resolved.The pWntiff insisted on
the payment of instalmcnts.When the defendantstill refusedto pay, the plaintiff
terminatedthe agreementand sued for the full balancedue. It was observedthat the
loss, destructionof or damage to the goods hired did not in any way dischargethe
hirer's liability to pay all sumsdueunderhirc-purchaseagreement.
c. Custody and Care of the Goods
is
The hirer undera duty for for
to usethe goods the purpose which they arc hired and
take reasonablecare of the tic
goods. must observe the special rcquircmcnts of the
hirc-purchascagreementconcerningthe repair and custodyof the said goods(Goode
1970).If the agreementis silent in the matter,the hirer is underno obligationto carry
out rcpairs to the goods,except if he is responsiblefor any damage that occurred to
the goods. However, most hirc-purchasc agrcemcnts impose an obligation upon the
hirer to keep in
the goods good order and condition (Guest 1966). Goods must be
in in the hirc-purchasc agreement. If the hirer
stored appropriateplace specificd
the or they arc lost, or taken from his possession,he must inform the
removes goods,
o%%mcr in, (Volirah
%NTiting and Aun 2000). If he fails to do so within fourteen days of
the removalhe is guilty of an offcnccgo.
d. Redelivety of the Goods
%Vhcnthe hiring has terminated and the hirer does not wish to exercise an option to
purchase the goods, tic is under a duty to rcdclivcr the goods to the owner (Goode
1970). If the goods perish during the hiring without negligence on part of the hirer, he
will be excused from rcdclivcring the goods, unless the agreement imposes upon him
an absolute responsibility for any risk for In

the goods. practice, the hirer is obliged by
the terms of hirc-purchasc agreement to indemnify the owner against the loss or
destruction of the goods whether this is due to his fault or not (Guest 1966).
Insuranceofthe Goods
It has bccn mcntioncdabovc that the hircr. gcncrally, is not rcquired to insurc the
goods let on hire unless there is an expressstipulation to this cffcct in the agreement.
1*Section 37
of the II ire-PurchaseAct 1967.
79
ChaPWr4
ReqAAw d Wwric KrePwdme
However,most hirc-purchasccontracts,particularly thoseinvolving motor vehicles,

will imposea duty of insuringthe goods(Goode1970).For instancein caseof motor
vehicles,it is unlawful to use a motor vehicle without a valid insurancepolicy. This
requirementmust be strictly adheredto, and it can be carried out in either of these
wa)s, namcly-,
the hirer takes insurancepolicy %ith a namedinsurancecompanyor with a
companyapprovedby the ou-ncr(Guest1966);or
ii. the owner will insurc the goods and rcnmv the insurancehimself, and then
rccovcrthe cost thcrcof from the hircr, or

iii. the o%%mcrcfTcctsa policy by taking a third-party insurancc,and the hircr will
bc rcquircdto rcncw the policy (VohrahandAun 2000);
If the hircr fails to carry out this duty, he will be liable to the owner for brcachof
contract.If on the hircr's dcfault,the o%%mcr clcctsto insurcor rcncw the insurance,he
canrccovcr from the hircr any sumsthat arc trcatcdasdamagesfor breachof contract
(Guest1966).
f Supplj- of Information
Section 24(l) of Ifirc-Purchasc Act 1967 requires the hirer, on receipt of a %%Tittcn
request by the owner, to inform the owncr the whereabouts of the goods and its
condition. If the goods arc not in his possession,he must notify the o%%mcr
to whom
the goods have been delivered or the circumstances under which he has lost
possessionor the goods (Buang 2001). Failure to respond in writing, within 14 days
of receiving such written request, will amount to an offence and the hirer shall be
guilty of such an offence. Undoubtedly, the o%%mcr
owes some rcsponsibiIi ties towards
the hirer. On the other side, the hirer is also obliged to perform certain duties in
carrying out his responsibilities under the agreement.The rights and duties of the hirer
arc primarily spcciFicd in the statutory laws, thus the position seems to bc more
certain. In contrast, the rights and duties of the o%%mcr,
though so provided by the
respective laws, they arc wcll-spcciricd by decided cases and by the terms of the
agreement.Nowadays, an o%%mcr's function is commercially expandedto provide the
rcquircd goods in a form of financing to the hirer.
so
ChapW 4 Regutabonci WarNe Km4%cha
4.3-63 Finance Companies
The fmancccompanies,as their nameimplies, are in businessto pro"idc money,but

in the field of hirc-purchasctheir role is highly unusual.Insteadof simply lending
moneyupon a mortgageof the goods,they actuallybuy the goodsfrom the dealerand

then let themout on hirc-purchascto the customer" (Lowc 1972).Financecompanies
do not involve directly in tradin& thus,they normally appointtheir own dealerswho
arc selectedwith greatcare. The contractof is
hirc-purchasc negotiatedby the dealer
as an intermediarybetweena rinancccompanyas the owner and the customeras the

hirer. A salenormally takesplaceby the dealerto the financecompany,while a hire-
purchaseagreement is eventuallyexecuted by the finance companyand the hirer.
4.3.6.4 Dcalcr
In practice,the dealerpla)i a vital role in conductinghire-purchasctransactions.He is

commonly perceived by the la)micn as a person who sells particular goods and
arrangcsevery matter relating to the transaction;from providing the goods, delivery,
acceptingthe dq)osit and many other important tasks.In fact, he does not only sell the
goods to the buyer, but more importantly introduces the bu)-cr to the finance
compan)-,resulting in a formationof hirc-purchascagreement.The buyer %villthen

becomea hirer and the financecompanybecomesthe owner. It is importantto note
that in this t)pc of transaction,the dealeris not a partyto the hirc-purchascagreement,
thoughlie pla)s a significantrole in the formationor conclusionof the agreement.He
is the one who attractsand dealsdirectly with the customerat a preliminary stage,
white the rinancccompanydoesnot comein view ),ct. Thus,the dealeris usuallyseen
as a negotiatorand sometimesan agent(althoughhe might be one) of the finance
company.
It is thereforeimportantto examinethe role playcdby the dealerin orderto determine

the extent of liability in respectof rcprcscntationmade to the customer.This is
ncccssary cspccially in the cvcnt of fault, in ordcr to asccrtain the party who will bc
madc rcsponsiblc. If the dcalcr acts as an agcnt of the rinancc company, the lattcr will
" If this hire-Purchase

operationis truly carriedout in practice,dienit complies%ithSharl'ah.
81
Chapkw4 RegAaban of WaMC Kre4h9dM"
also be jointly liable for any claim made by the customer. This issue will be
claboratcdfurthcr in the following discussion.
a. Functions of Dealer
The dealerconductsnegotiationof the transactionwith the customer.It is necessary

for him to stateto the hirer in writing the cashprice of the goodsanddeliver the copy
of agreementandother relevant documents to the hirer. He also takesdepositfrom the
hirer. Then he sendsall documentsrclating to purchaseof the goodsto the finance
If
company. the financecompanyapproves the the
transaction, company will buy the
goodsfrom the dealerand then let themon hire to the hirer.
b. Dealer asefgcni
It is vcry difficult to ascertainto what extentthe dealerfunctionsas an agcnt of the

financecompany.In reality, the financccompanyneedsa dealer'sscr%iccto negotiate
many transactions on its behalf, thus, it must carefully choosethe dealerto carry out
this important task. The finance companyusually enters into a standingagreement
with the dealer and provides him with its documentsand forms. These documents,
after being compictcdby the customerwill be sentback to the finance The

company.
dealer'sactson bchalf of the financecompanycannotbe simply regardedas an agent
of the company, in the sensethat the companywill be made jointly liable for his acts
as a result. I'lic dcalcr could have actcd purely as an intermediary or medium of
communication bctwccn the hirer and financc company. As such, this function would
not necessarilyindicatethat the dealer's act would createobligations binding on the
company.
c. Representation by the Dealer
?,
dost prospcctivc hircrs agmc to cntcr into a hirc-purchasc agrccmcnt rclying on the
rcprcscntations madcby the dcalcrin rclationto the quality and fitncssof the goodsto
bc Ict on hirc. It is importantto notc that therc is no direct contractualrclationship
bctwccn the hircr and the dcalcr. Aftcr the cnd of ncgotiationproccsswhich tak-cs
placc bctwccnthe dcalcr and hirer, the dcalcr sclis the goodsto the financccompany
and thcn the companyIcts the goodsto the hircr. If thcrc is any dcfcct in the goods,
the dcalcrmay argucthat hc shouldnot bc madcrcsponsibicsinccthe contractis not
madcwith him but with the financccompany.On the othcr sidc,the financccompany
82
will not simply take such responsibility which results from the dealer's
misrepresentations.Hire-PurchaseAct 1967 seemsto be crystal clear in deciding the
extent of the owner and dealer's liabilities for misrepresentation.Where there is
misrepresentationby the dealer,owner or his agentsin the negotiationsleading to the
hire-purchaseagreement,the hirer is conferred a statutory right to claim against the
owner and the personmaking the representation(Vohrah and Aun 2000). Section 8 of
the Hire-PurchaseAct 1967 considers that a representation,warranty or statement
made by a dealer or its agent as if it was made by an agent of the owner. By section
8(1) of HPA, the hirer is conferredthe following rights:
i. as against the owner, the right to rescind the agreementeven if the fraudulent
representation,warranty or statementwas madeby an agentof the owner; and

ii. as against the person or agent who made the representation,warranty or
statement, the hirer has the right of action in damages,as if the hirer had
purchasedthe goods from that person.
By virtue of section 8(2) of HPA, the above-mentionedrights are protected from any
terms of the agreementpurporting to exclude, limit or modify those rights. The
provision declaresthat such terms of the agreementshall be void. Then section 8(3)
specifies a right to be indemnified for an innocent owner who suffers damagesas a

result of the conduct of the dealeror its agent.He is entitled to be indemnified by the
person who made the representation,warranty or statement, or the agent of such
person. It is importantly noted that section 36 of HPA treats an act of making false
statement or representation in an agreementor offer in writing, by a dealer, agent or
person acting on behalf of an owner, will amountto a seriousoffence. If convicted, he
shall be liable to a fine not exceedingRM300082or to imprisonment for a term not
exceedingsix months or to both.
The abovediscussionon the issueof agencyandits liability hasraiseda very decisive

questionwhetheror not a dealercanbe regardedas an agentof the financecompany.
Although somecasesviewedthat a dealeris madean agentof the owner for certain
purposeswith limited role, but there are a number of casesindicating that a dealer is
the agent of the finance company for most purposes,thus, makes
representationson
82Ringgit Malaysia- RM3000 is

about L500.
83
behalf of the company.It would normally seemthat a dealeris an agentof the finance
company in relation to the formation or conclusion of a hire-purchaseagreement.

Thus, the finance company cannotjust exempt itself from any liability in respectof
the dealer's actions. The Hire-PurchaseAct 1967 makes a clear-cut indication that a
by
representation,warranty or statementmade a dealer or its agent will have a legal
effect as if it was made by the owner's agent.Therefore, a dealer or the owner cannot
simply escape from any liability in the event of wrongful and fraudulent
representationmadeby the dealer,but will be jointly answerableto that misconduct.
4.3.6.5 Guarantor
A guarantoris a person who guaranteesto the owner that the hirer would perform his
to
obligations and undertakes repay the hirer's debt to the owner should the hirer fail
to pay the debt by the due date (Pheng and Samen 1997). A finance company
normally requires the hirer to provide anotherperson(s)to guaranteethat he will duly
perform his obligations. A guarantorcan usually be a friend or relative of the hirer, or

a director of the hiring or buying company. The obligation to provide one or more
guarantors to the owner arises only if the owner requires the hirer to do so (Buang
2001)83 The owner usually imposes this requirement if he thinks the hirer does not
.
have sufficient resourcesto meet the monthly repayments.There is no definition of
guarantor in Hire-PurchaseAct 1967, but a 'contract of guarantee' is defined in the

interpretation section as;
"... a contract made at the request, expressedor implied, of the hirer to guaranteethe
performance of the hirer's obligations under the hire-purchaseagreement,but doesnot

include the dealer or a person engagedat the time of giving of the guaranteein the
trade or business of selling goods of the same nature or description as the goods
comprised in the agreement, and the expression "guarantor" shall be construed
accordingly."
From the above interpretation, in a legal term, a guarantor is a person who is
requestedby the hirer to guaranteeto the owner the performance of his obligations
83Section20A Hire-PurchaseAct 1967.

of
84
under the hire-purchaseagreement.The provision clearly excludesdealersor person

in
engaging the selling of goodsof the samenatureor description84
a. Liability of Guarantor
Basically, the guarantorwill not be liable unlessthe other party's loss is causedby the
act in respect of which he has agreedto act as guarantor.His liability to the owner
doesnot commenceuntil after the hirer hasmadedefault (Goode 1970), and continues
even after the owner has repossessedthe goods from the hirer (Pheng and Samen
1997)85.Hence, in proceedingsagainstthe guarantor,the owner must properly prove
the hirer's default. Section22 of HPA limits the guarantor'sliability in performing his
obligation under the He
agreement. shall not be bound:
1) to pay to the owner an aggregatesum which is larger than the balance
originally payableunder the agreement;or
2) to perform an obligation in respect of goods other than the goods
comprisedin the hire-purchaseagreement,
If therearesuchtermsincludedin the agreement,

that agreementshallbe void unless
the agreement is executed by the guarantor in the presence of a Magistrate, a
Commissionerfor Oathsor a Notary Public.
b. Guarantor's Rights against Owner
The guarantorhas the following rights againstthe owner;

(1) Section 23 provides that within sevendays of the making of the hire-purchase
agreement or guarantee,whichever is the later; the owner must supply the

guarantorwith a copy of;
i. the hire-purchaseagreement;and
ii. a note or memorandumof the contract of guaranteesigned by the
guarantoror by his duly authorizedagent.
84Seecase Hong Leong Finance Thamilcheleven Palinesamy

of v. slo &Anor [1996] 1 MLJ 351. The
primary issue in this casewas whether the dealer should be held responsibleas guarantor.The Judge
held that a dealer cannot be made responsibleas
a guarantor for the simple reasonthat it contravenes
the 1967 Act. Thus, other person than the dealer who is not engagedin the trade businessshould
or
haveundertakenthis responsibility.
85Section21(2) HPA.
of
85
If the owner fails to do this, he cannot enforcethe contract of guaranteeor any
security,but the court has the usual power to grant relief

(2) The guarantorhas the right to securehis dischargefrom the guaranteeby paying
to the owner the amount due to him by the hirer86 and then entitled to the right
,
of subrogation(Macleod 1971).
(3) After making such payment, he is entitled to sue the hirer in the name of the
owner for any breach of the hirer's obligations, provided that he provides the
87.
owner with a suitableindemnity for costs ,
(4) He can exerciseany set-off or counterclaim againstthe owner that would have
been available to the hirer88(Goode 1970); and
(5) He may insist that the owner transfersto himself all the securitiestaken by the
89
owner to securethe hirer's perfonnance .
Guarantor's Rights against Hirer
Unless there is an express agreement between the guarantor and the hirer, the
guarantor'srights againstthe hirer may arise in the following ways;

1) The guarantoris entitled to be indemnified by the hirer against any claim made
by the owner on the guarantee90.
,
An express or implied right of indemnity in respect of sums paid out in
dischargehis obligations as a guarantor(Macleod 1971);
3) The guarantormay compel the hirer to pay the instalmentsin respectof the hire-
purchaseagreementas and when they fall 91

due. He may apply to a Magistrate
for an order to that effect (Vohrah and Aun 2000); and
4) The guarantoris entitled to a right of subrogationwhen he pays the owner. This
means the owner must assign to him all his rights against the hirer, including
any securities taken by the owner in respect of the hire's obligation under the
hire-purchaseagreement(Goode 1970).
86Section23(l) of HPA
87Section23(2)(a) HPA
of
88Refer also to
section23(3) of the HPA
89Section23(2)(b) HPA.
of
90For example,
a guarantoris requiredby the owner to pay overdueinstalment on behalf of the hirer. If
hIemakessuchpayment,he is entitled to claim the sameamount from the hirer.
9 Refer section24(2) HPA
of
86
Chapter 4
Having given his assurancefor the hirer's complete performancein a hire-purchase

transaction,a guarantor's vital role is undeniable.Therefore,his rights and liabilities
must be properly safeguardedagainst any mistreatmenteither by the owner or the
hirer.
4.3.7 PROTECTION OF HIRERS AND GUARANTORS
The obligations and responsibilities of the owner to the hirer are comprisedmainly in
the expressor implied terms of the hire-purchaseagreement.However, expressterms
imposing contractual duties on the owner are rare since the owner is responsible for
the form of the agreement(Diamond 1971). Hence, in the absenceof these express
terms, we must look for implied terms. For this purpose, Hire-PurchaseAct 1967
implies a number of conditions and warranties,and restricts the power of exclusion in
certain instances. Thus, the owner cannot easily avoid any statutory liability by
relying on the exclusion clauses in the agreement. In this part, the subject on
protection of the hirer as well as guarantor(s) will be discussed under two main
headings; in respect of protection provided by implied terms and restriction on the
exclusion clauses.
4.3.7.1 Implied Conditions and Warranties
Implied terms are classified into conditions and warranties. This classification is
important to be understoodespecially when considering the hirer's remedies for the
owner's breach of contract. If the owner is in breach of warranty, the hirer is entitled
to claim damagesfrom the owner without affecting the agreementat all. On the other
hand, if the owner is in breach of condition, the hirer may claim damagesand if he
wishes, repudiate the contract. Section 7 of the Hire PurchaseAct 1967 provides for
the conditions and warranties to be implied in every hire-purchase agreement and
severely restricts the power of exclusion. These implied conditions and warranties
be
cannot excluded or modified except in relation to secondhand goods in respectof
merchantablequality and fitness for purpose (Vohrah and Aun 2000) but with strict
,
conditions to be observed. Those implied terms as specified in HPA are as follows:
1) A warranty for quiet possession;
2) A condition that the owner holds the title of the goods;
3) A warranty as to encumbrance;
87
4) A condition as to merchantablequality; and

5) A condition as to fitness for purpose.
a. Warranty as tOquiet possession
Section 7(l)(a) of HPA implies a warranty that the hirer shall have and enjoy quiet
possessionof the goods. When the owner gives possessionof the goods to the hirer,
he must leave the hirer in peacefulpossessionand in privacy throughout the period of
the hire-purchasetransaction. If the owner interferes with the hirer's enjoyment of
possession,this warranty is broken, and he shall be liable for damagesif the hirer
initiates any claim againsthim. Therefore, if the owner wants to inspect the goods or
need to do somethingwhich will unavoidablycausean interferencewith the goods,he

must first get the hirer's permission and consent,and do so during the time agreedby
the hirer. However, the owner is not liable for wrongful acts of interference
committed by a strangerwho is not authorisedby him (Goode 1970).
Condition as to title
There is an implied condition in a hire-purchaseagreementthat the owner does own

the goods. When the owner owns the goods, he shall have a right to sell the goods.
Section 7(l)(b) of HPA requiresthe owner to have a good title in the goods,which are
to be let out to the hirer, becausethe ultimate objective of a hire-purchasetransaction
is to acquire a title of the goods at the end of the hiring period. The phrase'at the time
when the property is to pass' in section 7(l)(b) of HPA means at the time when the
hirer decidesto pay all sums due under a hire-purchaseagreement(Phengand Samen
1997). In other word, when the hirer is about to exercise an option to purchasethe
goods and satisfiesall paymentsneeded.
c. Warranty as to befreeftom encumbrance
The warranty as to encumbrance 92is also implied that the

goods shall be free from
any charge in favour of any third party at the time when the property is to pass.
Therefore, before the title of the goods is transferred to the hirer, the owner must
ensurethat the said goods are free from any chargesuch as a lien or mortgage, as this
encumbrancewill affect the hirer's absoluteownership and enjoyment of the goods.
92Section7(l)(c)
of HPA.
88
d. Condition as to merchantable quality
Section7(2) of the Hire-PurchaseAct 1967providesthat there is an implied condition

that the goodsshall be of merchantablequality, exceptin the following circumstances:
(a) where the hirer has examinedthe goodsor a sample,as regardsdefectswhich
the examinationought to haverevealed:or
(b) if the goods are second-handgoodsand the agreementcontains a statementto
the effect that -
(i) the goodsare second-hand;and
(ii) all conditions and warranties as to quality are expresslynegatived,
and the owner proves that the hirer has in
acknowledged writing
that the statementwas bought to his notice.
Other than the two exceptionsprovided by the above section 7(2)(a) and (b), in every
hire-purchaseagreement,there shall be an implied condition that the goods are of
merchantable quality. However, this implied condition may be excluded where the
hirer has examinedthe goodsor a sample,and the examinationought to have revealed
the defects.In the caseof second-handgoods,this implied condition may be excluded
if the agreementcontains a statementmentioning that the goods are second-handand
all conditions and warrantiesas to quality are negatived.Provided that the owner must
prove that the hirer has acknowledgedin writing that the statementwas brought to his
notice.
e. Condition as tofitnessforpurpose
Section 7(3) of the Hire-Purchase Act 1967 requires that the goods must be
reasonablyfit for the purpose as by

stated the hirer either expresslyor by implication.
Whether the goods are reasonably fit must be tested in relation to the purpose for
which they are supplied, and must dependon the degreeof precision with which that
purposeis specified (Macleod 1971). However, this condition shall not be implied for
second-handgoodsprovided the agreementmentions that:
(a) the goods are second-hand;and
(b) all conditions and warranties of fitness and suitability are expresslynegatived,
and the owner proves that the hirer has acknowledged in writing that the
statementwas brought to his notice.
89
Chapter4 Regulationof IslamicHire-Purchase
The exceptionsto this implied condition appearto be similar to that of merchantable
quality. It must be noted that such exceptionswill only operateif it is proved that the
hirer has acknowledgedthe above provisions and is aware of their effect before the
agreementwas made.
4.3.7.2 Consequences for breach of Implied Condition and Warranty
A breach of condition goes to the root of the agreement (Pheng and Samen 1997) and
affects its very foundation. Hence, a hirer may rescind the contract and will be entitled
to recover the amount already paid him. In Public Finance Bhd. v. Ehwan Bin
Saring'3 the High Court observed that the owner had to have a good title when he
,
entered into the hire-purchase agreement, and not when the final payment was made.
Thus, the hirer was entitled to recover the amount already paid by him. On the other
hand, a breach of warranty does not give rise to a right to rescind the hire-purchase
agreement but to a claim for damages. In Lau Hee Yeah v. Hargill Engineering Sdn.
94
Bhd. & Anor the held that breach hirer to
, court such a would only enablethe claim
damagesagainstthe owner, but not to rescindthe contract.
4.3.7.3 Exclusion" Clauses
The owner usually takes the benefit of an exclusion clause to free him from any
liability for unforeseen damages to the goods. Coote (1964) emphasizesthat an
exclusion clause provides merely a shield to a claim for damagesand that it does not
in itself affect the obligations undertakenby the owner. As regard to implied terms,
while they may be independently implied of actual intention of the parties, they
cannot be in conflict with the expressterms in the contract.Thus, exclusion of implied

terms may have direct effect upon primary rights by preventing their ever coming into
existence(Coote 1964). There is a need to control the use of exclusion clause in the
agreementparticularly when there is an intention for avoiding the primary and core
responsibility in the contract. It is also aims to eliminate the hindrance for the hirer
from claiming damagesfor any loss arising from use of the goods supplied by the
owner.
93
[1996] 1 MIJ 331
94 [1980] 1
MLJ 145
9' Sometimes
referred to as "Exception or Exemption Clauses".
90
Now we shall look into eachimplied term, whetherit canbe excluded.

(1) Condition as to title - this condition cannot be excluded becauseit is a basic
requirement for transferring a title in the goods. Failure to pass title under a
to
contract amounts a total failure of consideration,resulting to a void contract
(Hudson 1957).96
(2) Condition as to fitness for purpose - it can be excluded but the owner must
comply with certain requirements(Macleod 1971), that are:

a. insert a clear exclusion clauseto this in
effect the agreement;
b. inform the hirer of this exclusion; and
c. make sure that the hirer understandsthe effect of this clause.
(3) Condition as to merchantable quality - section7(2) provides that this condition
be in
may excluded two situations:
a. where the hirer has examinedthe goodsor sampleas regardsdefectswhich
the examinationought to haverevealed;and
b. if the goods are let as second-handgoods, and the agreementcontains a
statementto that effect.
In addition,conditionof merchantable be if
quality may also excluded the goodsare
let subjectto defectsspecifiedin the agreement(Borrie 1969).The agreementmust
containa provisionthat this conditionis and
excluded, it is provedthat suchprovision
has beenbrought to the hirer's notice and its effect madeclear to him before the
agreement is made. Therefore,it couldbe clearlycomprehended that the impositionof
the aboveimplied terms aims to complimenta hire-purchaseagreementwhich may
ordinarily be silent in providing such protections.These terms cannot be easily
in
excludedexcept relation to second hand goodsin respectof merchantablequality
andtheconditionregardingfitnessfor purpose.Evenso,therearestringentconditions
to be observed.We might aswell find that theseimplied conditionsandwarrantiesare
generallysimilar to thoseprovidedin section14to 16 of the MalaysianSaleof Goods
Act 1957.Hence,this law is worth referredto in respectof this subject.
96In the other

articles published4 yearslater, the writer viewed that it was possible to exclude the term
implied by the subsection,but it must be preciselyput a limit to this freedom(Hudson 1961)
91
Chapter4 Regulationof IslamicHire-Purchase
4.3.8 REPOSSESSION
The hirer must ensurethat he pays the monthly instalmentsregularly, or he will face a
consequenceof repossession.Repossessionoccurswhen the hirer has defaulted in the

paymentof instalments.This is the right of the owner, which enableshim to take back
the goods from the hirer provided that he must follow certain conditions as provided
by the law. The Hire-PurchaseAct 1967 provides rights and obligations of the hirer
and owner in the event of repossessionof the goodsin section 16 to 20. In support to
these rules, reference must also be made to the Hire-Purchase (Recovery of
Possessionand Maintenanceof Recordsby Owners)Regulations1976. Thesematters
in
are neatly explained two situations;before and after the repossessiontakesplace.
4.3.8.1 Before Repossession
Section 16(l) of HPA provides that, before the owner wishes to exercisehis right of
repossession,he must ensurethat the following conditions have been fulfilled:

The hirer has defaultedin paymentof instalments,provided:
(a) there had been two successivedefaults of payment or a default in
paymentof the instalment;

(b) wherea hirer is deceased,
therehadbeenfour successivedefaultsof
97
payments;
2) A written notice of intention to re-possessas in the form set out in the
Fourth Schedulehas been servedon the hirer, and the period fixed by the
notice (not lessthat 21 days) has expired; and

3) A secondnotice is served to the hirer after 14 days of the service of the
Fourth Schedulenotice, reminding him to act promptly or the owner will
repossessthe goodsimmediately after the period as stipulated in the Fourth

Schedulenotice has expired98.
These notices shall be delivered by the owner personally or through post to the last
known addressof the hirer. However, section 16(2) states that the
owner need not
97
Section 16(IA)
98 This
condition is commonly practiced though not specified by the HPA. Its aims as a second
reminder to the hirer of the owner's intention to repossess if he still fails to exercise his obligation
under the hire-purchase agreement (Malaysia 2003).
92
comply with the above conditions as set out by section 16(l), if there are reasonable
grounds for believing that the goods will be removed or concealed by the hirer
contraryto the provisions of the agreement.In this situation, it is the owner who must
prove those groundsfor believing that the hirer will do suchacts.
As for the hirer, upon receiving the Fourth Schedulenotice, he must act accordingly;
in fact he has two choices:
1) He needs to pay all due payments as stated in the Fourth Schedule notice
within 21 days of the service of the notice, thus the goods will not be
repossessed;or
2) He can return the goods to the owner within 21 days of the Fourth Schedule
notice. In this situation, he is still obliged to pay a due sum after deducting the
value of the goodsat that particular time.
If the hirer returns the goodswithin twenty-one days after the service of the notice as
set out in the Fourth Schedule,

he shall not liable to pay (section 16A);
(a) the cost of repossession;
(b) the costincidentalto takingpossession;
and
(c) the cost of storage.
However,if the hirer doesnot exerciseeitherof theseobligations,the repossession
will take place at any time after the lapse of 21 days as statedin the Fourth Schedule
notice.
4.3.8.2 After Repossession
In the event of repossessionof the goods,the owner still has to perform severalduties
that are;
1) On repossessionthe owner must deliver to the hirer personally a document
acknowledging receipt of the goods. If the hirer is not present at that time,
such document of receipt must be sent to him immediately after the owner
takespossessionof the goods.99
2) The owner also has to set out in the abovedocument a short description of the
goods,the date, time 00

and place of repossession!
99Section 16(4)
100Section 16(5)
93
3) Within 21 days after repossessiontook place, the owner has to serve on the
hirer and every guarantorof the hirer a written notice as in the form set out in
the Fifth ScheduleSection 16(3).
4) Failure to do so, his rights under the agreementwill cease and determine
101
unlessthe hirer exerciseshis right to recoverthe goods.
5) The owner must not sell or disposethe goodswithout the written consentof
the hirer until the expiry of twenty-one days after the service of the notice as
set out in the Fifth Schedule. 102If he contravenes this rule, he shall be guilty
103
of an offence under HPA.
It is important to note that the service of the Fifth Schedulenotice does not indicate
that an absolute repossessionhas taken place, but to give a second warning and
chanceto the hirer to perform his obligations under the agreement. The purposeof the
abovenotice is to ensure that the hirer is awareof his rights and be given ample notice
to enable him to prevent the repossessionby settling his obligations (Pheng and
Samen 1997). After the event of repossession,the hirer still has certain rights and
responsibilities as expoundedby the HPA.
4.3.8.3 Rights of Hirer on Repossession
Section 18 confers on the hirer certain rights when goods are repossessed,which
include as follows:
Within 21 days after the service of a notice in the Fifth Schedule, section
18(l)(a) provides that the hirer may by giving to the owner a written notice
requiring the owner to-

a. re-deliver to the hirer the goodsthat have beenrepossessed;or
b. sell the goodsto any person introduced by the hirer who is preparedto
buy for cashat a pricenot lessthanthe estimatedvalueof the goodsset
out in thenotice.
2) Where the hirer has sent a notice to the owner as in section 18(l)(a), within
twenty-one day after giving such notice he can regain possessionof the goods
by performing the following acts:
101Section 16(6)
102Section 17(l)
103Section 17(2)
94
(a) pays or tendersto the owner any amount due under the hire-purchase
in
agreement respectof the period of hiring up to the date of payment
or tender;
(b) remediesany breachof the agreement;and
(c) to the the reasonablecosts and incurred
expenses in taking
pays owner
possessionof the goodsand redelivering them to the hirer.
3) Alternatively, according to section 18(l)(b), the hirer may also claim a refund
104
from the owner if the value of the goods exceedsthe net amount payable'05
(Buang 2001).
4) After repossession,where the owner intends to sell the by
goods public auction,
he must notify the hirer of such public auction not less than fourteen days from
106
the date of the auction.
is
5) If the sale not made through public auction, the owner must give the hirer an
the the he intends to sell if the price is
option to purchase goods at price which
less than the owner's estimateof the value of the goodsrepossessed. 107
6) Section 18(5)(a) requires the hirer to act fast in to

order recover the amountshe
He 21 days the the Fifth

entitles to. must within of receiving notice under
Schedule,give to the owner a written notice;
a. setting out the amountwhich he claimed under this section; and

b. signedby him or his advocateor agent.
7) After sending the notice to the owner, the hirer must commence an action in
later than three the had been to the 108

court not months after notice sent owner.
8) At any time before the commencementof the aboveproceedings,the owner can
make an offer in writing to the hirer in
any amount satisfaction of the hirer's
... Section 18(3)(b) explainsthe meaningof the "value of the goods" as

(a) the best price that could be reasonably obtained by the owner at the time of taking
repossessionof the goods;or
(b) if the hirer has introduced a person who has bought the goods for cash, the amount paid by
that person,lessthan the following costs:
(i) the reasonablecostsincurred by the owner in taking possessionof the goods;
(ii) cost of storage,repair or maintenance;and
(iii) reasonableexpensesincurred in selling the goods.
105Section 18(3)(a) defines the "net amount payable" as the total amount payable less the statutory
rebates for term chargesand insuranceas the owner taking possessionof the goods.
106
Section 18(4)(a)
107
Section 18(4)(b)
108
Section 18(5)(b)
95
claim. If the hirer accepts it, the dispute ends, but if he rejects the owner is
entitled to pay the amount into court.109
If the hirer performs the above duties, the owner must return the goods to the hirer.
Their relationship reverts to the original position, as if the breach had not occurred
andthe owner had not repossessed the goods. " 0
For the purpose of better understanding in this subject, a general procedure of
repossessionis illustrated in the diagrambelow:
FIGURE 4.2:
Procedure of Repossession
Before Repossession After Repossession

:4 e- 4
Days 14 21 22 )C 42 X 421 days
Serviceof the Serviceof a The owner Serviceof the The owner

Fourth secondnotice repossesses Fifth can sell the
Schedule of intention to the goods Schedule goodsto
notice repossess afterthe notice. other buyers
(21 days period stated Hirer is after the lapse
(Reminder in the Fourth of the Fifth
notice of Schedule remindedof Schedule
intention to notice) his rights to
notice has be exercised notice
repossess)
expired
within 21
days.
__j L---- -----------
Note:
'X' refersto the day in which the owner servesthe Fifth Schedulenotice, whereby such
servicemust be donewithin 21 daysafter the repossession.
From the foregoing discussion, it is clear that the rule of repossessionas enunciated
by Hire-PurchaseAct 1967 upholds the aims of HPA to protect the hirer's right. The
law gives severalremindersand enoughtime for the hirer to fulfil his obligation; upon
expiration of the given period only then repossessiontakes place. Having examined
Hire-Purchase Act 1967 in considerable detail, the next section will look into the
proposed Wamalah Hire-Purchase Bill as an alternative law for Islamic hire-

purchasetransactionin Malaysia.
109Section 18(6)
110Section 19
96
4.4 MU'AMALAT HIRE-PURCHASE BILL
Presently, there is no specific law regulating Islamic hire-purchase transaction.

Instead,all hire-purchasetransactionsare governedby Hire-PurchaseAct 1967. The
latest development in Malaysia has witnessed an effort taken by Bank Negara and
other government entities, including Attorney General Chambers, Ministry of

Domestic Trade and Consumerism, Finance Ministry and Department of Islamic
Development (JAKIM) to come with a special regulation on Islamic hire-purchase
transaction. The Malaysian government has indicated its intention to table in
Parliamenta new Islamic Hire-PurchaseBill in the near future (Alias 2004). The Bill
is known as Muamalah Hire-Purchase Bill. The proposed Bill suggests some
important matters, such as expandingscopeof assetsto be acquiredby Islamic hire-
purchase,defining the agreementsand mannersof entering them, ascertainingrights

and liabilities of the contractingparties,jurisdiction of courts and many more.
4.4.1 Development of Mu'amalah Hire-Purchase Bill
The Muamalah Hire-Purchase Bill was initially drafted by some members of

Sharl'ah Council of Bank Islam Malaysia Berhad (BIMB) that consisted of Dr
Abdullah, Dr Sabri, Prof Ahmad Ibrahim (deceased),Dr Osman Sahab and Mustafa
Hamat. It was then passedto the Managementof BIMB for amendment.In 1991, the
drafted Bill was submitted to the Ministry of Domestic Trade and Consumerism
(KPDN) and Central Bank of Malaysia for thorough examination. Before presenting
the Bill in the Parliament,it has to refer to Attorney GeneralChambers.Only in 2000,
the Bill was passedto Attorney General Chambers and then was examined by the
Shad'ah experts in Islamic Division of Prime Minister Department. In principle, the
is
government in support of the Bill, but are not certain of ways to implement it and
its drafting style; whether to come with a separate and new law (Islamic Hire-
PurchaseLaw) or incorporate Islamic hire-purchaseprinciples into Hire-PurchaseAct
1967. In other word, HPA needs to be amended to meet certain SharVah
requirements.
A special committee is formed to look back into the above issue. The committee
comprises members of Sharl'ah Advisory Council, representatives from Central

Bank, Ministry of Domestic Trade, Islamic Development Department
of Malaysia
97
(JAKIM), Attorney GeneralChambersand Associationof Hire-purchaseof Malaysia.

Their tasks cover analysing thoroughly provisions of the Bill, adding some rules that
deemnecessaryand amendingprovisions which are clearly contradictedto Sharl'ah
principles. The Bill needsto be substantiveand exhaustiveso that it would be in a

proper position to call for Shadah-based institutional involvement. In this case,the
Bill will give power to Sharl'ah Court to try hire-purchasecases which involve
variousShadah issues.
In short, the Bill hasundergonethe following processas depictedby Figure 4.3:
FIGURE 4.3:
Development of Muamalah Hire-Purchase Bill
Drafted by Shadah Council of BIMB
Amendedby BIMB management
Examinedby Ministry of DomesticTrade and Consumerism
Checkedby Central Bank of Malaysia
Examined by Attorney Generaland technical committeeformed by JAKIM
Approved by Govemment
98
4.4.2 Content of the SharTlah Bill
The Bill is mainly drafted by referenceto Hire-PurchaseAct 1967. It is therefore,not
surprisingto find that most of its provisions are identical to HPA. The researcherwill
not discussthe Bill in detail becausemost of its provisions which are similar to HPA
such as implied terms and warranties, rights and responsibility of owners, hirers,
guarantorsand dealersand repossessionhave beendiscussedin the previous sections.
The Bill is divided into 9 parts:
Part 1 is a preliminary section outlining the short title and application of the
Bill, interpretation of certain key words in the Bill and provisions for
appointmentof officers as controller of Islamic hire-purchasetransaction.
Part 2 consists of provisions for the formation, contents of Islamic hire-
purchaseagreementsand requirementsrelating to the agreements.

Part 3 provides for protection of hirers and guarantors which comprise
implied conditions and warranties in hire-purchaseagreementand liability of
the owner and personacting on his behalf for misrepresentation.
Part 4 prescribes rights and liabilities of hirers during hire-purchase
transactionand repossession.
Part 5 outlines matters relating to guarantors, comprising provisions as to
guarantors,exemption of liability in certain cases,guarantor's rights against

owner and hirer and their limitation from seizure.
Part 6 stipulates requirement for insurance or takaful for goods in Islamic
hire-purchaseagreement,powers of court and contentsof insuranceor takdful
contract.
Part 7 setsdown power of enforcementin Islamic hire-purchaseagreementin
respect of power of investigation, proof of identification, inspection with

warrant, inspection and seizure without warrant, warrant admissible
notwithstanding defects, list of seized goods, information by accusedperson
admissiblein evidence,prosecution,compounding and protection of officers.
Part 8 provides matters relating to offences comprising false statement by
dealers in proposals, hirer to state the location of goods, fraudulent
sale or
disposal of goods by hirer, obstruction of officers, disclosure
of confidential
information and penalty.
99
Part 9 statesgeneralprovisions in respectof profit margin, deposits,power of
court to reopencertain Islamic hire-purchasetransactions,avoidanceof certain

to
provisions, provisions relating securitiescollateral to Islamic hire-purchase
agreements,certain alterations of agreement,second-handgoods, power of

to
court extend time and order delivery of goodsunlawfully detained, service
of notice, proof of service, size and type required in certain documents,
liability of responsibleofficers of companyand liability of principal for acts of
agents.
In addition to the abovemain provisions, the Bill is supportedby six schedules.These
schedulesare to be in
read referenceto certain provisions of the Bill.
First Schedule lists down goods comprising house of not more than
RM250,000.00,consumergoods,motor vehicles and machinery. The schedule
must be referred to section2(l) of the Bill.

Second Schedule statesdefinition of Arabic words or phrasesused in the Bill,
for example, 'aqd, bay' al-Murdbakh, ibrd', Muamalat and takdful. The
scheduleis basedon section2 (4) of the Bill.

Third Schedule which is to be read with section I1 (1) provides summary of
hirer's financial obligation under Islamic hire-purchaseagreement.
Fourth Schedule provides a notice to be given to the hirer under section
12(l)(b).
Fifth Schedule states a notice of intention to re-possessas prescribed by
section 24(l)(a).
Sixth Schedule setsdown notice to hirers under section24(2) of the Bill.
Theseschedulescontain supplementarymatters including list of goods coveredby the

Bill, statementof financial obligation, explanation to Arabic terms and notices to be
served during hire-purchase transaction. By having been equipped with specific

provisions and schedules,the Bill aims to provide substantial rules to govern the
operation of Islamic hire-purchase transaction. The next section will compare and
contrastthe Bill with HPA and it will also look into those conflicting featuresbetween
the two regulations.
100
4.5 COMPARISON OF MU'AMALAH HIRE-PURCHASE BILL AND

HIRE-PURCHASE ACT 1967
As discussedin the previous chapter,Hire-PurchaseAct (1967) is the main governing
rule for hire-purchasetransactionsin Malaysia; while Mu "amalahHire-PurchaseBill

(2002) is a drafted regulation aiming to govern the operationof Islamic hire-purchase
transaction,but it has not beenpassedyet. Although Muamalah Hire-PurchaseBill is
drafted based on Hire-Purchase Act 1967, there are some differences in certain
aspects.Theseconflicting characteristicscan be found in the following parts:
4.5.1 Preliminary (Part 1)
1) In interpretation section (section 2), the Bill adoptsdifferent definitions of certain

important terms, such as:
(a) In contrast to HPA which defines "hire-purchase agreement" all-in-one,
the Bill takes slightly different approach.Firstly, it defines "Muamalah
hire-purchase"as leasing out a particular goods from owner to hirer with
an agreementto transfer ownership of the leasedgoods to the hirer at the

end of leasing period or at any earlier period based on conditions
prescribed by muamalah hire-purchase agreement which is mutually
agreedupon by both parties; and the transfer must be completedby any of
ways stated in the agreement. Secondly, "agreement" is described as
based on meaning given by the Act which means an agreement of
mu'amalah hire-purchasethat is madeunder provisions of this Act.

(b) The Bill terms "prescribed" as prescribedby this Act or other laws made
under the Act; while in HPA, it meansprescribed by the Minister under

this Act.
(c) Different definition is used by the Bill to describe "statutory rebate in
relation to profit margin" (HPA uses "term charges"). The Bill defines it
as a rebate obtained by deducting amount of overall profit during leasing
period with profit aggregatefor the shortenedperiod.
101
(d) In the Bill, "Takdfur' (insurance) means takdfull" as defined in the

Takaful Act 1984 [Act 312]. On the other hand, HPA provides definition
for "third-party insurance" which means any insurance in relation to

liability in respectof deathor bodily injury causedby or arising out of the
use of a motor vehicle being insurancerequiredby law.
2) Somedefinitions are identical to that of Hire-Purchase Act 1967, such as "action",
"contract of guarantee", "goods", "hirers", "Minister", "owner" and "statutory
rebate in relation to insurance (takafuo". There are some definitions that are
ignored by the Bill like, "cash", "consumer goods", "dealer", "hire-purchase
price", and "vehicle registration fees".
3) The Bill inserts additional provisions in the interpretation sections to support the
definitions provided in section2, which are as follows:

Section 2(2) statesall words or phrasesused in the Bill and are not defined in it
e
but are defined in Interpretation Act 1948 and 1967; such definitions must not
contradict to Shadah principles.

Section 2(3) rules that mattersrelating to Sharf'ah shall be referred to Sharf'ah
High Court.
Section 2(4) provides reference can be made to Arabic text for words or
phraseswhich contradict to that of defined in the SecondSchedule.
4) The Bill confers a power to appoint a Controller of Muamalah hire-purchaseto

the Royal Highness (Yang di-Pertuan Agong), while appointment of Deputy
Controllers, Assistant Controllers and other officers are made by the Minister. In
HPA, power to appoint all officers is conferredto the Minister only.
111Section 2 of the Takaful Act (1984) defines "takaful" as

means a schemebased on brotherhood,
solidarity and mutual assistancewhich provides for mutual financial aid and assistanceto the
participantsin caseof needwherebythe participantsmutually agreeto contribute for that purpose.
102
Chapter4 Regulation of Islamic Hire-Purchase
4.5.2 Formation and Contents of Agreements (Part 2)
This part comprisesthe most significant sectionswhich distinguishthe Bill from Hire-
PurchaseAct 1967.
1) In contrast to HPA, the Bill specifies some conceptsof muamalah hire-purchase
contract before stating requirementsrelating to hire-purchaseagreement. These

conceptscover the following points:
9 Concept of Muamalah hire and purchase should consistof two different and
separateagreementwhich is madebasedon provisions of the Act (section 4).
Muamalah contract (aqd) must be made separate;a contract of leasing and
contract of sale and purchasefor the samegoods(section 5).

e Absolute ownership of goodsis gainedby the owner before leasing the goods
out to hirer (section 6).
* Ownership rights of the goods remain with the 'owner until contract of sale
and purchaseis executedbetween the owner and hirer (section 7).
* Cancellation of leasing contract must be mutually made except if there is any

defect to the goodsor the owner violates the agreement,then hirer is entitled to
cancel the agreement.The owner will have the sameright if the hirer fails to
pay instalments
as in (section8 andsection10).
prescribed the agreement
4, Death does not affect the contract becausethe deceased'srelatives will be
responsible for continuance of contract, except if he gives prior notice to
cancellationthe contract in the event of his death(section 9).
2) Section II of the Bill covers all requirementsrelating to hire-purchaseagreements
as provided in section 4,4A, 4B and 4C of BPA; but it is silent in requiring a

separatehire-purchaseagreementfor every items of goods as provided in section
4D of HPA.
3) Section 12(l) requires copy of documentsto be servedon hirer within twenty-one
(21) days after the making of muamalah hire-purchase agreement. This
requirement is slightly different from HPA which imposes a duty on the owner to
serve such documents on hirers and Puarantors,within fourteen (14) days after
conclusion of hire-purchase agreement.The same length of period is given by
103
section 12(2) to the owner to supply to the hirer a copy of memorandumor note of
agreement.
4) Section 13 statesthe consequenceof unwritten agreementor non-compliance to
II
section and section 12(l) which makes a muamalah hire-purchaseagreement
becomesvoidable and unenforceableby the owner. However, HPA is silent in this
matter.
4.5.3 Protection of Hirers and Guarantors (Part 3)
Almost all provisions in this part arebasedon Hire-PurchaseAct 1967, exceptthe Bill
inserts additional provision into section 14(l). The provision requires muamalah
hire-purchase agreement to include owner's promise to sell the goods to hirer
accordingto the provisions of the agreementif the hirer wishes to purchasethe goods
in the sameperiod of time.
4.5.4 Hirers (Part 4)
Part 4 is divided into 2 general subdivisions. In both parts, the Bill appearsto take
different approachesfrom that of HPA in someaspectswhich are outlined as follows:
1) Statutory rights of hirer
(a) Section 16 (3) providesa specialrule of rebate(ibrd ) which is upon the
owner's discretion to exercise it. If he does, he will exempt the hirer from
paying the remaining amount and transfer the ownership to him. In this
situation, the owner's right to recover the goods and enforce any contract of
guaranteewill not be affected even if the he fails to supply documents and
information to the hirer as prescribed by section 16(l). On the other hand,
HPA disapprovesthe owner from enforcing the agreementagainst the hirer,
recovering the goods and enforcing any contract of guaranteein the event of
failure to supply required documentsto the hirer.
(b) The Bill provides that if the owner continuously fail to exercise the above
duty for a period of threemonths,he shall be liable to a fine not exceeding
three thousand ringgit (RM 3,000). The HPA imposes less degree of
requirement in respectof period to exercisethe duty to only one month and a
fine not exceedingonly one thousandringgit (RM 1,000).
104
(c) In respect of hirer's right to determinehiring, HPA specifies in more detail
such rights and entitlement of hirer or owner to an amount recoverableas a

debt due. The Bill only specifies in general terms this entitlement without
its
explaining mechanismand situations.
(d) In contrary to HPA, the Bill is silent in two provisions as follow:
9 Owner's refusal to give consentto the assigmnentof rights under

hire-purchaseagreementasper section 12(5) HPA.
e Some in
other situations which the hirer can exercise rights for
early completion of agreementas stated in section 14(3) HPA.

2) Repossession
In the matter of repossession,the Bill appearsto describethe event and procedure
12
in
of repossession clearer and more arranged way as compared to HPA'
.
However, the Bill is still lacking in providing certain rules, such as:
(a) Hirer's exemption from paying cost of repossessionif he returns goods
within the prescribedperiod, as provided in section 16A of HPA.

(b) Some of the hirer's other rights and immunities when good repossessed,
including right to require the owner to sell the goods to any person
recommendedby the hirer and right to recover certain amount from the
in
owner as stated section 18(l) and (2) of HPA.
(c). Power of hirer to regain possessionof goods in certain circumstancesas
per section 19 of HPA.

(d) Manners of selling the repossessedgoods by the owner through public
auction or otherwisethan the auction.
4.5.5 Insurance or Takfiful (Part 6)
in the provision of insurance (takdfuo, the Bill employs same rules as derived from
HPA in respect of powers of court in relation to insurance contracts associatedwith
112The Bill describesrepossessionby, firstly, stating situations where the goods can be repossessed;
secondly, specifying procedure of repossession; thirdly, mentioning fourthly,
effects of repossession;
outlining rights of hirers during repossession;fifthly, listing rights of owner; and finally providing
power of court to vary judgement or orders when goods are repossessed.Unlike the Bill, HPA begins
with explaining type of notices to be given to hirer during repossessionprocess; then exempting the
hirer from paying cost of repossessionif he returnsthe goods.The next provision authorisesthe owner
to retain the repossessedgoods for 21 days, and it is followed by provisions spelling out hirer's rights
and immunities when the goods are repossessed.After that HPA specifies certain circumstancesin
which the hirer is empoweredto regain possessionof the goods; and finally, statesthe power of court
to vary the judgement.
105
hire-purchase agreements, contents of insurance contracts and application of
provisions in this part. With referenceto basic concept and application of insurance
Qakdfuo, the Bill makes certain modification to the rules. The Bill clearly imposes
takdful responsibility onto hirer interferencefrom 13.
the owner' On the
without any
other hand, HPA requires the owner to take insurancecoveragein the name of hirer
for the goods throughout the duration of agreement,except in case of motor vehicle
which requires him to take insurance for the first only 114.
However, the Bill is
year
silent in issueof renewal of insuranceor takaful.
4.5.6 Power of Enforcement (Part 7)
This part is also substantially modified from Part 8 of HPA in which some new
provisions are insertedin this part of the Bill. Theseprovisions expressrules for proof
of identification, inspection with warrant, inspection and seizurewithout warrant and
list of seized goods. Yet, provisions of HPA are still adopted by the Bill such as
provisions referring to power of investigation, warrant admissible notwithstanding

defects, information by accused person admissible in evidence, prosecution,
compoundingand protection of officers.
4.5.7 Offences (Part 8)
Matters relating to offences as provided in Part 8 are basedon someprovisions in Part

7 and Part 8 of HPA. Part 8 of the Bill rules out offences comprising false statement
by dealersin proposals,hirer to statethe location of goods, fraudulent sale or disposal
of goods by hirer, obstruction of officers, disclosure of confidential information and

In
penalty. the provision of disclosure of confidential infortnation, the Bill provides
certain exception for its disclosurewhich includes:
(1) the disclosureappearsto be reasonableaccordingto the Act;
(2) for the purposeof legal proceeding;
(3) for the purposeof investigation madeunder the Act;
(4) for government consultant or any officers who are approved in writing
by the Minister to receive such information; or
113Section34(l), (2), (3)

and (4) of Muamalah Hire-PurchaseBill
114Section26(l)
of Hire-PurchaseAct 1967
106
(5) For the purpose of analysisby the Governmentof the operation of this
Act.
4.5.8 General (Part 9)
Almost all provisions in Part 9 of the Bill are referred to Part 8 and Part 9 of HPA
exceptin respectof profit margin and depositwhich are changedto be in compliance

to Shariah. Other provisions spell out power of court to reopen certain Islamic hire-
purchasetransactions,avoidanceof certain provisions,provisions relating to securities
collateral to Islamic hire-purchase agreements,certain alterations of agreement,
second-hand goods, power of court to extend time and order delivery of goods
unlawfully detained, service of notice, proof of service, size and type required in
certain documents,liability of responsibleofficers of company, liability of principal
for acts of agentsand regulations.
4.5.9 List of Goods (First Schedule)
As mentioned earlier, HPA appliesto consumergoods and motor vehicles only. Other
than thesegoods are known as 'non-Act goods' which are not coveredby the HPA. In
addition to the two types of goods,the Bill widens its application to include housesof
not more than RM 250,000 and machineries.
4.5.10 Term Charges and Annual PercentageRate
HPA provides the formula of calculating the term chargesand annual percentagerate
in the Sixth and SeventhSchedulerespectively.This formula is used to determine the
total amount payable and instalment payment under a hire-purchase agreement.In
contrast, the Bill does not provide such formula since both types of payments are
calculated on the basis of bay' al-murdbakh. However, the Bill does not specify
clearly how bay' al-murabalph works in determining the purchase price and
instalment payments.
From the above comparison, the Bill does adopt substantial provisions of Hire-
PurchaseAct 1967 which are not contradicted to*Sharl'ah principles. Yet, the Bill
takes different approachesin almost all provisions to make them more Shadah-
compliant.
107
To illustrate clearer the comparison of Muamalah Hire-PurchaseBill and Hire-

PurchaseAct 1967,Table 4.1 below is referredto.
TABLE 4.1:
Comparison of Muamalah Hire-Purchase Bill and Hire-Purchase Act 1967
ITEM MU'AMALAH HIRE-PURCHASE BILL HIRE-PURCHASE ACT 1967
(1) Interpretation 0 Defines "Islamic (Mulamalah) hire- Defines "hire-purchase agreemenf all-
purchase" and "agreemenf separately. in-one
a "prescribed" means prescribed by this "prescribed" means prescribed by the
Act or other laws made under the Act. Minister under this Act.
0 statutory rebate in relation to profit "statutory rebate in relation to term
margin" charges"
0 "Takafur "third-party insurance"
(2) Appointment of 0 The Royal Highness (Yang di-Pertuan The Minister has a power to appoint all
Officers Agong) appoints a Controller of officers.
Mulamalah hire-purchase
0 The Minister appoints Deputy
Controllers, Assistant Controllers and
other officers.
(3) Concepts of (a) 2 different and separate agreements. Not applicable

Islamic (b) Contract of leasing and contract of
(mu'amalah) sale and purchase must be made
hire-purchase separately.
contract (c) Owner's absolute ownership of goods.
(d) Ownership rights held by owner until
sale and purchase is executed.
(e) Cancellation of leasing contract must
be mutually with some exceptions.
(f) Death does not affect the contract.
(4) Requirements * copy of documents to be served on 0 service of documents on hirers and
relating to hire- hirer within 21 days after agreement. guarantors within 14 days after
purchase 0 consequence of unwritten agreement or conclusion agreement.
agreements non-compliance makes agreement 0 Not mention effect of non-compliance.
voidable and unenforceable.
(5) Protection of * additional provision to include owner's 0 No additional provision.

hirers and promise to sell the goods to hirer if the
guarantors hirer wishes to purchase the goods in
the same period of time.
(6) Statutory rights 0 provides a special rule of ibra. Not 0 owner from cannot enforce the
of hirer affect owner's right to recover the goods agreement, recover the goods and
and enforce contract of guarantee if he enforce contract of guarantee if fails to
fails to supply documents and supply documents to hirer.
information. 0 Impose a penalty of only RM 1,000.
Penalty for failure to supply document is 0 specifies in more detail of such rights
a fine not exceeding RM 3,000. and entitlement of hirer or owner to an
only specifies in general terms of hirers amount recoverable as a debt due.
right to determine hiring without * Other provisions:
explaining its mechanism and (a) Owner's refusal to give consent to
situations. assignment of eights
the Bill is silent in the two provisions. (b) other situations where hirer can
exercise rights for early completion
of agreement
108
Chapter4 Regulaflon of Islamic Hire-Purchase
ITEM MU'AMALAH HIRE-PURCHASE BILL HIRE-PURCHASE ACT 1967
(7) Insurance/ 0 imposes takaful responsibility onto hirer " requires owner to insure the goods
takaful without any interference from the owner throughout the duration of agreement,
0 the Bill is silent in issue of renewal of except for motor vehicle which requires
insurance/ takaful. insurance for the first year only
0 provides renewal of insurance
(8) Repossession 0 describe the clearer procedure of 0 provisions are mixed up
repossession in more arranged way 0 provides complete rules and rights of
0 fails to provide: hirers during repossession
(a) Hirer's exemption from paying cost
of repossession if he returns goods
within the prescribed period
(b) hirer's other rights and immunities
when good repossessed
(c) hirer to regain possession of goods
in certain circumstances
(d) Manners of selling the repossessed
goods by the owner
(9) Power of 0 new provisions express rules for proof * Part 8
enforcement of identification, inspection with warrant,
inspection and seizure without warrant
and list of seized goods.
(10)Offences 0 Provides matters relating to offences in 9 offences are provided in Part 7 and 8
one part
0 provides exceptions for disclosure of
confidential information
(11) General 0 Provisions for profit margin and deposit 0 Part 7
are modified to be in compliance to 0 Provisions for term charges and
SharVah. minimum deposit
(12) List of Goods 0 Wider application than HPA 0 Applies to consumer goods and moto
41 Include houses of not more than RM vehicles
250,000 and machineries
(13) Calculation of Based on bay'al-muraba)ph 0 Provides the formula in Sixth and
profit/term Seventh Schedule
charges
At the first glance from above discussion,the Bill appearsto be modelled around the
Hire-PurchaseAct 1967 since its contents, arrangementof provisions and schedules
are comparatively similar to those in HPA. But a thorough examination reveals some
conflicting featuresand rules underlying certain provisions of both regulations.
109
4.6 SUMMARY
This chapter describesbackground information of two ma or regulations of Islamic

hire-purchasetransaction in Malaysia. In the beginning section, the Malaysian legal
systemis briefly explainedin order to graspan understandingof the legal situation in

the country before presentingthe two regulations under study. The chapter proceeds
with thorough examinationof Hire-PurchaseAct 1967which revealsits content, rules
prescribing rights and responsibilities of parties involved in the transaction,
repossession,enforcement and other general matters. However, HPA appearsto be

insufficient in providing substantiverules prescribing basic concept of Islamic hire-
purchasecontract. This loophole may open to application of English law to Islamic

hire-purchasetransaction. Wamalah Hire-PurchaseBill is initiated to remedy the
inadequacyof Hire-PurchaseAct 1967.The Bill is modelled from the HPA with some
modifications to make it consistent to the Shadah requirements. A comparison

betweenthe Hire-PurchaseAct 1967 and Muamalah Hire-PurchaseBill disclosesthe
Bill's distinctive features in certain parts and provisions, for example, specific
definition of 'hire-purchase agreement', explanation to concept of Islamic hire-
purchasecontract, clear procedure of repossessionand provisions of offences. There

in
are some rules which the Islamic Bill is silent to them, including rights of hirers
during repossession,renewal of insuranceand imposing insuranceresponsibility onto
owner during the first year of contract.
It is important to note that, the chapter servesas an introduction to the regulations. A
more thorough examination of HPA and the Bill in respect of their strengths,
weaknesses and other features will be discussed in Chapter 8 when analysing
interview data. The next chapterwill discussmethodology and design of this research
and then followed by data analysischapters.
110
Chapter 5
RESEARCH METHODOLOGY
5.1 INTRODUCTION
Researchmethodology is a crucial aspectof any researchwork, and is vital for the
success of research. The choice of an inappropriate method can give serious

implications to a research,however good the objectives of the study might be. This
chapterwill focus on the design of the researchmethodsused in the study, which, in

addition to a plan of data collection and analysis, servesas a vital guidance from the
beginning to the completion of the study. Oppenheim(1992) depicted the importance
of researchdesign as follows:
"It is the researchdesign which must hold all the parts and phasesof the enquiry
together. The design must aim at precision, logic tightness and efficient use of
resources.A poorly designed survey will fail to provide accurate answers to the
questionsunder investigation; it will have too many loopholes in the conclusions; it
will permit little generalization; and it will produce much irrelevant information,
" (Oppenheim 1992).
therebywasting casematerial and resources.
The researchdesign of this study will cover the following matters;

(a) Research approach: whether to adopt a quantitative and qualitative
method or a combination of both (Stone and Harris 1984).

(b) Selection of data-collection methodswhich involve specifying research
setting, sources of research data and choice of appropriate research

instruments.
(c) Design of researchinstruments which include method of designing the
contentsand ways of administering the instruments

(d) Sampling strategiesfor selectingthe respondents
(e) Testing the researchinstrumentsin pilot study
(0 Distribution of researchinstruments
(g) Mode of analyzing data and interpreting the researchfinding
ill
Chapter 5 Research Methodology
Tlie oLitline of research design adopted by this study is illustrated by Figure 5.1 below:
FIGURE 5.1:
Outline of Research Design
RESEARCH DESIGN
RESEARCH PILOT STUDY

SELECTION OF DESIGN OF SAMPLING
APPROACH DATA- RESEARCH STRATEGIES
COLLECTION INSTRUMENTS
METHODS
Judgement
DATA I DISTRIBUTION
Qualitative
ANALYSIS OF RESEARCH
INSTRUMENTS
FQ-ua -ive-I Convenient
ntitat
I Northern I I Eastern I Central II Southern

Interview II Questionnaire
I SPSS I I Transcription I
Before considering alternative research design strategies, more fundamentally choice
of research method must be made between a quantitative method and a qualitative
one.
112
Chapter5 Research Methodology
5.2 QUANTITATIVE AND QUALITATIVE METHODS
Essentially,researchcan be quantitative,concernedwith measurementand analysisof
relationshipsbetweenvariables;or qualitative, examiningthe context of a processand

meanings in an exploratory way. The decision whether to use quantitative or
qualitative method depends on the given context of this research as there are
advantagesand disadvantagesin both methods.
5.2.1 Quantitative Research Method
Quantitativeresearchusually involves massiveamountsof data;that is, the greaterthe
number of casesstudied, the more accurateand representativethe outcome of study

ought to be (Slater 1990). This method is appropriately used for certain forms of
behaviourwhich can only be performed if conceptsare quantifiable (Mann 1990).For
if
example, a customer defaults in payment, the bank can take action when there's a
proof of exact amount of default and frequencyof default. The bank cannot solely rely
on its officer saying the customerhas defaulted.One of the most important featuresof
quantitative researchis that it is highly structuredand producesdata which is open to

statistical analysis. Surveys, tests, structured interviews, laboratory experiments and
non-participant observation are usually categorized as quantitative data collection
methods. Results of quantitative researchare presentedin the form of descriptive or
complex statistics, like tests of significance, correlation and regression analysis
(Scanlon2000). In short, it is concernedwith presentingfindings in a numerical form.
5.2.2 Qualitative Research Method
Qualitative researchprovides descriptive reports of individuals' perceptions,attitudes,

belief, views, interpretationsof eventsand things, as well as their behaviour (Bryman
and Burgess 1999). All social research and much that is designed as scientific
research, has qualitative aspects and subjective elements (Slater 1990). The great
strengthof qualitative researchis the validity of the data obtained, for example, a data
from a sufficient and detailed interview will result in true, correct, complete and
convincing reports of individual's views and experiences(Hakim 2000). The normal,

meticulous, statistical rules of sampling may not be applicable to selecting
respondents.But sampling principles still apply as guidelines in social inquiries. The
113
main weakness of qualitative is

research that due to cost, time constraints and
interviewer fatigue, a sample of larger proportions cannot be attained. These
compelling limitations restrict the effort of the researcherto a small numbers of

respondentswho may not be true representativeof the population. Frequently, the
researchercannot count or test the findings obtainedat the conclusion of a qualitative

research.There are four major qualitative methodsused by researchers;observation,
unstructured interviews, analyzing texts and documents, and recording and
transcribing (Silverman 2001). Most people think of qualitative researchmainly in
terms of in-depth interviews and group discussions.However, Mary Goodyearpoints
out that:
"Qualitative researchis a many-splendouredthing and certain problems and clients
will respondto one type of approach,whilst other problems and other clients need to
be offered somethingelse. There is no one correct way to do qualitative research.It
all dependson "

your problem. (Slater 1990)
5.2.3 A Comparison of Research Methods
Qualitativemethodoffers the researcher

an opportunityto probeand follow different
lines of inquiry becausethey are generally more flexible than quantitative technique
(Elliott 2000). In contrast, quantitative research offers techniques to collect more
pieces of specific data in a short space of time and it also gives greater precision.
Further comparativeaspectsbetweenquantitative and qualitative methodsare outlined
in the following table.
TABLE 5.1:
A Comparisonof Quantitative and Qualitative Research
Items Quantitative Research Qualitative Research
(1) Objective To quantifythe data and To gain a qualitativeunderstanding
generalizethe resultsfrom the of the underlyingreasonsand
sampleto the populationof interest motivations
(2) Sample Large numberof representative --g-m-all
numberof non-
cases representativecases
(3) Relationbetweenresearcher Distance Close
and the subject
(4) Data Collection Structured Semi-structured
(5) Natureof data Hard, reliable Rich, in-dept
(6) Data Analysis Statistical Non-statistical
(7) Outcome Recommendas final course of Developan initial understanding
action
&3UUrC; U.Y-. dUdIJLC; U iIUIIIJ. 3LY11J, 411411UJDUlrUbS kI Yyy)
114
Thus,the main difference betweenthe two approachesis that, qualitative researchers
prefer narratives and accountsof the way they have interpreted the world, whereas
quantitativeresearchersuse mathematical models and statistical tables to relate the
research in impersonal terms (Denzin and Lincoln 2000). To conclude, if the
researcher wants to measure how often something happens, and describe its
occurrencein strictly controlled terms, the quantitative researchwill best provide him
with appropriateresearchinstruments.On the other hand, qualitative researchoffers a
different dimension when the researcheris interested in the detailed structure and
natureof what and why somethingis happening.It is concernedwith the nature of the
phenomenon under study rather than its incidence in statistical terms, completely the
subjective experience by respondents. It seeks the essence or quality of the

researcher'sexperience.
5.3 SELECTION OF DATA-COLLECTION METHODS
Data can be collected in a variety of ways, in different settings, and from different
This
sources. study is concernedwith the operationof Islamic hire-purchase(AITAB)
in financial institutions and its legal framework in Malaysia. Being a setting of this
research, Malaysia has to be the source of empirical data. Data-collection works are
designedto achievethe following objectives:
(a) To examinethe concept and application of AITAB and conventional hire-
purchaseas actually practiced in Malaysia today.

(b) To obtain a clear insight of the AITAB and conventional hire-purchase
practicesfrom the providers' and users' perspectives.

(c) To examine the extent of customers' awareness and expectations as
regardsthe financial serviceprovided by AITAB.

(d) To identify problems faced by the providers and users of AITAB
transaction.
(e) To inquire the experts' opinions about the implementation of AITAB and
conventionalhire-purchaseaspracticed today.
Based on the above purposes, primary data will be needed about views, opinions,
experiences,and reactions of people involved in the operation of hire-purchase.By
115
employingcertain methodsof collecting data,sufficient datahasbeenobtainedfor the

purposeof this research.
5.3.1 Selection of Research Instruments
The most suitablemethod must be carefully selectedto ensurethat the neededdata are
obtained. Choosing a method involves different considerationswhich have to be

cross-weighedand balanced. In particular, the method chosen needs to meet the
following requirements(Stone and Harris 1984):
(a) It must be suitable for studying the problems
(b) It must be within the available resources
(c) It must be within the competenceof the researcherwho will be using it
(d) It must producethe kind of dataneeded
After weighing the suitability of various researchmethods, and due to the in-depth
coverageof this study, it has been observedthat the most appropriatemethods for the
study are semi-structured interviews and questionnaires. Thus, the qualitative

method is the main researchtechniques adoptedby the study and it is supplemented
by quantitativemethods.The selectionis justified by the following reasons:
(1) The most vital data are mainly obtainedfrom people involved in AITAB
practiceseither as providers or expertsin AITAB. It involves somedetails and
complex information which are suitably collected by interviewing the
respondents.
(2) To understand the basic concept of Islamic hire-purchase in theory and
practice, there has been a need to refer to extensive texts and documents,for
examplebanks' report, courts report etc.
(3) Duration of data collection in Malaysia has been limited to 3 months only;
hence,the researcherhas to prioritise types of data needed.The most wanted
ones are opinions and experiencesof provider and expert in AITAB, while
reactions from people using the facility are collected by administering
questionnaires.
(4) The researcheris more competent to adopt qualitative research compare to
quantitative one for having a legal and SharVah background.
116
In addition, using interview and questionnaires leads to the collection of most
extensivedata on eachrespectiverespondent.The methodshave met the requirements

setby Stoneand Harris (1984) as referred previously.
5.3.2 Semi-Structured Interview
Interview is often'claimed to be the best method of gathering intensive qualitative

information. It can be defined as a direct verbal contact between the researcherand
the samplingpopulation. Interview is classified into three main types according to the
structuralnatureof questions(Saunders,Lewis et al. 2000):
(a) Structuredinterviews
(b) Semi-structuredinterviews
(c) Unstructuredinterviews
An interview may be performed by face-to-facemeeting, telephoneconversationand
interview;
computer-assisted or sent through the email (Sekaran2003). Each of these
styles can serve a specific researchtarget. The choice of interview styles dependson
the researcher'sextent of understandingthe researchproblems.
For this study, semi-structured face-to-face interview has been selectedas the main
method of collecting extensive data about the operation of AITAB in Malaysia and
issuesarising thereof. Using this method, the researcheraims to reach providers and
experts in AITAB in order to find out about its actual operation in Islamic banks and
conventional banks offering Islamic products. Face-to-faceinterview has been carried
out using an interview guide technique, in which a checklist of topics is preparedand
notified to the respondents in advancebefore the actual interview sessionstook place.
The researcher is free to ask questions on these topics in a way which seems
appropriateto the situation.
The advantagesof face-to-facepersonal interview using 'interview guide' technique
are as follow (Kvale 1996; Gillham 2000; Sekaran2003):

(a) It securesindependentresponsesof the intervicwees, which is a highly
valued quality in field data collection.

(b) The topics of interestto the researcherare mostly covered
117
(c) Definite responsesfrom specific and identified persons in a specific
subjectare obtained
(d) Respondentsare well-prepared and able to respond according to their
best knowledge and experience
(e) Respondentsare able to respondin their natural language
(0 The researcheris able to form questionson topics and ask them in any
order which seemsto arise naturally from the context.

(g) The researchercan clarify ambiguousquestionsto the respondents.
(h) Flexibility in using any type of question and changing the sequenceof
the questions.
(i) The researcheris able to observe the respondents'bodily responsesto
certain questions which may appear to be sensitive or difficult to be

by
explained them.
Instead of group interviews, this study conducts personal interviews involving 46
respondents who are categorized in six different groups. The approachis preferred to
group interviews for the following reasons:
(i) In personal interviews, respondentsare able to express themselves more
freelyanddo not haveto fit their ideasinto someoneelse'scategories.
(ii) Individuals may feel less able to communicatein a group than they would on
a one-to-onebasis, especially if there are statusdifferences (Stone 1984).

(iii) It can be difficult to control the impact of key individuals in the group,who
may control and bias the discussion.

Recording is difficult, especially if severalpeople start to speakat the same
time.
The overall advantageof interview over other forms of data collection is summedup
by Chen and Hemon (1982):
"Personal interviews, allowing a high response rate, direct interaction between
surveyor and surveyed, question clarification, and the elaboration of data through
minimization of unclear answers, is conceptually the superior form of study
technique." (Chen and Hernon 1982)
118
Thereis one basic disadvantageof the interviewing method; it is time-consuming and
costly, especially when geographical limitations are encountered. The researcherhas
spenta lot of time and money in travelling around Malaysia to interview the bankers
and experts. The journey started from the central (Kuala Lumpur) to the eastern
region; and then went on to the southern region before moving back to the central
region. The travelling was continued to the northern area, and finally returned to the
central part of Malaysia. In addition, managing interview schedulesand back-up
plans to suit the availability of all interviewees has been a real challenge to the
in
researcher terms of time and trip-management.
5.3.3 Questionnaires
A questionnaire is a pre-formulated set of written questions to which respondents
record their answers, usually within closely defined alternatives (Sekaran 2003).
Questionnairescan be administeredpersonally or mailed to the respondents.Each of
these has its advantages and disadvantages.This study has adopted personally
administeredquestionnairesfor the following reasons:
(a) The researchercan collect all completed responseswithin a short period of
time.
(b) Any doubt raised by the respondents regarding the questions could be
clarified on the spot.

(c) The researchercould explain the topic and motivate the respondentsto give
their honestanswers.
(d) Administering questionnairesto individuals simultaneously is less expensive
and less time-consuming,for instancecustomersin a bank's premise.
In this research,personally-administeredquestionnairesare distributed at a particular
place, for example at an Islamic bank, where respondentsare most likely present and
willing to participate in the survey. All respondentsare randomly selected from the
public who have actually used or are about to use AITAB facility. This method
guaranteesan immediate response, thus it receives a high response rate. One of the
advantagesof this it
method, allows explanation to any ambiguous questions, thus
reducing number of non-responsiveand unusedquestionnaires.
119
Having decidedon the most appropriateresearchmethodsfor data collection, the next
step is to develop the research instruments; interview questions and survey

questionnaires.
5.4 DESIGN OF RESEARCH INSTRUMENTS
The research instruments used in this study are semi-structured interview and
personally administered questionnaire. This part will discuss how interview and
questionnaireare designedfor data collection, and the quality and reliability of data.
5.4.1 Design And Content Of Interview Questions
Interview questions are primarily developed from literature reviews, but discussion
with experts and feedbacks from pilot study were also valuable sourcesof question
setting. The design of the questions is constantly guided by the objectives of this
research. Interview questions are prepared in two languages; English and Malay
language.In respect of contents of interview question, the following considerations
have been taken when constructing the questions(Moser and Kalton 1985; Tull and
Hawkins 1993):
(a) Was the question necessary?Only the questionswhich are related to the
information required are included in the setsof question.
(b) How many questions were required to gain information? In most cases
there is one main questionto gain the information, but multiple responses
were required. For example, questions 5 aims to know the adequacyof
Hire-Purchase Act 1967 and it also seeks to inquire the strengths and
weaknesses.
(c) Were respondentscapable of answering the questions? Respondentsare
chosen on the basis of their knowledge, expertise and experience in the

subject area.They are given the questionsin advanceand explanationsare
made before hand.
This study has referred to the above guidelines and the research objectives in
designing the contents of interview questions.In addition, interviewees' profiles are
required such as, their full name, positions, institutions they belong to, specialization,
120
information about their experience in the present institution and position. The
interview questions are particularly stated to be very specific and detailed. Only
expertsand persons who really involved in the operation of Islamic hire-purchase
would be capableto answerthem. Detail discussionof constructingthe questionsare

presentedin Chapter8.
5.4.2 DEVELOPING A QUESTIONNAIRE
The secondsurvey instrument adopted in this study is a questionnairedesigned for
respondentswho has actually experienced Islamic hire-purchase (AITAB). The

questionnairehas been carefully designedso that the relevant respondentswould be
able to fill it even without the aid of the researcher.Developing the questionnairehas
been a huge task in this study due to lack of previous questionnairesabout Islamic
hire-purchase,particularly that's related to its legal framework. The researcherhas
only managedto review previous questionnairesabout perception of Islamic banks'

customersto the banks' operationsin general(Haron, Ahmad et al. 1994; Gerrard and
Cunningham 1997; Naser, Jamal et al. 1999; Rosly and Seman2003). The researcher
has to look into various textbooks on quantitative research and designing a
questionnaire.Referring to Hind (2000), the following key questions have been the
researcher'sbasic guidance(Hinds 2000):
To whom is the questionnairedirected?
Are you sure the instrumentwill be receivedand actedon by that person?
How will you structureyour questions?
How will you processthe returns?
How will you analysethe responses?
How can you design your questionnaireto enhanceyour responserate?
The planning and preparation of the questionnairehave included actual construction
of questionnaire, arrangements for piloting, distribution and return. Time-line and

back-up plan for delays are also determined.
121
5.4.2.1 Design of Questionnaire
Whendesigninga questionnairecertain guidelineshavebeenfollowed:

Firstly, determining the question structure which would best generatevalid data and
devising clear wording, accurate and non-biased expressions(Dillman. 2000). The
questionnaireis developed as a closed-endedtype in a multiple choice format. For the

data
researcher, from close-endedquestionswould be relatively easierto processand
analyseso that the researchercould benefit from the standardformat of the answers
for statisticaltests.
Secondly, observing the wording of questions. Dillman (2000) and Hinds (2000)
outline severalguiding principles in stating suitablewording.

* The wording of a single questionshould be as simple as possible, of not more
than 20 words.
* No hidden assumptionsin the questions
Avoid double-barrelled questions; such as putting two questions in a single
sentence.
Avoid questions using negatives. The question must use positive form of
thus
sentence, question like, "Don't you prefer Islamic hire-purchaseto
conventional hire-purchase?
" is not appropriate to be addressed in the
questionnaire.
Avoid potentially irritating or sensitivequestionsbecausethis will discourage
the respondentsfrom completing the questionnaire.
* in orderto avoid confusionamong

Questionsmustbe clearandunambiguous
the respondents.
The above guidelines have been strictly followed by the researcher. Wording of
questions was constantly revised and checked. Some questions were rephrased to
make it more straightforward and clearer. Some are even omitted due to their less
importance.
Thirdly, considerableattention has been given to the appearancedesign and layout of

the questionnaire so that the presentation of questionnaire would appeal to the
respondentsallowing them plenty of spacefor responses.Dillman (2000) stressesthe
122
need to present an attractive, well-organised questionnaire that looks easy to

complete:
No questionsare permitted on the front or back pages.
Questionsshould be appropriatelygroupedinto severalsections.
Personalinformation should be placed at the end of the questionnaire.
Clear directions should be given on how to answer.
The front and back pagesshould be carefully designed.
The questionnaireshould not be more than 12 pages.
The questionnairesin this survey adopt the above rules. The front cover states the
survey topic, presents the statement of confidentiality and the researcher's contact
details. The second page outlines the general instruction. The questionnaires are
grouped into five sections,the last one being questionson personal information. Total
pageis only seven pages for English questionnaireand nine pagesfor Malay language
questionnaireincluding front cover and instructions.
Fourthly, piloting is particularly important to ensure respondents understand the
questionsand help to reveal any problematic areasin the following aspects:

Whether all the questionsare understood.
+ Whether questionsare interpretedsimilarly by all respondents.
+ Whether the questionscreatea positive impression, one that motivates people

to answerit.
Whether there is any aspect of the question suggesting bias on part of the
researcher.
To find out the length of time needed by respondents to complete the
questionnaire.
Pilot study had been carried out for the above-mentionedpurposes.Detail discussion
of pilot study is put forward in section 5.6.
5.4.2.2 Content of Questionnaire
As shownin AppendixC, the front coverof the questionnairestatesthe surveytopic,

a statementof confidentiality and the researcher'scontact details. The secondpage
contains general instructions and information. The respondent was assured of his
anonymity and confidentiality of the responses. The subsequent pages are the
123
of the questionnairewhich are groupedinto five sections.All questionsare

substances
provided with multiple choice answers; in which the respondentcan put his own
answerin the 'others' answerspace.
Section 1 comprises questions regarding the respondent's opinions of AITAB, in

terms of how the respondentwas introduced to the facility and the bank or finance
company which he has signed up for Islamic hire-purchase (AITAB). The section also
seeksto know the respondent's level of satisfaction with the procedure of Islamic
AITAB and the reasonsof their answers.
Section 2 is devoted to elicit respondents'opinion about conventional hire purchase.

The questions are designed to seek the opinion of respondents who have used
conventional hire-purchasebefore. Respondents,

who have no such experience, are
directedto section4.
Section 3 comprises question which asks about the facility which gives the
respondent more benefit given that he had experienced both facilities. If the
prefers
respondent AITAB to conventional facility, he is then required to indicate the
reasons in the following question. If not, he needs to complete the subsequent

question.
Section 4 aims to extract the respondent'soverall view of AITAB facility. The final
question asks the respondent'spreference in the future if he is given a choice to use

Islamic hire-purchaseor conventionalhire purchase.
Finally, section 5 requires respondent'spersonal information relating to gender, age,
marital status,occupation,and educationalbackground.
At the end of questionnaire, a space is provided for the respondent to give any
additional information or commentsrelating to the operation of Islamic hire-purchase.

If the respondentwants a summary of result from this study, a space for his email
addressis provided as well.
124
5.4.2.3 Translation to Malay Language
The preparedquestionnaireshave been translated into Malay languagewhich is the
main languageused in Malaysia. Translated is to

set prepared cater for certain types
of respondent who are not well-versed in English. The translation work is quite
difficult for certain questions.It often results in longer questionswhen translatedinto
Malay language.To assistin the translation work, a "reverse translation method" was
used (Casley and Lury 1981). This is done by translating back the translated version
of the questionnaireinto English. When the translation does not match the original
language,more attempts are made until the best translation is attained. The final
version was referred to an English teacherin Centre for Languagesand Pre-Academic

Development(CELPAD), International Islamic University Malaysia.
5.4.3 RELIABILITY AND VALIDITY
In all researchstrategies,there is a need to develop procedureswhich produce results

that are both reliable and valid. Hinds (2000) defines reliability as consistency of a
measure, for example, the likelihood of the same results being obtained if the
procedureswere repeated.Validity tells us whether the question really measureswhat

it is supposedto measures,for example. A clock is supposedto measure"true time"
and to do so continuously. In this research,efforts have been taken to make sure the
instruments are valid and reliable. These have been carefully monitored during pilot
study. As pointed out by Silverman (2001);

66pre-testing
can act as a preventive measureagainstinconsistenciesand ambiguities"
(Silverman 2001).
Therefore, researchinstrumentswhich have been developedshould be tested in order

to justify their reliability and validity for collecting the most accurate data. Before
discussing how the instruments were tested, sampling designs must be first
considered.
125
5.5 SAMPLING
The criteria for selecting a sample in a researchare usually statistical ones, that is,
they are based upon well-established and formal statistical grounds for selecting
people, documents,organisationsor whatever from the population. This approachof

sampling and selection is not usually employed by qualitative researcherswho
typically argue that such criteria are inappropriate (Bryman and Burgess 1999). It is
necessaryto stress here that this study primarily adopts qualitative instruments, i. e.
interview, supportedby quantitative instrument,i. e. questionnaire,as a supplementary
method.Hence, systematicand proper sampling designsshould be usedto support the

validity of the study. The discussion in the following part will be mainly guided by
Sekaran(2003) as a basic referencein the subject.
5.5.1 Sampling Design
There are two major types of sampling designs; probability and non-probability
sampling. Probability sampling designs are used when the representativenessof the
sample is of special importance for purposesof wider generalizability. When time or
other factors other than 'generalizability' become critical, non-probability sampling is
adopted (Sekaran 2003). For this study the criterion used in sampling is non-
probability sampling. The reasonsfor this selectionare as follow:

(d) The most important and relevant data can only be obtained from specialized
interviewees, and using any of the probability sampling design would not
offer opportunities to gain the specializedinformation.

(e) Some supplementarydata need to be obtained quickly, and are not worth of
using the probability sampling design which would cause the researcher
spendingmuch time and effort.
(f) Other critical reasonsare limited time and attitude of the respondentswhich
makethe data '

collectiontime-consuming.15
After evaluating each non-probability sampling design, the researcherbelieves that

the most appropriate sampling designs for this study are judgement sampling and
"5 This point will be

-further highlighted when discussing some limitations encounteredduring data
collection in the concluding chapter.
126
convenient sampling. Judgement sampling is used where gathering "informed

specializedinputs" on the topic area researchedis vital. Though not a probability
design,judgement sampling still calls for special efforts to locate and gain accessto
the individuals who do have the requisite information (Sekaran2003). Thus, although
it is restricted in generalizability, it may sometimes be the best sampling design
choice, especially when there is a limited population that can supply the information
needed. For this study, judgement sampling is best suited for collecting data from
providersand expertsin AITAB who possessspecializedexpertisein the area.
Convenientsampling is not generalizableat all and is not appropriatefor "scientific"
research (Sekaran 2003). It may however, be used at times to get some "quick"
information. Of all sampling designs,it is the least reliable in term of generalizability,
but sometimes it may be the only viable alternative when quick and timely
information is needed.Therefore, convenientsampling is adoptedto collect data from
116of AITAB whose perceptionsand reactions are neededto
users supplementthose
primary data from providers and expertsin AITAB.
5.5.2 Sample Size and Composition
Data collection involves all individuals and institutions that are engaged in the
operation of AITAB, namely providers, usersand experts.

(a) Provider of AITAB representsbanks and finance companies which provide
AITAB facility to their customers. Out of 33 institutions offering Islamic
banking services,there are 13 financial institutions which are identified to offer
the facility. There's no needto draw a samplefrom this type of population since
all are important informants to the research.The researcherhas approachedall
the institutions, except Southern Finance117 and interviewed their representative
.
officers; eight of them are managers of Islamic Banking Division and the
remaining are senior officers who are directly in charged of AITAB operation.
The followings are lists of financial institutions involved in the study:
116
The selection of individuals using AITAB is done randomly, thus, it has an element of probability
sampling.
117
This is due to the researcher'stime constraint.
127
TABLE 5.2:
Lists of Financial Institutions involved in the Study

INSTITUTIONS OWNERSHIP INTERVIEWEE
Aff in Finance Local Manager
Alliance Bank Local Senior Officer
AmFinance Local Manager
Bank Pembangunan Local Senior Officer
Bank Rakyat Local Manager
Bank Muarnalat Local (Islamic bank) Senior Officer
EON Finance Local Manager
Hong Leong Finance Local Manager
HSBC Foreign Senior Officer
Maybank Finance Local Manager
OCBC Foreign Manager
Public Finance Local Manager
(b) AITAB users are customers of bank or finance companies who have experience
of AITAB facility, including those who are still engaged in the transaction.
Because of time, moncy and work force factors, convenient sampling is used in
this context. It involves choosing and questioning people in the street or
markets, selected banks and educational institutions. A total of 450
questionnaires have been distributed because the ultimate target is to obtain 200
At
responses. the end, this study managesto obtain 203 questionnaires.
(c) Experts in AITAB are individuals who are known in their own capacity or
representing partiCLIlar institutions, for their expertise in the area of Islamic
economics, banking and finance, ShtirT'ah and law. They consist of SharT'ah
advisors, Shw-T'ah scholars, economists, legal experts and govemi-nent officers.
A total of 34 experts in various fields were interviewed. The details are
illustrated as follows:
TABLE 5.3:
List of Expert Groups involved in Interview

EXPERT GROUPS NO.
Sharf'ah Advisors of Banks 9
SharVah Scholars 8
Economists 8
Legal Experts 6
Government's Officials 3
TOTAL 34
128
It is observedthat the involvement of the above groups of population will assist in
providing variety of data and balanced information pertaining to their knowledge,
experiencesand problems. Since members of each group possess distinguished
speciality and perform different functions, their is

representation expected to bring in
variety of contributions. Identifying target population and a sampleof the population
will make the distribution of researchinstruments more systematic and certain. But
theseresearchinstrumentsneedto be testedin a pilot study for the purposeof making
themmore valid and reliable.
5.6 PILOT STUDY
A pilot study has been conducted in Malaysia from 24th December 2003 till 21't
January2004. The task includes testing the questionnairesand interview questions,
reaching out potential respondentsand preparing the ground work for the empirical
study which was then conducted in I" May 2004 till 3 l't July 2004.
5.6.1 Objectives of Pilot Study
The importance of a pilot study as a testing ground for an empirical work is

Thus,
undeniable. the objectives
of the pilot studyareas follows:
(a) To test the viability of the questionnaires;
(b) To identify the potential respondents and interviewees and establish
contacts;
(c) To understand the Malaysian respondents, in terms of their attitudes,
perceptionsand opinions towards the like survey.

(d) To analysethe feedbacksand responsesobtained from the study.
(e) To review the questionnairesand list of questionsto be used in the interview
basedon their practicality and suitability to the Malaysian respondents.
to the aboveobjectives,the studyhasbeencarriedout in severalways.

In accordance
Themodeof conductingthepilot studyis illustratedin the next heading.
129
5.6.2 Modus Operandi
As mentioned earlier, the pilot study undertakes three main tasks; testing the
questionnaires and interview questions, reaching out potential respondents and

the
preparing ground work for the empirical study.
Firstly, pre-testing the questionnairesand interview questions.The test is hoped to
revealunanticipatedproblems with questionwording, instructions, presentationetc. It

if
could also see the respondentsunderstandthe questionsand give useful answers.
Secondly, an attempt to identify potential respondentswas made with cooperation
from officers of the financial institutions. In addition, potential intervieweeshave also
beenidentified for the purposeof the study.
Thirdly, preparationfor the empirical work included applying for the researchgrant.
Other activities included identifying prospective copier for printing the
questionnaires, selecting research assistants, searching some articles and books,

particularly Shari-ahreferences,meeting people from banking sector, academicians
and Shari-ahscholarsin the areaof Islamic banking.
5.6.3 Pre-Testing Interview Questions
To test the interview questions, six individuals who will not be in the main study,
have been selected comprising a banker, Sharl'ah advisor, Shariah scholar,
economist, lawyer and a draftsman from the Attorney General Office. They have been
interviewed before finalizing any check list or scheduleto be used during empirical
works later on. This pre-tested interview gives some idea of the length of the
interview, whether the approachchosenreally gives the expected data, and whether
certain questions need to be improved (Stone and Harris 1984). The testing of
interview questionshas resultedin the following decision:
(a) The wordings of the questions are simplified to make it more
by
understandable the interviewees.
(b) Some unnecessaryand sensitive questions are omitted, such as question
seekingconfidential information from the bank officers.

(c) Widening the scopeof questionsrelating to Muamalah Hire-PurchaseBill
in order to gathermore information about it from the interviewees.
130
In addition,the length of an interview is estimatedto be around45 minutes to an hour.

This result is important for structuring a well-planned interview to be conducted
duringthe empirical works.
5.6.4 Target Group in the Administration of Pre-tested Questionnaires
The questionnaireshave been tested with a small number of identified respondents

from different backgroundand expertise.They are:
(a) Senior executivesfrom the Central Bank of Malaysia and officers of Bank Islam
Malaysia Berhad.
(b) Membersof the SharVah Advisory Board of Islamic banks.
(c) Shariah Scholars having expertise in Islamic jurisprudence, Sharf'ah and
Mu'amalat.
(d) Economists
(e) Legal practitioners comprising legal assistants (solicitor) and assistant
parliamentary draftsmen from the Attorney General's Chambers of Malaysia.
Government officer
(g) Academicians from the law school of the International Islamic University
Malaysia. They have the expertise in both civil and Shadah laws.
(h) Corporate.
(i) General public
About 20 questionnaireshave been randomly distributed to the above respondents.

Fortunately, with strong cooperation from most respondents, the researcher has
managed to obtain 17 questionnaires and informal feedbacks from them. The
responsesare impressively useful for improving the questionnairesin particular. In
addition, the respondents'opinions on other related matters are also noted as valuable
br the in
and practical guidelines research general.
5.6.5 Results of Testing the Questionnaires
From the total of 20 questionnaires, about 17 have been obtained from the
respondents.The questionnaireshave been fairly distributed among the identified

respondents.The most important result is the respondents' overall conclusion of the
questionnaire. Most of them view that the questionnairesneed to be substantially
131
Chapter5 ResearchMethodology
to
changed accommodate the Malaysian general public; only 10% of them thought
that the questionnaireis generally fine with someminor correctionsin rephrasing the
questionsand grammars. 15% of them know nothing about AITAB, thus, are unable
to complete the questionnaire.However, they have provided valuable opinions and
inputs towards better understandingin the attitude of Malaysian general public. The
is
generalresponse summarisedin the following table:
TABLE 5.4
Number of Responsesfrom Pilot Study

Respondent Response Percentage
No. N
Bankers 2 10
Sharrah Advisory member 2 10
Sharf'ah Scholars 2 10
Economist 1 5
Solicitor 2 10
Draftsmen of AG's Chambers 2 10
Government Officials 1 5
Academician 2 10
Corporate 1 5
Public 2 10
Non-respondents 3 15
TOTAL 20 100
The respondents'overall views are three-folds:

(1) If the questionnaireis to be substantially kept as it is, the only suitable target
group is the experts in AITAB, who may also include the bank officers,
Shad'ah scholarsand Islamic economists.
(2) If the main objective of the study is to know the perception of various
respondents,ranging from those having knowledge in AITAB or not; and

those using the facility or not, then the questionnairemust be reconstructedin
such a way on to accommodateall different types of respondents.Thus, it
must be very simple, straight-forward, avoidance from complexities and
technic ities.
(3) If the very objective of this study is to know directly and clearly the perception
of the respondent,then the survey should concentrateon a particular identified

group, i. e. bank customer signing up for AITAB, whether individual or
institutions.
132
The researcherhas come to know that most customersusing AITAB through car
financing schemeas provided by Islamic banks or other banks which offer Islamic
banking scheme.In fact, they are unawarethat they are using the AITAB facility. Of
all banks providing Islamic car financing scheme based on Islamic hire-purchase
concept,only Bank Islam adopts Bay' Bithaman jjil (deferredpayment sale) concept
in their car financing scheme.
Therefore, the attitude and perception of the Malaysian public must be taken into
serious account as a part of considerationsfor the preparation of the empirical study

later on. In general, Malaysian public are perceived to have a negative perception
towards questionnaire or the like, thus they are usually not cooperative with the
surveybecausethey can't seethe benefit they will gain from the survey. Furthermore,
reading is not the Malaysian's regular habit. Thus, they will not read or complete a
lengthy questionnaire.They are not critical-thinking in matters which they think do
not benefit thern.
The researcher has opined that there is a need to make some changes to the
questionnaire so that it would become more practical, suitable to the targeted

andcapableof achievingthe objectivesof the study.
respondents,
5.6.6 Alterations to Questionnaire
Based on the responsesobtained from the study, there is a need to make several
modifications to the The

questionnaires. alterationsaffect such aspectsas:
Topic of Questionnaire has been changedto cover those who have applied for car
financing scheme from 13 selectedbanks offering Islamic banking scheme, except
Bank Islam. In fact, the topic had been changedfor 5 times.
Presentation of the questionnaire is made more attractive and friendly to the
respondents.This is done by making clear arrangementand position of each question

and the questionnairesare printed using colourful papers.
Simple questions. Some questionsare rephrasedin order to make them simpler and
easierfor the respondentto understand.

Clear Instructions. Some instructions are too general, thus, need to be specified.
Someother instructions are, in fact not neededat all, thus are omitted.
133
Order of Answer. The answers are put in a more suitable order and flow so that
readerwill find it easierto understandand decidetheir answers.

Additional Answer. In somequestions,certain relevant answerswill be added.
Additional Question. There are a few questionswhich needto be divided into two or
more questionsin order to make it easier to understandand gain responsefrom the
reader.
Unneeded Question. There are many questionswhich can be omitted for their less
practical function in carrying the survey objective.
5.6.7 Conclusion of the Pilot Study
During a month period of the pilot study, the researcherhas gainedlots of information
and experienceas useful equipmentsto make a more proper plan for the empirical
work which is then carried out in the following three months.
Firstly, the researcherhas established some useful contacts and networks for the
purpose of conducting the survey. These include bankers and in

experts AITAB. The
researcherhas found out 13 banks and finance companies offering Islamic hire-
purchaseexcluding Bank Islam.
Secondly, the researcherstartsto understandthe potential respondent'sstateof mind,
attitude and perception, and also the way to treat various types of respondent.The
action taken is to change the topic of questionnaireand some question wordings in
order to ensurethe respondentsunderstandthe context of the questionnaires.

Thirdly, the researcherhas found that the most effective method of administering
questionnaires and obtaining the feedbacksis by face-to-face survey. Although this
method is time-consuming and very tiring, the researcher is confident, with
cooperation from the networking contacts and assistancefrom two or three research
a
assistants, high response rate will be obtained.
Fourthly, during pre-testing interview questions, the researcherhas discovered that
personal interview is in
more effective obtaining crucial data significant to this study,
as compared to group interview. Personalinterview, although is time-consuming and
relatively costly, guarantees an independent views from individuals of different
groups targetedby this study.
134
5.7 DISTRIBUTION OF RESEARCH INSTRUMENTS
Empirical work has been carried out in Malaysia from 1" May 2004 till 31" July
2004. Intensive preparation and planning for the works have been carried out since
pilot study. These include making a detailed planner, reviewing the interview
questions and questionnaire,contacting interviewees, seekingbank's approval to use

their premisesfor administering questionnaire,getting support letters and identifying
printing facilities. A detailed planner is drawn up as a basic guidance of data-
collection works. It comprises appointments with all interviewees and plans for
administering questionnaires.Most interviewees have been contacted ahead of the

time when the researcheris still in the UK. There are only 3 out of 13 financial
institutions giving approval to use their premises for purpose of administering the
This
questionnaires. situation led the to
researcher searchfor other alternatives:
(a) The researcher needs to travel to every region to administer the
questionnairesin the approvedbranches.

(b) One of the banks is registered under cooperative society regulations. It
provides special Islamic financing scheme to government servants who are
mostly academic and non-academic staffs. Thus, school teachers, university

lecturers and non-academic staffs become the researcher's next aim in this
empirical work.
(c) Other target is people in driving schools,either driving instructors or pupils.
They are presumed to have signed up for car financing due to having a
driving license.
The researcherhas to travel to each region to meet the interviewees and at the same
time taking the opportunity to distribute the questionnaires.This has led the researcher
to stay for one week in every region, except the Central region which is the
researcher'sbase.
5.7.1 Administering Interviews
The researcherhas interviewed 46 respondentson individual basis comprising 12

bank officers and 34 experts in AITAB from different background expertise. Most
interviewees are reached in the central region, i. e. Kuala Lumpur and Selangor
becauseof the following reasons:
.
(a) all headquartersof financial institutions are located in this region
135
(b) Kuala Lumpur is the centre of Islamic banking and finance business and
research, thus nearly all experts in the area can be found here.
(C) About 41.3% of interviewees are attached to academic institutions as

professors, or administrative staffs or visiting academic associates. Most
leading universities and academic institutions are located in the central
region.
They are illustrated as follow:
TABLE 5.5:
List of Interviewees
RESPONDENT GROUPS NO
" Bank Officers 12
" Shan'ah Advisors 9
" Shanah Scholars 8
" Economists 8
" Legal Experts 6
" Government Officers 3
TOTAL 46
Overall, good responses have been received from the interviews. Useful and valuable
comments, suggestions and recommendations were obtained. Every Interview has

taken approximately 45-60 minutes. The conversation during face-to-face interview is
recorded on a cassette tape and audio thumb recorder.
5.7.2 Administering Questionnaires
A total of 450 questionnaires have been distributed to individuals having experience
of AITAB facility in four states (Pulau Pinang, Kelantan, Kuala Lumpur and Johor)
representing four regions in Peninsular of Malaysia. Certain groups of people are
targeted due to their high probability of using AITAB. Then respondents in the groups
are selected based on convenient sampling. They comprise:

(a) people in the bank premises who either are dealing with their financial
affairs orjust accompanying their friends or family

(b) people in the street and residential area
(c) school teachers and support staffs from secondary and primary schools.
(d) university academic and administrative staffs,
(e) people at selected driving schools.
in the course of administering questionnaires, the respondents were asked the
following questions:
136
whether they have ever signed up for Islamic car financing scheme'?
Whether they applied to any of 13 identified banks and finaricc
companies'?
Ifthey do, researcher then appeals to them to answer the questionnaire by explaining
briefly the ob jectives of the survey and contribution they would give by participating
.
in the sLirvc%,.Finally the researcher has managed to get 20-3 responses which is
incredibly surprising results. The tables below 1111-istratcthe distribution of
questionnaires in repional basis:
TABLE 5.6:
Distribution of Questionnaires (Regional)

Respondents Northern Central Southern Eastern Total
People in selected banks 20 60 20 30 130
People in street/residential area 10 50 10 30 100
Primary/Secondary School teachers and support staffs 10 30 10 50 100
University Lecturers and administrative staffs 10 60 20 10 100
Driving Schools 2 7 2 9 20
TOTAL 55 210 65 130 450
the distribution and collection of researchinstrumentsare illustrated as

To SLImmarise,
follow:
FIGURE 5.2:
Collection of Research Instruments in Malaysia
REGION
NORTHERN 102"E -- EASTERNREGION
125 km
Pulau Pinang,Kedah, Kelantan,Terengganuand
ZZ Pahang
Perakand Perlis
Perli, 3
1
Interview 2 Interviews
Kedah f
16Questionnaires ( 61Questionnaires
Pulau Pinang
Sabah
Kelantan Labu an
Sarawak
Perak Tetengganu
Pahang O'N
Selangor
Kuila Lurnput ---

N
Se rn Han
Ktrajayiy a
Melaka
CENTRALREGION SOUTHERN REGION
KualaLumpur
and Johor
JohorMelaka
and
Selangor , Sembilan
Negeri
41interviews 2 Interviews
101Questionnaires 1 25Questionnaires
137
From the above figure, researchinstrumentswere distributed in four different regions

in Malaysia. In total, this study managedto conduct 46 interviews and obtain 203
questionnairesfrom theseregions.
5.8 DATA ANALYSIS TECHNIQUES
Two types of data are generatedfrom the empirical research;qualitative data from
interviews and quantitative data from the questionnaires.Data gathered from the
questionnairesare analysed using the Statistical Package for the Social Sciences
(SPSS).Analysis of questionnairesinvolves the following tasks:
(a) Coding the variables in the questionnaires,
(b) Setting the variable in the SPSS
(c) Inserting the codenumber of the variable into the SPSS,
(d) Cleaning data by checking its frequency and comparing between different
relatedquestions.
(e) Expandingthe "others" answersby adding variables to certain questions.
Describing data using univariate and bivariate distributions with frequency
tables,pie diagramsand bar charts.
in addition, important and significant commentsfrom the respondentsare noted down
and included to support and elaboratethe findings.
The interview data cannot not be analysedstatistically. The cassettetapes and audio
thumb recorderare transcribedas soon aspossible.This is done for three reasons:
(a) Any shortcomings found during the interview can be corrected before the next
interview.
(b) The researchercan contactthe respondents
whoseinformationand voice were
unclear,for furtherclarifications.
(c) The transcriptionworks havebeenheavily time-consumingbecauseit involves
46 interviews. It required severalplaybacks of the tapes and audio recorder to
acquire the infonnation. By transcribing early, it is one way of avoiding

backlog.
138
In analysing interview data, the researcherattemptsfirstly, to identify the common

themes in the transcribed interviews. This task is not a big problem since the
interviews are basedon a standardizedformat. Next, a frequencycount is undertaken
simply to note the same or closely related answers. Significant comments and
were
recommendations noted down to supportthe research.
5.9 SUMMARY
This chapter describesthe researchdesign and methodsusedto gather empirical data

for the study. During the first stage,a selectionof researchmethodsis made whereby
this study adoptsboth qualitative and quantitative researchmethod. In the next stage,
type of research instruments is considered. This study chooses interview and
questionnaires as instruments to collect empirical data. These instruments are
developed,tested in pilot study and then distributed among the target groups. The
decision to chooseboth qualitative and quantitative methodsfor this study appearsto
have beenjustified as it is observedthat the interviews and questionnaireshave given
a full picture of the study. Moreover, the responsesreceived from the respondents
have been most satisfying. This chapter also explains briefly the data analysis
techniquesfor both qualitative and quantitative data. The results of the analysis will
be presentedin the subsequentchapters.The next chapterwill presentthe outcome of
profile analysis comprising individuals who have participated in the interviews and
thosewho are involved in the questionnairesurveys.
139
Chapter 6
PROFILE ANALYSIS
6.1 INTRODUCTION
This chapter describes the population under study which covers people who are
involved in the operation of Islamic hire-purchase (AITAB) in Malaysia. The
descriptiontask is a method of analysiswhich has beenusedin many studies,prior to
other statistical analysis (Haron, Ahmad et al. 1994; Otike 1997; Elliott 2000; Hashim.
2000; Durrani 2001), and commonly known asprofile analysis.
The aim of this chapteris to provide a backgroundof characteristicand profiles of the
population under study. An understandingof their background helps giving a clear

insight into their expectedperceptionsand authoritativenessof their opinions in issues
relating to AITAB practices. Since the study is the first of its kind to investigate
thoroughly the implementation of Islamic hire-purchase(AITAB) from conceptual

and practical aspects,more attention is neededto such profile analysis. The chapter
starts with presentingprofile of population who have participated in the interviews,
and then followed by thosewho are involved in the questionnairesurveys.
6.2 PROFILE OF INTERVIEWEES
6.2.1 Classification of Interviewees by Groups
In-dept interviews have been carried out to get first-hand information pertaining to
AITAB operation in Malaysia. This technique is believed to be the best method to
obtain reliable data and to acquire the needed information. There are 46 individuals
involved in the interview. List of the interviewees is shown in Table 6.1 below. The
interviewees comprise experts and practitioners in AITAB from different fields and
backgrounds.More than a quarter of them are bank's officers (26%) who consist of 12
individuals, while SharVah advisors cover 9 individuals (20%). Economists and
SharVah scholars are equally representedby 8 individuals (17%) respectively. Legal
obtained from 6 legal experts (13%),
opinions are and the remaining 7% standsfor 3
governmentofficers.
140
Chapter 6 hofile Analysis
TABLE 6.1:
Distribution of Interviewees by Groups

Interviewees Frequency Percentage
Bank officers 12 26.1
ShanvahAdvisors 9 19.6
SharT'ahScholars 8 17.4
Economists 8 17.4
Legal Experts 6 13.0
GovernmentOfficers 3 6.5
Total 46 100.0
The above interviewees act as key Informants to the researcher. Key informants are
individuals who possess special knowledge, status, or com mull Ication skills, who are
willing to share their knowledge and skills with the researcher and who have access to
perspectives or observations denied to the researcher (Gilchrist 1999). For example,

bank officers have becomeresearcher'skey informants becausethey possessa kind of
knowledge and access to information which otherwise could not have been accessed
due to bank"sconfidentiality.
For a clear overview of interviewees' profile, the following figure illustrates their
general characteristics.
FIGURE 6.1:
0,,, er-*,ie-*N,
of Interviewees' Profile
Officers
3 Government 9 Shari'at
Off icers Advisors
PROFILE OF
INTERVIEWEES
6 Legal Experts 8 Shari'ah

Scholars
8 Economists
141
Chapter 6 Profile Analysis
6.2.2 Profile of Bank Officers
About 12 officers, representing12 financial institutions which offer AITAB facility,

have participated in the interview. They are selectedon the basis of their positions,
specialization and experience in managing AITAB transaction on part of their

institutions. The following table lists down their positions, specialization and other
involvement (if any).
TABLE 6.2:
Details of Bank Officers
Interviewee Position Specialization Other Involvement
F1 Head, Asset Financing Councilmembersof
IslamicBankingDivision AIBIM 2000-2002
B2 DeputyGeneralManagerIslamic Non-Muslimcustomerof
BankingDivision IslamicBanking -
F3 GeneralManager, Hire-purchaseproduct Vice President,
Hire-PurchaseDepartment Associationof Hire
PurchaseCompanies
Malaysia
B4 ExecutiveOfficer AITAB (Islamichire-
Hire-Purchase(AITAB)Section, purchase)
ConsumerBanking
B5 Head, IslamicBanking Councilmembersof
IslamicBankingDivision AIBIM
B6 ExecutiveOfficer, Credit & Processing
Hire-PurchaseDepartment
F7 Manager, Financing
IslamicBankingDivision
F8 Manager, ConsumerFinancing Councilmembersof
IslamicBankingDivision AIBIM 2002-2004
B9 Manager, ProductDevelopment -
Amanah Finance and Management
F10 AssistantVice Presidentand IslamicBanking Councilmembersof
Head of IslamicBankingDivision AIBIM 2002-2004
B11 Assistant President, IslamicBanking
BusinessBankingUnit,
-
F12 Senior Manager, IslamicBanking II Councilmembersof
BusinessDevelopment AIBIM 2002-2004
r: rinance t.,ornpuny
B: Bank
AIBIM: Association of Islamic Banking Institutions Malaysia
All the above-statedinterviewees are officers in charge of AITAB facility in their

institutions. During interview, they have been fully cooperative in supplying the
researcherwith needed information and documents in relation to the product. They

have emphasizedthe confidentiality aspect,thus, the exact conversations,documents
and other confidential information, which would appear to directly relate to those
particular institutions, will not be disclosed.
142
6.2.3 Profile of SharVah Advisors
SharVah advisor is a member of Shar! ah Advisory Board (SAB) of financial

institutions that participate in the Islamic banking scheme. SAB is established to
monitor a respective institution in it

case violates any Shad'ah principles in its
operations.44% of the Shadah advisors involved in the interview are members of
National Shariah Advisory Council (NSAC) of the Central Bank of Malaysia. They
118
are also Shadah advisorsto someother banksin Malaysia
TABLE 6.3:
Details of SharVah Advisors
Interviewees Formal Position Specialization Institutions Advised
Al DeputyRectorStudentAffairs IslamicJurisprudence, Central Bank of
InternationalIslamicUniversity IslamicBankingand Malaysia,Securities
Malaysia Finance,Shartah, Commission,
IslamicMedicalLaw Dow Jones
A2 Very DistinguishedAcademic Sharl"ah,Muamalah Central Bank of
Fellow Malaysia,Islamic
Ahmad IbrahimKulliyyahOf Laws DevelopmentBank
InternationalIslamicUniversity
Malaysia
A3 Vice PresidentANGKASA IslamicLaw, Islamic Bank Muamalat
(NationalCo-operative Bankingand Finance
Or anisationof Malaysia)
A4 Departmentof PrivateLaw, Company& Securities, Bank Muamalat
Ahmad IbrahimKulliyyahOf Laws IslamicLaw of
InternationalIslamicUniversity Transaction,Islamic
Malaysia Bankingand Finance
Head, IslamicLaw Department IslamicTransaction, Bank Muamalat,
IslamicBankingand AmanahrayaBerhad
Finance
A6 DistinguishedLecturerin Law IslamicLaw Bank Muamalat,
Securities
Commission,Bank
Rakyat, MARA&
ANGKASA
A7 Head of Sharie*Judge Sharl"ah,Islamic Central Bank of
Departmentof Sharrah Judiciary Bankingand Finance Malaysia,Securities
Malaysia Commission,Bank
Islam MalaysiaBerhad
A8 DirectorIKIM (Instituteof Islamic IslamicLaw, Islamic Central Bank of
n ers anding Malaysia) Bankingand Finance Malaysia
A9 Departmentof SharTah, Muamalah Affin Finance
NationalUniversityof alaysia
114LIVIM II UbL %-VUIILJl
Sharieis an adjectiveof Shail'ah
i's Central Bank of Malaysia (BNM) has recently

passesa directive to all financial institutions that,
they shall not appoint any Shad'ah advisor who is attachedto BNM. They can appoint up to 3 advisors
from a list distributed by BNM. The first advisor must be a Shadah expert, secondly legal
a expert,
and thirdly a personof either the two earlier expertisesor an economist.
143
All Shadah advisorspossesswide knowledge in Islamic jurisprudence and Shadah
and they hold formal educational qualification in the area. They have provided
important information in respect of basic rules of ijarah and sale, and the
implementationof Islamic hire-purchaseas a mode of financing from Shar! ah point
of view. SomeShadah advisorshave also additional qualifications and knowledge in
economics, finance and law, thus, they are capable of giving comprehensive
information from different angles and making comparative analysis among different
areas,e.g. Islamic and conventional law, Shadah and economy etc. This kind of
information is very valuable to this study to help to understand the operation of
Islamic hire-purchasefrom Shadah and practical point of view.
6.2.4 Profile of SliarTah Scholars
The Shar! ah scholars selectedfor the study are those who are well-known for their
knowledge and contributions in the area of Fiqh (Islamic Jurisprudence),Muamalah
(Islamic Transaction)and Shadah (Islamic law). Someof earlier-mentionedShadah
advisors are also included in this category, but they are more renowned for their
formal advisory positions.
Shad'ah scholarsare identified by their writings 6ournals, newspapers,books,

magazines )
etc. or direct involvement
in Shadah-based institutions.For instance,
S4
is a memberof National Technical Committeewho drafts the Muamalah Hire-
PurchaseBill. His informationwould be very significantto the study.It appearsthat
some Shadah scholars are involved in advisorypositionswhich are only discovered
duringthe interview.
During the interview, a number of information and Sharl'ah issues pertaining to

Islamic hire-purchasehave been thoroughly discussed.The researchermanaged to
gather significant information from different perspectives in the area of Shadah. In

contrast to SharVah advisors, information obtained from the Shariah scholars
concentrate more on Shad'ah issues; while Sharf'ah advisors, besides discussing
important legal and Shadah issues, they contribute knowledge based on their
experienceas advisors of leading financial institutions in Malaysia.
144
TABLE 6.4:
Details of SharTlahScholars
,
Interviewees Formal Position Specialization Other Involvement
S1 AssociateProfessor, IslamicJurisprudence,
IslamicLaw Department IslamicTransaction
Ilum
S2 Director, Professorin Islamic Councilof International
InternationalInstitutefor Jurisprudence, Islamic Rqh Academy,OIC
MuslimUnity Economics Assemblyof Muslim
Jurists in America
Board of TrusteesAAOIFI,
Bahrain
S3 AssistantProfessor, IslamicLaw, Islamic Advisorto Waqfinstitution
IslamicLaw Department Transaction
IIUM
S4 AssociateProfessor, IslamicLaw, NationalTechnical
Departmentof SharTah, Islamic Economics,Islamic Committee,
UKM Jurisprudence SharieLawyer
S5 AssistantProfessor, IslamicJurisprudence, Shariah Advisor EON

Facultyof Economicsand IslamicLaw, Finance,CIMB, Southern
ManagementSciences, Islamic Economics Bank
IIUM
S6 AssistantProfessor, Rqh, Usul Fiqh, Siyasah Shariah Advisor CIMB,
Facultyof Economicsand Shariyyah Hijrah Unit Trust
ManagementSciences,
lium
S7 Head, SharTahand IslamicLaw, Islamic SharVahAdvisor,Al-
EconomyDepartment,UM Economics HidayahInvestmentBank
(Labuan)Ltd and IBFIM
S8 AssociateProfessor, IslamicJurisprudence, Sharrah Advisor
Centrefor IslamicStudies IslamicBanking CooperativeSociety
and Social Development,
I UTM
HUM: InternationalIslamic University Malaysia
UKM: NationalUniversity of Malaysia
UM: University of Malaya
UTM: TechnologyUniversity of Malaysia
113FIM: Islamic BankingandFinanceInstituteof Malaysia
CIMB: CommerceInternationalMerchantBankersLimited
EON: NationalAutomobileDistributor
6.2.5 Comparative Profile Analysis of SharTah Advisors and SharTlah Scholars
At the outset it must be emphasizedthat Sharlah advisor is also a Shad'ah scholar
and there is no difference in their basic qualification and expertise. All of them are
in
specialized Islamic law (Shad'ah), Islamic Transaction(Mu'amalah) and Islamic
Jurisprudence(Fiqh); while there are a few of them having special qualifications in
securities,medical law and economics.But the distinction between them is only made
for the convenience of comparison between the two groups who reflect different
attitude when their opinions are analysedand presentedas in Chapter 8.
145
This section discussesa profile analysis of SharVah advisors and Shadah scholars
for the purpose of assessingtheir similarities and differences in respect of their
expertiseand involvement in AITAB business.Comparative analysis also looks into
their opinions and standsin certain issuesaddressedduring the interviews, whether or
not such opinions have been independentlygiven or limited by their respective formal
0 positions or other involvements.
Given the above description of profiles, almost all Shadah scholars and 67%
Shad'ah advisors hold official positions as senior academicians,besideshaving been
appointedas Shadah advisors for financial institutions and non-profit organisations.

About 44% of the interviewed Shadah advisors are members of the National
Shad'ah Advisory Council of the Central Bank of Malaysia. The Shadah scholars
are also involved in the advisory works; 38% of them are responsible to certain
financial institutions119
and 50% are attachedto somenon-profit organisations.
Apart from the above facts, the Sharl'ah advisors and Sharl'ah scholars are
segregated into two distinct groups by taking into account the extent of their
involvement in AITAB operation and their different observation of the transaction.
Hence, the segregationis deemednecessaryfor the interest of this study due to the
following facts which are generally listed as follow:
(a) SharVah advisors are directly exposedto issues and regulatory framework
of AITAB operation; while Sharl'ah scholars appear to be indirectly

involved by giving their independent opinions regarding the operation.
Indeed, their experiences and involvements in AITAB operation, either
directly or indirectly have actually reflected the differences in their opinions
of the transaction.
(b) Like the bankers who involve directly in the operation, Shadah advisors
tendto be moreacceptingto the facility, thus,areconstantlylooking for the

most pragmatic ways of developing it to be a flexible and competitive
product within the limit prescribed by the Shadah. In contrast, SharVah
scholars are critical in issues relating to conceptual nature of the facility,
it
whether is Shariah compatible or not.
11967% of thesefinancial institutions do not provide AITAB facility.
146
(c) In respect of regulatory framework of AITAB operation, Shuri'uh advisors
are actually working on the law, while most SharT'tih scholars are not
involved in such task. Interestingly, this explains the fact that the Shtiri'ah
advisors attempt to justify what they are doing which often does not reflect
20
their independent opinion in certain issues' . The SharT'ah scholars oil tile
other hand. appear to have more 'freedom of expression' to some issues

which invoke ShaiTah consideration.
The above analysis has reflected that both groups of Shari'ah advisors and SharT'ah
scholars are inevitably separated due to their extent of involvernents and observation
to AITAB operation. Detail analyses are presented in Chapter 8 which assessestheir
opinions in various issues relating to the operation and regulatory framework of

AFFAB in Malaysia.
FIGURE 6.2:
Relation of SharT'ah advisors and Sharr'ah scholars
" MOREPRAGMATIC , MOREIDEALISTIC

" DIRECTLY
INVOLVED
a INDIRECTLY
INVOLVED
" MAYNOT GIVE , INDEPENDENT
VIEWS
SHARI AH INDEPENDENT
VIEWS SHARVAH
ADVISORS SCHOLARS
......---------
EXPERTSIN
" SHARPAH
" MUAMALAH
" FIQH
12"Their observations to particular issues are presented in Chapter 8.
147
Chapter6 ProfileAnalysis
6.2.6 Profile of Economists
Economists are those having expertise in economics, finance and banking. 50% of
them have involved in Islamic banking from the very beginning, exploring this area
while serving in the first Islamic bank, i. e. Bank Islam Malaysia Berhad (BIMB) in
1983. When Islamic banking and finance began to expand, which haVe led to
establishmentof many Islamic institutions and subsidiaries,these experts moved or

were transferred to these newly-established organizations. Their knowledge and
experienceas pioneersin the areaof Islamic banking are very valuable, indeed.
From Table 6.5 below, 3 are lecturers in Islamic economics and banking; 2 of them
are professorsin economics.2 expertswith more than 20 years experiencein Islamic
banking, servein a researched-based
Islamic institution. Another 2 are still in banking
industries,while one expert involves in securitiesbusiness.
TABLE 6.5:
Details of Economists
El Professor in Economics Islamic Economics, Federation of Malaysian
Banking and Finance Unit Trust Managers
E2 Professor, Economics, Finance and Islamic Banking and
School of Finance and Banking Finance Institute of
Banking, Northern Malaysia (IBFIM)
University of Malaysia
E3 CEO Islamic Banking and Islamic Transaction, Chairman,
Finance Institute Malaysia Sharrah, Economics MDC (Market Product
(IBFIM) Development Committee)
and IIFM (International
Islamic Finance Market)
E4 Internal Research Fellow Islamic Transaction, Had served BIMB for 20
for Centre of Fiqh Shad6h, Economics years
Mu'amalat IBFIM
E5 Executive Director Economics, Islamic SharVah Advisor,
BIMB Securities Banking and Finance Central Bank of Malaysia,
Securities Commission,
Labuan Offshore Financial
Services Authority
E6 Islamic Banking and SharVah Specialist Lecturer in Islamic Law for
Takaful Department, 20 yrs
Central Bank of Malaysia
E7 Head, Islamic Banking and Finance, Islamic Banking
Finance Programme,
Faculty of Business
Manaqement, UiTM
E8 Senior Manager, Bank Economics, Banking
Islam Malaysia Berhad
(BIMB)
Ul I IVL. 1 E;LIlllvlvry ujllwa., y .. v. -. -
148
Most economists are known for their writings and involvement in conferences as
presenters.But their most important contribution in the areaof Islamic banking is by
providing basic and important referencesin form of books, articles and other reading
materials.
6.2.7 Profile of Legal Experts
The selectedlegal experts comprise 6 legal practitioners from different institutions.

Half of them are practicing lawyers; one Sharie lawyer, one Sharie judge and a legal
advisor (in-house lawyer). All of them have handledhire-purchasecasesbefore, while

some have experienced in presenting AITAB case, but there have been very few
decided casesin the area. Thus, they are deemedto have deep knowledge in hire-
purchaselaw in Malaysia.
TABLE 6.6:
Details of Legal Experts
Interviewee Position Specialization Other Involvement
Ll AssociateProfessorin IslamicBankingand Lawyer
Law, IIUM Finance
L2 Professorin BusinessLaw BusinessLaw Directorof Legal Affairs,
UniversitiPutra Malaysia Leqal Advisorto UPM
L3 AssociateProfessorin IslamicContract, SharTahlawyer of Federal
IslamicLaw, UM Succession,Zakat, Islamic Territory
Law ShatVahA\dvisor
L4 Head of SharieJudge IslamicLaw, Technicalcommittee
SharMhCourt, State of IslamicTransaction
Kelantan
L5 ProjectManagerIFSB IslamicBanking& Finance, PracticingLawyer
overnance Corporate
L6 Partner,Zul Rafique& Islamicbanking,corporate
Partners
Hum: intemationai isiamic university rviaiaysia
UM: University of Malaya
UPM: Putra University of Malaysia
IFSB: Islamic Financial Services Board
Some legal expertsprovided very useful information to the researcherin perceiving a
wider dimension of law, without limiting to a particular law only. Hence, to
understand issues arising from the practice of AITAB, the concept of conventional
hire-purchasemust be understood first. They pointed out that to identify prevailing
issuesin hire-purchase,there is a needto go beyond hire-purchaselaw and understand
the Malaysian legal systemsas a whole and other laws involved. The possibility of
having an Islamic hire-purchaselaw has also been discussed.
149
Chapter6 Profile Analysis
6.2.8 Profile of Government Officers
This part discusses profile of government officers who directly involve in
conventional and Islamic hire-purchase.They comprise officers of three government

institutions responsible for controlling hire-purchase business in Malaysia. The
Central Bank supervises hire-purchase transactions operated by the Malaysian
financial institutions. The first interviewee serves in Islamic Banking Department
which is authorised to approve any Islamic product proposed by the financial

institutions. The second government officer is attached to Islamic Development
Division of the Prime Minister Department. This government institution governs
Islamic affairs in the country including matters relating to Islamic law. The third
intervieweeis an officer of Ministry of Domestic Trade and Consumerismwhich is in
chargedof controlling hire-purchasebusinesssubjectto Hire-PurchaseAct 1967.
TABLE 6.7:
Details of Government Officers
Interviewee Position Specialization
G1 Bank Negara Malaysia (Central Bank of Malaysia) Business and
Economics
G2 JAKIM (Islamic Development Division), Prime SharVah
Minister Department
I
G3 KPDN HEP (Ministry of Domestic Trade and II Law
Consumerism)
Views from these government officers are of primary importance as they represent
three important bodies which have official jurisdiction over matters relating to hire-
purchasetransaction.Incidentally, theseofficers are membersof a committee set up to
examine the newly-proposed Muamalah Hire-Purchase Bill. Their information is
very useful to help to know the current status and development of the Bill. The
researcher has inquired about the government's inclination and policy regarding the
possibility of passing the Bill. This point will be thoroughly discussedin Chapter 8.
6.2.9 Classification of Interviewees by Working Experience
All intervieweesinvolved in this researchare known to have wide knowledgein

Islamic hire-purchase practices in Malaysia, based on their qualifications,
involvementsandexperiencein the area.Their periodof holding certainpositionsand
serving at particular institutions is an important basis to determinetheir working
The
experiences. selectionof interviewees
involved in this studyis madein line with
150
Schatzman and Strauss' assertion that their positions, seniority in the organization, or
then- power of making vital decisions in the organizations are sonic selective
considerations to obtain most authoritative data for this research (Schatzman and
Strauss 1999). Table 6.8 below gives a general impression to the Interviewees'
experience in their present institutions.
TABLE 6.8:
Distribution of Interviewees by Years in the Present Institutions
Years in the Present Insti tution
Interviewees Less 1 1-5 6-10 More Total
year years years 10 yrs
Bank's Officers N 0 1 3 8 12
11 8.3 25.0 66.7 100.0
.0 1
Shar-VahAdvisors N 0 0 3 6 9
% 33.3 66.7 100.0
.0 .0
1 Shari'ah Scholars N 1 0 0 1 17 8
% 0 0 12.5 87.5 100.0
. .
Economists IN 0 3 0 5
% 37.5 62.5 100.0
.0 .0
Legal Experts N 0 0 1 5 6
1)/o 16.7 83.3 100.0
.0 .0
Government Officers N 0 1 2 0 3
,"'. 33.3 66.7 100.1
I . .01 , , .0 .
Total IN 10 5 1 10 1 31 4
11% 0 10.9 21 67.4
.7
From the above table, it is shown that 89% of interviewees are those witli experience
more than 6 years in the present institutions. This shows that most of interview data
are obtained from people with sufficient knowledge in AITAB facility since its
introduction more than 10 years ago. About 11% have been working in the present
institution for a period ranging from I to 5 years. Most of them are Shari'ah scholars
who are known to have a wide experience and expertise In their area. None of
interviewees have less than I year working experience was interviewed. This result
proves that all selected interviewees are individuals who are capable of furnishing
important data to this study based oil their experience in the institutions that they
Currently serve. Table 6.9 below presents different range of periods in which the
respondents have been in their present positions.
151
TABLE 6.9:
Distribution of Interviewees by Years in the Present Positions

Years in the Present Pos ition
Interviewees Less 1 1-5 6-10 More Total
year years years 10 yrs
Bank's Officers N 2 6 1 3 12
% 16.7 50.0 8.3 25.0 100.0
Shan-ah Advisors N 1 3 3 2 9
% 11.1 33.3 33.3 22.2 100.0
Shad'ah Scholars N 0 5 2 1 8
% 62.5 25.0 12.5 100.0
.0
Economists N 0 4 2 2 8
% 50.0 25.0 25.0 100.0
.0
LegalExperts N 0 2 4 0 6
0/1, 33.3 66.7 100.0
.0 .0
Government Officers N 0 3 0 0 3
% 100.0 100.
.0 1 .0 .0 .
Total N 3 23 12 8 1 46
% 6.5 50.0 26.1 17.4 100.0
Table 6.9 Illustrates that 50"I,o of respondents have been in their present position for a
period ranging from I to 5 years. 26% of them have been in the current position for 5
to 10 years. About 17% interviewees have been serving in the same designation for
more than 10 years, while only 7% of them being in present position for less than I
year. Details of their positions and working experience have been discussed In the
previous sections.
Furthcr analysis of the interviewces' working experience and period of service In tile
present position, Table 6.10 below is referred.
TABLE: 6.10
Cross Tabulation of Years in the Present Position by
Years in the Present Institutions
Years in the Present Years in the Present Position I

Total
Institutions Less than 1 yr 1-5 years 6-10 years Above 10 yrs
1-5 years N 1 4 0 0 5
% 2.2 8.7 10.9
- .0 .0
6-10 years N 6 3 0 10
%1 2.2 1 13.0 6.5 1 2.7
.0
More than 10 N 1 13 9 8 31
years % 2.2 28.3 19.6 17.4 67.4
Total N 3 23 12 8
I % 6.5 50 26.1 17.4
.0
152
The above table shows that among all the interviewees, 37% of them have been
serving the present institutions for the period of more than 10 years and hold the
positions
present for more than 6 years. These individuals are usually regardedas the
most senior staffs in their institutions, and are believed to possessvaluable experience
and knowledge significant to their respective institutions. They are significantly
regardedas key informants to this study. A comparatively high percentage(67%) of

interviewees possess more than 10 years working experience in their current
institutions as compared to those of having less such experience. Most other
intervieweeshave been in the current institutions for a period ranging from 6 to 10
years. This result affirms the interviewees' competencyto provide relevant and valid
datato the study.
Table 6.11 below more specifically present a cross tabulation analysis of the
interviewees' experiencein the present institutions and positions in their respective
groups. 38% of the interviewees having more than 10 years experiencein their current
positions and institutions are bank officers who are mainly managers or heads of
Islamic Banking Division in particular financial institutions. This meanstheseofficers
have been involved in the areaof Islamic banking for more than 10 yearswhich cover
the introduction period of Islamic banking scheme in 1994. In fact, they have
contributed valuable information pertaining to background and development of

Islamic hire-purchasein Malaysia to this study.
Among all interviewees, government officers appear to have a relatively shorter
period of service. In respectof working experience,they have been serving for their
current institutions for a period ranging from I to 10 years. None has more than 10
years of such experience. They are also consideredas new officers becausethey have
been in the present position for 1 to 5 years only. This is a common experience for
any government servant who is transferredto different governmentbodies for several

times. An officer may have more than 10 years of working experienceas government
servant,but will probably have less than 5 yearsworking in a particular institutions or

positions.
153
Chapter6 ProfileAnalysis
TABLE 6.11:
Cross tabulation of Interviewees' Experience in Present Positions by
Years in the Present Institutions
1 Years In the Present Position
Lessthan 1-5 years 6-10 years More than Total
Years in the Present Institutions 1 year 10 years
Bank 1-5 years N 1 0 0 0
Officers % 100.0% 0% 0% 0% 100.0%
. . .
6-10 years NN
N 0 2 1 0 3
01 0% 66.7% 33.3% 0% 100.0%
. .
More than 10 years N 1 4 0 3 8
% 12.5% 50.0% 0% 37.5% 100.0%
.
Total N 2 6 1 3 12
% 16.7% 50.0% 8.3% 25.0% 100.0%
Sharl'ah 6-10 years N1 1 1 1 0 3
Advisor /,. 33.3% 33.3% 33.3% 0% 100.0%
.
% 0% 33.3% 33.3% 33.3% 100.0%
.
Total N 1 3 3 2 9
% 11.1% 33.3% 33.3% 22.2% 100.0%
Sharl'ah 1-5 years N1 0 1 0 0 1
Scholars % 100.0% 0% 0% 100.0%
.0 . .
% 57.1% 28.6% 14.3% 100.0%
.0
Total N 0 5 2 1 8
% 62.5% 25.0% 12.5% 100.0%
I .0
Economists 6-10 years N 0 3 0 0 3
-
Zo
f 100.0%
.
0%
.
0% 100.0%
More than 10 years N
% .0
0
.0
20.0%
1
40.0%
2
40.0%
2
100.0%
5
Total N 0 4 2 2 8
% 50.0% 25.0% 25.0% 100.0%
.0
Legal 6-10 years N t 0 0 1 0 1
Experts /- 0% 100.0% 100.0%
.0 . .0
% 40.0% 60.0% 100.0%
.0 .0
Total N 0 2 4 0 6
% 33.3% 66.7% 100.0%
.0 .0
Government 1-5 years N
'i i 0 1 0 0 1
Officers - Yo 100.0% 100.0%
N
.0 .0 .0 2
6-10 years 0 2 0 0
% 100.0% 100.0%
.0 .0 .0
Total N 0 3 0 0 13
I % 11 100.0% 1 100.0%
.0 .0 .0
The aboveprofile analysis reflects that all interviewees are rightly selectedto provide
infonnation relevant to the study on the basis of their knowledge and experience in
Islamic hire-purchasebusiness.
154
Chapler6 Profile Analysis
6.3 PROFILE OF QUESTIONNAIRE RESPONDENTS
A total of 450 questionnaires were distributed to individuals who have used AITAB
facility. Out of this total, 249 or 55% questionnaires were returned. From tile returned
questionnaires, 203 or 45% were usable for analysis. This suggests a satisfactory
response rate from the respondents. The unusable questionnaires were so classified
due to several factors. Some respondents returned incomplete or blank questionnaires;
while there are a few who completed the questionnaires but it appeared that their
to this research121 Table 6.12 depicts the rate of
information was irrelevant . response
differmt typc of respondents.
TABLE 6.12:
Distribution of Response Rate from Five Respondent Groups
Respondents No. No. Of No. Of % Usable

Issued Return Usable
People in selected batiks 130 83 70 53.8
People in street or residential area 100 31 18 18
Primary or Secondary School teachers and support staffs 100 79 70 70
University Lecturers and non-academic staffs 100 45 41 41
Driving Schools 20 11 4 20
TOTAL 450 249 203 45.1
From the table, it is observedthat school teachersand support staffs have given tile
highest response of 70% to the qUestionnaires. The obvious reason is that, they are
entitled to special government scherne of owning a private car, whi IjI ointly
122
provided by the Government and a bank Interestingly, the bank adopts Islamic
.
concepts in all its financing facilities, including car financing which is based oil
Islamic hire-purchaseconcept. The second highest response rate is obtained frorn
those people interviewed in sorne selectedbanks (54%). Most of them were either
waiting for their turn, or simply accompaniedtheir friends or relatives to the bank.
University academicand non-acadernicstaffs contributed 41% responses,a relatively
half of school teachersand support staffs as mentioned earlier. Almost all university
12' For example, a respondent clain-fing that lie has applied Islamic car financing which lie thought is
based on Islamic hire-purchase concept. However, the financial institution which gave him such
financing, in fact, adopts concept of bay' bithanian ijil (deferred payment sale) in their car financing
facility. This is a case of Bank Islarn Malaysia Berhad (BIMB).
122This is based on interview with the bank officers and some of school teachers. Detail information
can be found in littp: //", baiikrakvat.
Nv\\!. coiii. i-ny/iildex. pliL. ch--6&p!,,=26&ac -II en.
155
staffs use a staff schemewhen applying for car financing. However, certain scheme
provided by some universities does not adopt a financing which is based on Islamic
hire-purchase concept, for instance, conventional hire-purchase financing and BIMB's
financing 123
car .
Apart from the above respondents,questionnaireswere also distributed in market
place, shopping complex and town streets. Response is

rate relatively low (18%),
which is not surprising due to the fact that most people in the street are in hurry and
less cooperative to the like research.Finally, only 20% responseis obtained from
instructorsand managersof driving schoolsand this is the lowest responserate gained
by the research.From the researcher'sobservation,their tiring working environment
which constantly exposethem to hot and wet weather makesthem less cooperativeto
the survey. Having to deal with various attitudesof driving studentsis another factor
which mostly occupies the instructors' time. Although the responsesfrom these two
groups are small in number, they significantly give a valuable insight to perceive the
respondents'understandingand opinions regardingthe operation of AITAB.
6.3.1 Classification of Respondents by Regions
Table6.13depictsa distributionof respondents

by four regions.As mentionedin the
previous chapter,these samplesare taken from four statesrepresentingfour main

regionsof PeninsularMalaysia.
This approach is intended to ensuregoodquality and
wide of
representation samplestudy.It is observedfrom the tablethat almost50% of
the total respondentwho completedthe questionnaire,are from the central region.
Northern region marks the lowest responserate (8%) with only 16 questionnaires
being returned. Respondentsin eastern and southern regions returned 61
(30%)
questionnaires and 25 (12%)
questionnaires respectively.Different response
ratesin the four regionsare by
caused severalfactors,namely,accessibilityto banks'
premises,public cooperationand attitudetowardsthis research,public awarenessof
Islamic products,time and financial factors. For instance,most respondentsin the
northernregion are quite cooperativeand friendly, but they are unawareof Islamic
Thus,they wereunableto completethe questionnaires.
based-financing. On the other
hand,Islamic awareness
amongstthe easternrespondentsis very high; unfortunately
123
BIMB's car financing usesconceptof Bay'bithaman did (deferredpayment sale).
156
most of thern are sceptical towards this research, thus refusing to participate M the
SUrvey.
TABLE 6.13:
Distribution of Respondents' Response Rate based on Regions

Respondent Group Nort hern Central Sout hern East ern To tal
N % N % N % N % N %
Peoplein selected banks 8 11.4 38 54.3 10 14.3 14 20 70 100
Peoplein street/residentialarea 2 11.1 11 61.1 3 16.7 2 11.1 18 100
Primary/Secondary School 2 2.9 24 34.3 4 5.7 40 57.1 70 100
teachers and support staffs I I
UniversityLecturers and non- 4 9.8 27 65.8 7 17.1 3 7.3 41 100
academicstaffs
Driving Schools 0 0 1 25 1 25 2 50 4 100
Total 16 7.9 101 49.8 25 12.3 61 30.0 203 100
FIGURE 6.3:
Overview of Respondents in Four Regions
NORTHERN
REGION 10A
Bank -8
Residential-2
School -2
University -4 is
Driving -0
Kedah j
16Respondents
ulau Pinang
Kelantan
Perak TerE
- b"N Pahang
Selangor
Kuala Lumpur
Neger!
CENTRAL Sembilan SOUTHERN
REGION utrajaya REGION
Melaka
Bank -38 Johor Bank -10

Residential - 11 Residential-3
School -24 School -4
University -27 University -7
Driving -1 i1 Driving -1
10i',
101Respondents 25 Respondents
157
6.3.2 Classification of Respondents by Gender, Age and Marital Status
General characteristics of respondents are shown in Table 6.14 below. The
respondents are prcdornInantly male (51%); of 203 respondents, 49 % arc 1'ernale.
Nearly half of the respondents (43%) are between the age group of 31-40, and almost
one-third of thern were above 41 years old. About 26% respondents are between 20-
30 years old, while those under 20 years of age are relatively few (I%).
TABLE 6.14:
Distribution of Respondents by Gender, Age and Marital Status

Frequency Percent (%)
Gender Male 104 51.2
Female 99 48.8
Age Group Below 20 1 0.5
20-30 53 26.1
31-40 88 43.3
41-50 46 22.7
Above 50 15 7.4
Marital Status Single 37 18.2
Married 166 81.8
The above result suggests that respondents at the age of 30 years and above are
presumed to have permanent and well-paid Job which entitle them to apply for car
financing in certain financial institutions. This is confirmed by cross tabulation Table
6.15 below which depicts that 80% of academicians, consisting university lecturer and
school teachers, are at the age of 30 years and above; only 20% academicians are at
the age range of 21-30.7% of respondents are above 50 years old of age, comprising
4% academicians, I% businessmen, I% retired persons, I% manager and I% support
staff. Only I% respondent who is Linder 20 years old and he is a student.
The findings of the survey show that 27% of respondents are below 30 years of age,
while 73% are above 31 years old. Younger respondents who work as manager,
professional, academic and non-academic staff, businessman etc. are very small "I
number as compared to those of older respondents. This suggests that age factor is one
of important considerations to determine one's experience and probability of getting a
good job. Almost 82'YO

of the respondents are married; only 37 respondents are single.
This will probably show that vehicles which are suitable for family, like sedan car,
158
IIILlltl-pLirpose vellicle (MPV) and four-wheel drive will be mostly attractive to tile
respondentsin this study.
TABLE 6.15:
Cross tabulation of Respondents' Age by Occupation

Age of the respo dent
Respondent's
occupation Total
Below 20 20-30 31-40 41-50 Above 50
Manager N 0 46 3 1 14'
0% 2 8.6% 1 42.9%, 21.4% 7.1% 10 0. O,YO
.
Professionals N 0 7 28 5 0 40
% 17.5% 70.0% 12.5% 0% 100.0%
0% .
Academician N 0 17 35 26 9 87
% 0% 1 19.51Y. 40.2% 29.9% 10.3% 100.0%
.
Housewife N 0 1 0 0 0 1
%. 0% 100.0% 01YO 00% 011/0 100.01YO
. . . .
Student N 1 2 0 0 0 3
% 33.3% 66.7% 0% 0% 0% 100.0%
. . .
Businessman/ N 0 5 0 1 2 8
Trader 0% 0% 62.5% 0% 12.5% 25.0% 100.0%
. .
Clerical/ Support N 0 6 11 6 1 24
staff % 0% 25.0% 45.8% 25.0% 4.2% 100.0%
1 .
Unemployed N 0 1 4 2 0 7
1% 0% 14.3% 57.1% 28.6% 0% 100.0%
. .
Retired N 0 0 0 0 2 2
% OIYO 0% 0% 0% 100.0% 100.0%
. . .
Others N 0 10 4 3 0 17
00//0 58.8% 23.5% 1 17.6% 0% 1 100.0%
I% 1 , 1 . 1
Total N 11 1 53 1 88 1 46 1 15 1 203
% 5% 1 26.1% 1 43.3% 1 22.7% 7.4% 1 100.0%
.
6.3.3 Classification of Respondents by Level of Education and Occupation
Results in Table 6.16 show that majority of respondents are well educated, with 11jore
than 20% holding college diplorna, matriculation or A-level certificates and about
67% holding at least a bachelor degree. This result reflects respondents' good level of'
education, which impliedly proves their maturity and openness wlicri participating III
the survey. Table 6.16 below also depicts the respondents' Occupation, in which more
than 42% are academician, covering school teachers and University lecturers. Almost
20% of the professional group respond very well to the questionnaires, which Include
lawyers, engineers, accountants, doctors and architects. 12% of clerical and support
staff fi-orn selected schools and universities complete the given questionnaires.
Responses from housewife, retired persons, students and unemployed are relatively
159
low, totalling only 6% of overall responses. Their firnited entitlement to apply for
financing is one of the reasons, clue to not having a properjob, and fixed salary.
TABLE 6.16:
Distribution of Respondents by Level of Education and Occupation

Frequency Percent (%)
Level of Education Primary School/UPSR 1
.5
Secondary School/PMR/SPM 25 12.3
Diploma/Matriculation/STPM 42 20.7
First University Degree 102 50.2
Professional qualification 17 8.4
Masters 12 5.9
Ph.D 4 2.0
Occupation Manager 14 6.9
Professionals 40 19.7
Academician 87 42.9
Housewife 1
.5
Student 3 1.5
Businessman/Trader 8 3.9
Clerical/Support staff 24 11.8
Unemployed 7 3.4
Retired 2 1.0
Others 17 84
A cross-tabUlation of respondents' level of education and occupation below will show
that personswith excellent educationalqualification usually have well-paid jobs. This

shows the importance of paper qualification to secure a good working position.
According to Table 6.17 below:
(a) More than half of respondents (50%) are degree holders. 68% are qualified
academicians, 60% are professionals, and 57% are managers. Only 4% degree
holder work as a support staff.
(b) 160/o respondents are postgraduate degree holders, who include 38%
professionals, 14% academicians and 21%managers.

(c) From 13% holders of primary and secondary school certificates, 54% work as
staffs,
SLIpport 3% are school teachers,
and 35% servedin other areas.
The findings indicate that two-third of the respondents are highly educated and work
in various goverriment and non-goverriment sectors. Tile renI a]ining

II one-third, llav'ing
lower educational qualification, serve mainly as support staffs and school teachers.
These results imply the quality of respondents who appear to be capable enough to
participate in this study and provide reliable responses.
160
TABLE 6.17:
Cross tabulation of Respondent's Educational Background by Occupation

Educational Bac ground
C
0 -M C:
Respondent's ' CU
75 - t2 C2
0 0
2
occupation E (n C: 0 Q -3
- 4) 0) 2 Total
-0
0 .r - (n e U)
U U) a. 9 ? LZ (U
a- (f) a) 5 1:; D
0
(f) a- m L Cr
2
Manager N 0 0 3 8 2 1 0 14
01 0% 21.4%, 57.1% 14.3%) 7.1% 01Y. 100.0%.
. .
Professionals N 1 0 0 1 24 12 3 0 40
% % 0% 2.5% 60.0% 30.01Y. 7.5%, 0% 100.00/1)
.0 . .
Academician N 01 3 13 59 0 8 4 87
% 0% 3.4% 14.9% 67.8% 01Y. 9.2 % 4.6% 100.0'%
. 1
Housewife N 0 1 0 0 0 0 0 1
% 0% 100.0% 1% 0% 00/1) 0% 01% 100.00%
. .0 . . .
Student N 0 1 0 2 0 0 0 3
%. 0% 33.3% 0% 66.7% 0% 1% 01Y. 100.01yo
. . . .0
Businessman/ N 0 1 4 2 1 0 0 8
Trader % 0% 12.5% 50.0% 25.0% 12.5% 0% 0% 100.0%
. . .
Clerical/ N 1 12 10 11 0 0 0 24
Support staff 0% 4.2% 50.0% 41.7(,,
o 4.2% 01% 0% 01Y. 100.011%
. .
Unemployed N 0 1 3 3 0 0 0 7
0% 14.3% 42.9% 1 42.9% 0% Oly. 0% 100.01yo
. 1 . .
Retired N 0 10 1 0 1 0 0 2
% 0, /" 0% 50.0% 0% 50.0% 0% 0% 100.0%
. . . . .
Others N 0 6 7 3 0 0 17
01,
0/( ;, 1 35.3% 41.2% 17.60% 5.91yo 0% 0% 100.0%
, . . 1
Total N 1 25 42 102 17 12 4 203
I- I% 5". 12.30% 20.7% 5021%1 &4% 5.9% 2.0% 100.0%
.
6.4 SUMMARY
This chapter describes background of population under study compri sIng Irid ividuals
who participate in the interviews and respondents to questionnaire survey. About 46
interviewees involved In this Study, representing six different groups; bank officers,
Shari'ah advisors, ShmTah scholars, economists, legal experts and government
officers. Their profiles in respect of their positions, working experience, area of
expertise and other involvements are analysed in order to prove that they are
significant and competent informants to this study. In addition, profiles of 203
questionnaires respondents are examined in respect of their age, status, gender, level
of education, occupation and experience for the purpose of ensuring their responses
are valid and reliable. It is hoped that, by understanding the interviewees' and
respondents' background, important findings which are to be discussed in tile
subsequent analysis chapters will be more appreciated and understood.
161
Chapter 7
CUSTOMERS' PERCEPTION OF
ISLAMIC HIRE-PURCHASE (AITAB) IN MALAYSIA:
ANALYSIS OF QUESTIONNAIRE DATA
7.1 INTRODUCTION
A questionnaire survey has been carried out to elicit the perception of customers
towards the operation of Islamic hire-purchase (hereafter AITAB) in Malaysia. In
general, from a total of 450 questionnairesdistributed, 203 were returned, thereby
yielding a good response rate of about 45%. The chapter presents the analysis of
questionnaire data designed to survey the extent of customers' awareness,their
perception and level of satisfaction towards AITAB. This chapter is divided into four
parts. The first part presents the result of analyses on the extent of respondents'
satisfaction with AITAB. The secondpart explores the perception of customerswho
have experiencedconventional hire-purchase.The third part provides a comparative
analysis of customers' perception towards both conventional and AITAB. Finally, the
general view about AITAB is also elicited from the respondentsand the results are
reported in the final part of the chapter. The statistical methods employed in this
chapter range from frequency distribution, descriptive statistics, pie charts to non-
parametric analysis using Kruskall-Wallis and Mann-Whitney U-Test.
7.2 CUSTOMERS' SATISFACTION WITH ISLAMIC HIRE-PURCHASE

(AITAB) FACILITY
This section aims to explore the extent of customers' satisfaction with AITAB offered
by financial institutions in Malaysia. Indeed, as one of the most important players in
service industry, banking is no longer regarded as a business dealing with money

transactionsalone, but also as a businessthat is ineluctably in need for winning over
customers and retaining the old ones.As for Islamic financial institutions, customers'
satisfactiontowards their is
products very crucial mainly becauseof the fact that they
have to compete with the long-established conventional banks especially in the
Malaysian dual-banking system.Accordingly, the respondentswere asked to express
162
Chapter 7 Customers' Perception of AITAB in Malaysia
their degree of satisfaction towards AITAB facility. The Findings are reported in
Figurc 7.1.
FIGIURE 7.1:
Customers' Satisfaction with AITA13
As depicted in Figure 7.1 above. a large majority of respondents (87%) are satisfied
with AITAB facility offered by various Islamic financial institutions. Only a small
percentage (I--)%) expresses their dissatisfaction with the facility. To further examine
the relationship between the degree of satisfaction and other demographic factors
related to tile respondents (age, gender, level of education, marital status and
occupation), chi-square, X2 and Z-score, Z values were computed.
7.2.1 Comparative Analysis across Different Respondents' Characteristics
'File KrUskal I-Wallis test (K-W Test) and Mann-Whitney test (U-Test) are conducted
in tile comparative analysis. The K-W Test and U-Test are used to assess ally
significant difference in the responses, given the different groups involved in this
This non-parametric test is appropriate when measurement of tile variables
survey.
124The hypothesis be
under investigation is in ordinal scale. null to tested reads:
124Unlike the parametric test (Such as F-Test or T-Test) which requires data to be measured on interval
level and that samples are drawn from normal distribution populations, non-parametric test do not
is
require the shape of the underlying distribution to be specified even thouph samples need to be selected
at random. In other words, non-pararnetric test requires a less strict assumption about underlying
Population and the type of data to be analysed. Although it is not as powerful as a parametric test,
increasing the sample size can increase its power to that approaching its parametric equivalents. For
detailed discussion, refer to (Kachioan 1986-,Siegel and Castellan 1988, Kerr, Hall et al. 2002; Norusis
2004).
163
Ho: There are no significant differences in the various subgroups of
respondents when expressing their degree of satisfaction with AITAB,
i. e. the nican ranks of various subgroups (age, marital status, gender,
educationlevel and occupation)are equals.

HI: There are significant differences in the various subgroups of
respondents when expressing their degree of satisfaction with AITAB,

i. e. the mean ranks of various subgroups are not equal.
The results of these K-W Test and U-Test are presented in Table 7.1.
TABLE 7.1:
K-W Test and U-Test Results Comparing the Mean Ranks of the
Degree of Satisfaction towards AITAB in terms of Age, Education, Occupation,
Gender and Marital Status
Asymp.
Variable Subgroup N Mean Rank z2 Sig. (P)
AGE: K-W Test:
Below 20 1 ki=89.00
20-30 53 k296.66 2
3.019 0 555
31-40 88 k37106.30 .
41-50 46 k4"': 100.03
Above 50 15 k5=102.53
EDUCATION: K-W Test:
Secondary or lower 29 k6=96.00
Diploma/A-Level 58 k7=99.50 2
3.463 0 484
Bachelor (first degree) 93 k8=103.19 .
Professional Qualification 7 kq=103.50
Master or PhD 16 ki o=114.38
OCCUPATION: K-W Test:
Manager 14 A 12 118.00
Degree of
Satisfaction Professionals 40 kl3=96.61
with AITAB Academician 87 kl4=104.17
Housewife 1 k, 5=89.00
Student 3 k16=89.00 2= 3.463 0.484
BusinessmanlTrader 8 k17=1 14.38
Clerical/Support staff 24 kl8=93.23
Unemployed 7 kiq=1 18.00
Retired 2 k20=89.00
Others 17 k2l=94.97
GENDER U-Test:
Male 104 m=1 02.66 -0.285 0.776
Female 99 112=101 . 30
MARITAL STATUS U-Test: -
Single 37 0.345
113=97.23 z -0.944
Married 166 IN= 103.06
164
Chapter7 Customers'Perceptionof AITAB In Malaysia
As shown by the K-W Test and U-Test results in Table 7.1, even though there are
differencesin the mean ranks of various subgroupsin terms of their age, gender,
marital status,educationlevel and occupation,thesevariations are not likely to hold in
the population since the observed significance levels are all higher than 0.05
confidenceintervals. The computed X2 and z values are all lower than the tabulated
chi-squareand z-score values, at various degreesof freedom. The null hypothesis of

equal independent means, therefore, cannot be rejected; which suggests that
customers are homogeneously satisfied with the AITAB facility offered by financial
institutions in Malaysia irrespective of their differences in terms of age, level of
education,occupation,genderand marital status.
This result implies a strong potential of AITAB in appealing to various groups of
customers. Since satisfaction is an important componentof the total packageof value

required by customers,financial institutions can use a segmentof satisfied customers
in their marketing strategy and as promotional tools to attract new customers. This
necessitates banks to strategically promote and market AITAB facility through

various channelsof marketing communications.
7.2.2 Sources of Information on AITAB
The above results show that banks need to strategically market AITAB facility. This
is further confirmed by the findings of our study as depicted in Figure 7.2, whereby
respondents have indicated their awareness and knowledge about AITAB from
various sources of information. More specifically, the majority of respondents(61%)
point out that they got the knowledge and understandingabout AITAB from various
means of communication endeavoured by the industries such as advertisements,
banks' prospectus, and conferences and seminars. Besides direct effort by banks,
tword-of-mouth' communication is undoubtedly among the strongestcommunication
tools in forming expectationsand influencing subsequentpurchasing behaviour. This
is substantiatedby the fact that 30% of the customers have been influenced to use
AITAB facility basedon the recommendationmadeby friends and dealers.
165
FIGURE 7.2:
Customers' Sources of Information about AITA13
30
25
20
15
CL
O "1 06.011,
Sources of Information about AITAB
To add tip, more than 90% of customers benefit from these direct and Indirect sources
of information or means of marketing communication, as compared to only 2% of
customers who claim that they took their own Initiatives and personal efforts in
getting to know and learn about AITAB. This proves the importance of the financial
institutions to strategically package and market AITAB product to stimulate and
influence patronage behaviour of customers by adopting various marketing tools and
strategies.
7.2.3 Reasons for Satisfaction 'with AITAB
The findings in the preceding section seern to Suggest that custorners are generally
satisfied with AITAB facility. To further illuminate the reasons for their satisfaction, a
question with a set of probable reasons that may explain why custorners have chosen
AITAB facility for financing was posed to tile respondents. The results are reproduced
in Table 7-2.
166
Chapter7 Customers!Perceptionof AITAB In Malaysia
TABLE 7.2:
Cross-Tabulation of Reasonsfor Satisfaction by Banks
Reasons for Satisfaction with AITAB
E 0
>
m
0
U) t -ccL)
0 s-A'-
(U Z, 12 0
> r- a r_
= .2
ju
CL-[2 Ein
E cu 0 mCo r- l
m Co 0) -i,-
cu a) m

Bank r- a) ,0 (-) 8x 0 CL 0
CL i2 ctu o Total
0E m o(D 0 2! 0 4-
0
E
-
IL r-
Z) 0. 0
CL < L)
Affin Finance N 2 2 3 1 0 0 0 0 0 8
% 25.0 25.0 37.5 12.5 0 0 0 0 0 100.0,
AmFinance N 5 5 3 2 0 1 0 1 1 18
% 27.8 27.8 16.7 11.1 0 5.6 0 5.6 5.6 100.0
Bank Muamalat N 2 9 3 2 0 0 0 0 0 16
% 12.5 56.3 18.8 12.5 0 0 0 0 0 1OUT
Bank N 0 2 0 0 0 0 0 0 0 2
Pernbangunan - Z/- 0 100.0 0 01
, 0 0 0 0 100.0
-0 11 1
Bank Rakyat N 15 7 12 81 0 01 2 0 55
%l 27.3 12.7 20.0 21.8 14.5 0 01 3.6 0 100.0
EON Finance N 3 4 5 1 0 0 01 1 2 16
% 18.8 25.0 31.3 6.3 0 0 1
01 6.3 12.5 100.0
.
Hong Leong N 0 3 1 1 0 0 0 0 2 7
Finance % 0 42.9 14.3 14.3 0 0 0 0 28.6 100.0
HSBC N 0 1 1 0 0 0 0 0 1 3
% 0 33.3 33.3 0 0 0 0 0 33.3 100.0
Mayban N 2 6 8 4 1 -1 1 1 2 26
Finance 'XO 7.7 23.1 30.8 15.4 3.8 3.8 3.8 3.8 7.7 100.0
OCBC N 0 0 0 0 0 0 0 0 2 2
% 0 0 0 0 0 0 0 100.01 100.0
Public Finance N 3 4
.0 '3
3 1 0 0 1 161
0/0 18.8 6.3 1 25.0 18.8 6.3 0 6.3 18.8 100.0
-0
Southern N 0 1 1 1 0 0 0 0 1 4
Finance % 25.0 25.0 25.0 0 0 0 0 25.0 100.0
-0
Cooperative N 1 1 2 0 1o 0 0 0 0 4,
Socleties % 25.0 25.0 50.0 01
-0 0 0 0 100.0
1 - .0
N 1 33 42 42 27 10 2 11 6 14 177
Total
0/01 18.6 23.7 23.7 15.3 5.6 1.1 3.4 7.9 100.0
-. - .6
According to the results depicted in Table 7.2, a large majority (87%) of respondents
indicate that factors pertaining to documentation and procedure constitute the main
reasons why they chose AITAB facility for financing. In particular, 47% of
respondentsassign 'standardisedcontract' and 'procedure well explained' as two key

reasons for their satisfaction with AITAB, followed by 'convenient payment system'
and 'uncomplicated preparation of document' with 19% and 15%, respectively.
167
Interestingly,only 1% expresstheir satisfactionmerely basedon religious reason,i. e.
compliance with Sharl'ah. This does not indicate that the religion factor is not
important. It merely underscoresthe paramount importance of documentation and
procedure in the service quality as by

assessed customerswho shall shortly, give this
factor in the context of AITAB benefits in section7.4.1.
The cross-tabulationof reasonsfor satisfactionwith AITAB by respondents'bank, as

depicted in Table 7.2, reveal a similar pattern of response. The majority of
respondentswho indicated their reasonsfor satisfactionwith AITAB on the basis of

contractual and procedural convenience are customers of conventional banks with
Islamic windows.
7.2.4 Reasonsfor Dissatisfaction with AITAB
As depicted in Figure 7.1 above, a small percentage (13%) of the respondents
expressed their dissatisfaction with AITAB facility. Hence, it is appropriate to

investigatethe reasonsfor their dissatisfaction.The study posed a question with a set
of probable reasonsfor dissatisfactionwith AITAB to the The

respondents. results are
presentedin Table 7-3.
The results in Table 7.3 reveal that 42% of the customersindicate their reasonsfor
dissatisfactionare mainly due to the lengthy and confusing AITAB contract. Nineteen
percent further claim that the terms and condition attachedto AITAB transaction are
very complicated, while 8% feel that they had to go through a confusing procedure.
Fifteen percent allege that AITAB contract is not truly compliant with principles of
Sharl'ah.
zooming in the results of cross-tabulationin Table 7.3 further reveals that 20% of
customersof Bank Muamalat claim that the bank was slow in processingthe AITAB,
50% of Hong Leong Finance customersindicate that no standardisedAITAB contract
was offered to them and 25% of Mayban Finance feel that AITAB is offered at a
higher rate than the conventional facility.
168
TABLE 7.3:
Cross-Tabulation of Reasonsfor Dissatisfaction by Banks
Reasons for Dissatis faction with AITA B
i
U) c: (0
72 15
mm .2
-0 :; -m E E CO
-Z 0
-
m .280 0E 0 CL
->
00
Banks U)0 002 0 CL 00 :s 3: M8 0
0 -1 c -0 0 Total
Z 0 > Z
0
ArnFinance N 0 1 0 2 0 0 0 01 3
% 0 33.3 0 66.7 0 0 0 01 100.0
Bank Muamalat N 0 1 1 1 0 1 0 1 5
%1 0 20.0 20.0 20.0 0 20.0 0 20.0 100.0
,
Bank Rakyat 1N 0 5 0 1 0 0 0 0 6
%l 0 83.3 0 16.7 0 0 0 0 100.0
EON Finance N1 0 0 0 1 1 0 0 0 2
Im.10 0 0 50.0 50.0 0 0 0 100.0
Hong Leong N 1 1 0 0 0 10 0 0 2
Finance % 50.0 50.0 0 0 0 0 0 0 100.0
HSBC N 0 0 1 0 0 0 0 0 11
% 0 0 100.0 0 0 0 0 01
N 0
100.0
41
Mayban Finance 0 0 0 0 3 0 1
i.-
-% 0 0 0 0 75.0 0 25.0 0 100.0
OCBC /.l0
1%
N 0 1 0 0 0 0
- 0 0
0
1
100.0
loo.o o 0 o o o
Public Finance N 0 2 0 0 0 0 0 0 2
0 100.0 0 0 0 0 0 0 100.0
Total N 1 11 2 5 4 1 1 1 1 26
3.8 42.3 7.7 19.2 15.4 3.8 3.8 3.8 100.0
1% 1 1 , 1
Comparing the results in Table 7.2 and 7.3 above, it is interesting to note that despite
a majority of customerswho expresstheir satisfactionwith AITAB contract especially

in terms of documentation,procedureand transaction,there is a considerableminority
(13%) who respond to the contrary. Three plausible reasonsmay account for such
Firstly, there could be some lack of consistency and uniformity in the
perception.
AITAB contract by the financial institutions. This may be
processing and executing
true as the results of Tables 7.2 and 7.3 depict that customers from the same bank
offer two contradictory views regarding the standard of documentation and

involving AITAB contract. A case in point is customers of Hong Leong
procedures
Finance who have two different views regarding the standard of AITAB contract.
Secondly, there may be also lack of consistencyin service quality particularly when
banks interact with clients and fail to give a satisfactory explanation regarding AITAB
169
As
contract. a result, unconvinced customersbecome confusedabout the system. The
lack of consistencyis more apparentwhen customersfrom the sameinstitution (e.g.
Mayban) Finance have two different opinion regarding the issue of SharVah-
compliance. Thirdly, the responsesfrom the small minority could reflect isolated
incidencesinvolving those who might have bad experienceswith the service. Hence,
somegreaterefforts should be taken to improve thesedeficiencies.
Overall, the above result implies the need for financial institutions to secure and
attract their by
customers offering a product like AITAB which is charactcrisedby
features like user-friendly, convenient and less complicated in terms of

documentation,procedures,transactionand payment system. Moreover, bank officers
should also be trained to explain AITAB in a languagethat can easily be understood

by their customers as well as to stimulate their interest in dealing with AITAB.
Perhapsone of the most important market implications emerging from this finding is
the ability of financial institutions like Islamic banks and Islamic windows to provide
convenient banking to attract patronage from a wider section of the Malaysian
population. Thus, Islamic banks and windows must not take for granted assuming
religious motivation to be sufficient to sustainpatronagefrom the existing customers.
Instead,banks should packagetheir products in such a way that conveniencebecomes
a paramountimportancethat can satisfy the customers.
7.3 CUSTOMERS' SATISFACTION WITH CONVENTIONAL HIRE-

PURCHASE FACILITY
This study has also elicited customers' opinion from those who have experienced
conventional hire-purchase facility. Out of 203 total respondents, more than half
(55%) have indicated that they have experiencedconventional hire-purchasefacility.
it is expected that previous banking experiencesare likely to influence customers'
attitudes, perceptions and degree of satisfaction with AITAB. Therefore, it is

interesting to investigate these customers' perceptions towards the conventional
facility.
Customerswho have experiencedthe conventional hire-purchase were asked about

their level of satisfaction towards the facility. Figure 7.3 depicts the proportion of
satisfied and dissatisfied customerstowards the conventional facility. From Figure
170
7.3 below, it is evident that majority (73%) of customers indicate that they arc
satisfiedwith the facility, while only 27% are dissatisfied. This is Interesting when
comparing their opinion towards the two products i. e. AFFAB and conventional hire-
purchase,which will be explored in the later part of this chapter.
FICURE 7.3:
Customers' Satisfaction with Conventional Hire-Purchase
27%
73%
Satisfy
Cl Dissatisfy
To further examine the relationship between the degree of satisfaction and other
demographic factors related to the respondents(age, gender, level of education,
occupation) chi-square, 2 Z-score,

marital statusand y, and z values are computed.
7.3.1 Comparative Analysis across Different Respondents' Characteristics
The study has once again conducted the Kruskall-Wallis test (K-W Test) and Mann-
Whitney test (U-Test) on these variables. The null hypothesis to be tested reads:
Ho: ]'here are no significant differences in the various Subgroups of
respondents when expressing their degree of satisfaction with

conventional hire-purchase,i.e. the mean ranks of various subgroups
(age,marital status,gender.educationlevel and occupation) are equals.
There are significant differences in the various subgroups of
respondents when expressing their degree of satisfaction with

conventional hire-purchase, i. e. the mean ranks of various subgroups
are not equals.
The results are presented in Table 7.4.
171
TABLE 7.4:
K-W Test and U-Test Results Comparing the Mean Ranks of the Degree of
Satisfaction towards Conventional Hire-Purchase in terms of Age, Education,
Occupation, Gender and Marital Status
Asymp.
Variable Subgroup N Mean Rank z2 Sig.
AGE: K-W Test:
20-30 18 A,=67.69
2
31-40 57 4,2=54.99 X. = 3.672 0.299
41-50 30 k3=55.60
Above 50 7 k4=43.86
EDUCATION: K-W Test:
Secondary or lower 11 k5=49.05
Diploma/A-Level 32 k6=53.42 22 736 0 603
Bachelor (first degree) 53 k7=61.24 . .
Professional Qualification 4 k8=45.75
Master or PhD 12 k9=54.21
OCCUPATION: K-W Test:
Degree of Manager 13 klo=61.23
Satisfact ion
Professionals 34 k11=49.38
with AITAB
Academician 45 kl2=57.98
Student 1 kl3=96.00 2= 8.313 0.306
z
Businessman/Trader 1 kl4=66.00
Clerical/Support staff 8 ki5=59.63
Unemployed 3 k16=91.00
Others 7 kl7=47.43
GENDER U-Test:
Male 65 ni=58.50 z- -0.803 0.422
Female 47 112=53.73
MARITAL STATUS U-Test:
Single 14 113=65.64 2 -1.180 0.238
Married 98 114=55.19
As shown by tile K-W Test and U-Test results In Table 7.4, even though there are
differences in the nican ranks of various subgroups in ternis of their age, gender,
marital status, education level and occupation, these differences are not likely to hold
in the population, since the observed significance levels are all higher than 0.05
confidence intervals. The computed X2 and values are all lower than the tabulated
zz
chi-square and z-score values, at various degrees of freedom. The null hypothesis of
equal independent means can therefore be accepted; suggesting that custorners are
homogeneously satisfied with the conventional hire-purchase insti-Linient offered by
various batiks in Malaysia.
172
Chapter7 Customers'Perceptionof AITAS In Malaysia
7.3.2 Reasonsfor Satisfaction with Conventional Hire-Purchase
The study also manages to gauge the reasons for customers' satisfaction with
conventionalhire-purchasefacility. The results are reproducedin Table 7.5.
TABLE 7.5:
Cross-Tabulation of Reasons of Satisfaction with Conventional Hire-Purchase
By Banks
Reasons for Satisfaction with Conventional Hire-purchase
E '0%- 0
43) (D 0 >
-r- U) (D T) 0
0) >. (D 0
.
E
(D U)
-2 m 2 r_ =CL .la 0) m 12 C:
:3 - E (D (D 2 2g -he
>
r- 0) 't3 E-M m0 r- :E a. 0- R 0
r_
Bank 0E
,0 8x 0.0 -
0 >1 20 2 4) 0 Total
m
13.
.
(0 0. :)0.
LL 0 0
z
I I I I I
Affin Finance N 1 0 0 1 0 0 0 0 0 2
% 50.0 50.0 100.0
.0 .0 .0 .0 .0 .0 .0
AmFinance N 1 1 2 0 0 1 0 0 2 7
% 14.3 14.3 28.6 14.3 28.6 100.0
.0 .0 .0 .0
Bank Muamalat N 2 1 2 1 0 2 11 0 0 9
7 - r- 22.2 11.1 22.2 11.1
6 22.2 11.1 100.0
.0 .0 .0
Bank Rakyat N 3 2 2 7 3 2 0 2 21
% .0
14.3 9.5 9.5 33.3 14.3 9.5 9.5 100.0
.0 .0
EON Finance N 2 1 0 2 0 2 0 0 K I1 8
% 25.0 12.5 25.0 25.0 01 12.5
2.5 100.0
. .0 .0 . .0
Hong Leong N 0 4 0 0 0 1 0 10 0 5
Finance % 80.0 20.0 1 100.0
.0 . .0 .0 .0 .0 .0 .0
HSBC N 0 1 10 0 0 0 0 10 0 1
% 100.0 100.0
.0 .0 .0 .0 .0 .0 .0 .0
Mayban N 1 8 3 1 0 4 0 1 0 18
Finance % 5.6 44.4 16.7 5.6 22.2
.0 5.6 100.0
.0 .0
Public Finance N 2 2 0 0 0 1 0 0 1 6
% 33.3 33.3 16.7 16.7 100.0
.0 .0 .0 .0 .0
Southern N 0 1 1 1 0 0 0 0 0 3
Finance % 33.3 33.3 33.3
.0 .0 .0 100.0
.0 .0 .0
Cooperative N 1 0 0 1 0 0 0 0 0 2
Societies % 1 50.0 50.0
.0 .0 .0 0 100.0
.0 .0 .0
N 13 21 10 14 3 13 1 1 6 82
Total
25.6 12.2 1 17.1 3.7 15.9 1.2 1.2 7.3 100.01
1 -
Corresponding to the previous findings, the results shown in Table 7.5 reveal that
customershighly regard documentation and procedural issuesas important reasonsfor

satisfactionwith conventional hire-purchase.in total, 55% of the customerswho have
experienced conventional hire-purchasestatethat standardisedhire-purchasecontract,
173
Chapter7 Customers'Perceptlonof AITAB In Malaysla
well-explained procedure and uncomplicated preparation of documents are the main

reasons for their satisfaction with the facility. Other factors include convenient
paymentsystem(16%), fast process(1%) and others (16%). There is 5.6% respondent
who feels there is no difference between conventional and Islamic hire-purchase.

Again, these results reinforce our earlier assertion that customers are very much
concernedwith a product which is characterizedwith convenienceand ambiguity-free

featureswhether in terms of its documentation,procedure,processing and payment
system. Therefore, banks must always take these factors into consideration when
offering and developing a product especially in the caseof AITAB.
7.3.3 Reasons for Dissatisfaction with Conventional Hire-Purchase
It is also important to further investigate the opinion of 27% of customerspertaining

to reasonsfor their dissatisfaction with the conventional facility as depicted in the
earlier Figure 7.3. Table 7.6 below highlights the reasons for customers'
dissatisfactionwith conventional hire-purchase.There are mixed responsesobtained
from the respondents. 23% of customers indicate their dissatisfaction with
conventional hire-purchasedue to its interest-basednature. This is a very interesting

finding which shows an increasing Islamic-consciousnessamong the Malaysian
This
customers. attitude is also in
reflected their responseto the later questionswhich
require an overall assessment
of AITAB facility and their possible choices in the
future.
Other reasons raised, include no standard set of hire-purchase contract offered by the
bank (20%), very complicated terms and conditions (20%), confusing procedure
(13%), lengthy and confusing contract (10%), late penalty charges imposed (7%) and
others (7%). On the whole, most customers states misleading documentation and
procedure as the main reasons for their dissatisfaction with the hire-purchase facility.
This is true for both AITAB and conventional hire-purchase customers. This is no
surprise unless customers are given sufficient explanation on how hire-purchase

transaction works in terms of procedure and documentation, they can easily get
125
confused
125The customerswill only becomeabsoluteowners of the assets

under hire-purchaseagreementafter
they have settled all paymentsas agreedin the agreement.Prior to the transfer of ownership, the assets
174
TABLE 7.6:
Cross-Tabulation of Reasonsof Dissatisfaction with Conventional Hire-Purchase
By Banks
Reasons for Dissatisfaction with Convontional HP
U) u
5.6 (0 0 (0
r- w (V LO
0 o CD 40)
Bank Z cu R Total
c" r- 8
r_ 8 c9 :a@
E C) U).5 (0 8
a)
-1
Affin Finance N 0 0 0 0 1 0 0 1
%1 0 0 0 0 100.0 0 0 100.0
AmFinance N1 1 0 0 0 0 0 1 2'
0/01 50.0 0 0 0 0. 0 50.0 100.0
Bank Muamalat N 1 11 0 0 0 0 1 3
% 33.3 33.3 0 0 0 33.3 100.0
-0
Bank N 0 0 0 1 0 0 0 1
Pembangunan % 0 0 0 100.0 0 0 0 100.01
Bank Rakyat N 3 1 3 31 3 1 0 14
% 21.4 7.1 21.4 21.4 21.4 7.1 0 100.0
HSBC N 0 0 0 0 0 1 0 1
% 0 0 0 0 0 100.0 0 100.0
Mayban Finance N 0 0 0 0 1 0 o l1
10
11/0 0 0 01 0 0 100.0
OCBC N 0 0 0 1
100.0
1 0 0 2
% 0 0 0 50.0 50.0 0 0 100.0
Public Finance N 0 1 1 0 1 0 0 3
% 0 33.3 33.3 0 33.3 0 0 100.0
N .
Cooperative 1 0 0 1 0 0 0 2
societies % 50.0 50.0 0 0 0 100.0
10 .0
N 6 13 14 6 7 2 30
T ot al 12
% 20.0 1 10.0 1 13.3 20.0 23.3 6.7 1 6.7 100.0
,
The results given abovereinforce the need for banks and other relevant parties such as
lawyers or dealers to carefully and adequately explain to their clients about hire-
purchasecontract. This is in
necessary order to avoid confusion and misunderstanding
about the procedure,obligations and duties of eachparty to the contract. For example,
one of the typical issues that may easily create misunderstanding relates to the
ownership status. In conventional hire-purchase financing, customers can easily get

confused by thinking that banks merely finance their purchasing assets like other
financing instruments do. However, they should be enlightened that banks hold
are owned by the financiers who can repossess the assetsif there is a violation of the agreement.In
Malaysia,there havebeenmany reportedcasesrelating to hire-purchasewhich arise from the sameroot
of problem (Penang 1986; Khair, Veera et al. 2001).
175
ownership claim over the asset insofar as they call repossess the asset in tile case of
delaLlit. 11crice,such procedure and obligation need to be sufficiently explained to the
clients before entering into the agreement.
The ensuing sections provide an analysis of' perceptions of' the conventional-
experienced Customers towards both cotiventional and Islamic hire-purchase tacility.
7.4 COMPARATIVE ANALYSIS OFAITAB AND CONVENTIONAL 111REl-

PURCHASE
Since the Study has managed to obtain responses from customers who have
experienced using both AITAB and conventional facilities, it is pertinent to gauge

their opinion towards the benefits of using these two facilities. This enables us to
further study and make comparative analysis between the two instruments offered by
various banks. Hence. the respondents were asked to compare both facilities in term
of their benefits. Figure 7.4 reveals that a vast majority of respondents (79%) feel that
AFFAB has given more benefits as compared to only 21% stating otherwise.
FIGURE 7.4:
Comparison of Benefits between AITAB and Conventional Hire-Purchase
To provide better insights into tile possible reasons of why these customers think
Islamic hIrc-pUrchase gives more benefits, the following sections further discuss the
findings and analysis ot'various variables which may constitute major reasons IIor tile
customers' perceptions.
176
7.4.1 Benefits of AITAB
To qualify on the finding in section 7.2.3, we have asked the customers to rank tile
different benefits which they obtain from AITAB. Respondents who prercr AITAB to
conventional facility were asked to rate, oil a five-point Likert scale ranging from I=
strongly disagree to 5= strongly agree, the extent to which they have agreed ill each
benefit gained from using the product. The null hypothesis is advanced as follows:
Ho: There is no significant difference in customers' degree of agreement
regarding all benefits gained from using AITAB facility i. e. the mean
ranks of various benefits gained from using Islamic lilre-purchasc
facility are equal.
HI: There is significant difference in customers' degree of agreement
regarding all benefits gained from using AITAB facility i. e. the mean
ranks of various benefits gained from using Islamic hire-purchase
facility are not equal.
The results are presented in Table 7.7 and 7.8 below.
TABLE 7.7:
Friedman's Test Statistics: Benefits of AITAB
114 96
Chi-Square, X,2 133.305'
df 8
Asymp. Sig. 0.000
TABLE 7.8:
Friedman Test to Rank the Various Reasons of Benefits Gained From Using
AITAB
Arithmetic Std. Mean

Mean Deviation Rank
Rank
AITAB is based on Sharrah principles 4.5625 59493 6.70 1
.
Free consultation and enquiries 3.9688 1.07069 5.41 2
Friendly customer service 3.8854 91617 4.99 3
.
Easy instalment payments 3.8646 90169 4.95 4
.
Attractive financing terms and conditions 3.8542 94009 4.93 5
.
Speedy processing and approval 3.8229 1.03613 4.90 6
Free processing 3.7604 1.15845 4.88 7
Longer financing period 3.5938 1.06205 4.31 8
Lower rates of bank's return 3.5000 1.04630 3.95 9
Note: Mean values - scoring: 1= strongly disagree; 5= strongly agree
177
The results in Table 7.7 shows that the chi-squarevalue (X2= 133-305)is higher than
the tabulated chi-squarevalue ()? = 15-51) at 0.05 confidence interval; 8 degree of

freedom.The observedsignificance level p=0.000, is lower than the 0.05 confidence
level, which implies that variations betweenthe nine variables are likely to hold in the
population. Thus, we may infer that the ranking of benefits of AITAB as perceived by
customersis statistically significant, thus, the null hypothesis can be rejected. The
to
extent which customers have agreed in each benefits gained from using AITAB is
tabulatedin Table 7.8.
The results in Table 7.8 clearly indicate that customersrank 'AITAB is based on
SharVahprinciples' as the highest benefit gained from using AITAB. In other words,
respondents regard the Islamic legitimacy aspectof the product as the most important
benefit to gain from AITAB. The result reinforces the importance of AITAB facility
to be Shadah-compliant. Therefore, although the documentation and procedure
factors were more important than the religious factor in the earlier question (refer to
section 7.2.3), it has now become clear that the religious factor is most important
when statedin the context of different benefits that customers can draw from AITAB.
Furthermore,by complying with all the necessaryShadah requirements,banks can
secure patronage and enhance confidence amongst their customers, which may
consequentlyreap comparative advantagein competing with conventional products.
This proves that banks may still create a niche in the market for pious Muslims who
are committed in avoiding interest and engaging in Shadah-compliant products.

Even this feature appealsto the non-Muslims as there are evidencesthat these group
of customers are increasingly attracted to the Islamic banking products which are
be based SharVah 126
well-known to on .
On the otherhand, 'lower ratesof bank's return' is consideredthe leastbenefit that

customershave gained from usingAITAB facility. This doesnot imply that customers
do not really care aboutthe rate of paymentwhich they have to pay to the bank.
Ratherthey are more concernedwith the religious aspectof AITAB facility, which
126 MS is
fact
further confirmed by an interview conducted among bank officers of various Islamic
financial institutions. In particular all bank officers acknowledgethat about 60% of AITAB customers
are non-Muslims. They proclaim that thesenon-Muslim customersare attracteddue to the late penalty
chargeswhich are far lower than the conventional facilities. Some financial institutions do not even
imposethis penalty chargeto attract customers.For details of the results,refer to Chapter8.
178
they have benefited most. It is also interesting to note that, respondents highly regard
human factors and convenience as important benefits that they have gained from
using AITAB. In particular, both 'free consultation and enquiries' and 'friendly
custorner service' are ranked second and third respectively. This also reinforces our
earlier assertions that custorners do not only value product in terms of its pricing and
attractive terms and conditions but More importantly the quality of services attached
to the products that bank can offer.
7.4.2 Benefits of Conventional Hire-Purchase
For the purpose of comparative analysis, the opinion of respondents who prefer
conventional hire-PUrchase to AITAB facility is also gauged. Tile respondents were

asked to rate, on a five-point Likert scale ranging from I= strongly disagree to 5-
strongly agree, the extent to which they have agreed in each benefit gained frorn using
the conventional product. The null hypothesis is advanced as follows:
Ho: There is no significant difference in customers' degree of agreement
regarding all benefits gained from using conventional hire-purchase

facility i. e. the mean ranks of benefits gained from using conventional
hire-purchase facility are equal.
HI: There is significant difference in customers' degree of agreement
regarding all benefits gained from using conventional hire-purchase

facility i. e. the mean ranks of benefits gained from
using conventional
hire-purchase facility are not equal.
To test this Mill hypothesis, the study perfomis Friedman Test statistics to calculate
the chi-square as well as the mean ranks for each variable Linder study. The results are
presented in Table 7.9 and 7.10.
TABLE 7.9:
Friedman's Test Statistics: Benefits of Conventional Hire-Purchase

N 26
Chi-Square, 35.276
df 8
Asymp. Sig. 000
.
179
2=
Table 7.9 reveals that the chi-square value (Z 35.276) Is higher than the tabulated
2
chi-square value (y = 15.51) at 0.05 confidence interval; 8 degree of freedom. The
observed significance level p=0.000, is lower than the 0.05 confidence level, which
implies that variations between the nine variables are likely to hold in tile population.
ThLIS,we may infer that the ranking of benefits of conventional hire-purchase as
perceived by customers is statistically significant, thus hypothesis

IILIJI can be rejected.
TABLE 7.10:
Friedman Test to Rank the Various Reasons of Benefits Gained From Using
Conventional Hire Purchase
Easy instalment payments 3.9615 59872 6.04 1

.
Clear procedure 3.7692 90808 5.75 2
.
Free consultation and enquiries 3.8077 56704 5.48 3
.
Speedy processing and approval 3.6923 88405 5.35 4
.
Friendly customer service 3.6923 92819 5.25 5
.
Free processing 3.3077 1.19228 4.65 6
Low monthly instalments 3.3846 1.02282 4.60 7
Attractive financing terms and conditions 3.4231 94543 4.46 8
.
Lower rates of bank's return 3.0769 97665 3.42 9
.
Note: Mean values - scoring: 1= strongly disagree; 5= strongly agree
Tile correspondingmean rank table as depicted in Table 7.10 further demonstrates
that respondentsmostly rank factors associatedto convenience and unambiguous

transaction procedures and processes as the main benefits obtained from using
conventional hire-purchase facility. To be more specific, tile highest ranked benefit
perceived by the respondents is 'easy instalment payments', followed by 'clear
procedure', 'free consultation and enquiries', 'speedy processing and approval' and
'friendly custorner service', which are ranked second, third, fourth, fifth and sixth
respectively. This finding implies that customers who prefer conventl ire-
purchase to AITAB facility perceive that AITAB does not provide more satisfactory
level of benefits in terms of convenience and clear procedures as compared to
conventional product. This necessitatesbanks to improve their business strategy

especially with regards to repackaging AITAB facility to satisfy tile clients' need by
reducing elements of ambiguities relating to documentation and procedure.
180
7 Ctstorners' Perception of AITAS in kWaoia
On the other hand. similar to the earlier findings. consumers who prefer conventional
hirc-purchase also rank 'lo,%,.
-cr rates of bank's return' lowest among other benefits
gained. This again substantiatesour claim that consumersdo not emphasize on returns
or pncing issues, rather they are concerned more with convenience and anibiguitN-
free transaction. Therefore. banks should endeavour to emphasize on reducing any
elementsof confusion that may anse from AITAB facility especially with respect to
documentation and procedural matters. This can be done by taking effort to educate
the customers about the products and adequately explain to them about vanous issues
pertaining to contractual obligations and procedures.
*7. ';
(1*FN IR %I PF R( IPI ION I()%% %RD's %IT %B
I ills 1""i"! ; :, .1c latistical approach i. e. incans and standard

deviation. The study airns to assessthe consensus among respondents by way of
extracting their overall views on Al FAR In the final section. a non-parametric Mann-
'-hitncy I *-Tcst is also adoptcd to test any association between each statement and
preferences of AIT. All
7.5.1 ('u%1omcr%' (tcncral Perception of %IT %B
,1() cliabic 111C

stik! ', '0 . Ithcr
a QC11cral ol I rcspondcnIs' pcrccption to\\ ards
k)\cl\lc\\
\ITAB. fi%-cdifferent statements%%ere
posed to theni. The statements are measured
, il a fi%-cpoint I. ikcrl--. cale (frorn I- strongly disagree to 5= strongly agree). Table
711 dewribc,; '
rcqsoYidcw,, ,wcTccpiionon Islamic Ifire Purchase.
I %III F -. 11:
( lencral Perception% tom-ard-s AFFAB

Staterrm ts Disagree Do not Agree Mean Std.
know Dev.
10 19 7 79.3 41527 0.76516

guideoovs
2
AI TABis a good &NpmSWvf,, purrhase 00 21 1 789 4.0837 0.70912
3 AITAB is rx)f much ddh-rpnf frcvn
236 384 379 3.1626 0.97401
convenbonalhwe-purchase
AITAB is too COSVy 291 493 21 6 2.8818 0.93120
AI rAB is a farwncingmpitixi -1iaq
409 13 8 2.5764 1.00387
,,,, 4 14
-vim ,-, "1, - ; IQrpe
Isl
Chapter7 Customers'Perceptionof AITAS In Malaysia
Table 7.11 shows that the vast majority of the respondents (79%) agree with
StatementI that: "AITAB is in accordancewith SharVah". With high meansand low
standard deviation of 4.15 and 0.765 respectively, it indicates a strong consensus
amongst the respondents.This high response reflects the positive perceptionsamongst

the customers towards AITAB. It implies that customers have a high degree of
confidence on banks' current practices especially with respect to offering products

that are fully Sharl'ah-compliant. Therefore, banks must maintain their level of
integrity and take necessarystepsto ensurethat their practicesare in accordancewith
the Islamic principles. This in turn will ensurethe customers' loyalty and continuous
supportto the banks' operation.
Statement2 examinesthe perceptionsof respondentstowards the potential of AITAB
as an alternative to other financing methods.The statementstates:"AITAB is a good

to
alternative purchase". The mean for Statement2 turns out to be 4.08 which imply
that, in general,the respondentsagreewith the view that AITAB is a good alternative

to purchase transaction. This is confirmed by the fact that the majority of respondents
(79%) agree with the statement. Considering a relatively low standard deviation
(0.709) associatedwith the statement,it is believed that a conclusion based solely on
the mean score is adequate to measure the degree of agreement among the
respondents.
This particular finding substantiatesmany assertionsmade in the literature pertaining

to the various advantagesof AITAB to both parties of the contract, the customersand
the bankers. For example, as discussedearlier in Chapter 3, among the advantages
that banks can gain from offering AITAB is lower credit risk since it is an asset-
backedtransactionand ensurethe security of the underlying assetsdue to the retention
of title by the owner at the sametime offer the prospectsof an attractive rate of return
(seefor example in Pervez 1990; Fisher 1993). On the part of customers,they can also
the benefits of having a fixed-rate facility 127 to financing
gain as opposed other
facilities. Hence, AITAB adds to the list of financing product menu that customers
can chooseat their convenienceand preference.
"' In other word, AITAB is a non-floating rate facility. With a fixed-rate facility, the customers
can
plan aheadthe payment of instalmentsand managetheir resources.
182
Additionally, Statement 3 examines perception of respondentsabout the nature of

AITAB vis-h-vis conventional hire-purchase.The statementsstates: "AITAB is not
much different from conventional hire-purchase". Referring to the Table 7.11, there
are mixed responsesobtained from the The

respondents. mean score is 3.16 and the
standard deviation is 0.974. About 24% disagree with the statement, while the
percentagesof those who 'agree' and 'are not sure' are quite similar. About 37.9%
agree with the statement, while 38.4% do not know or unsure. In total, those who
responded 'agree' and 'do not know' represent 76%, implying a vast percentageof
respondents incline to be of the opinion that AITAB and conventional hire-purchase
are similar. This is not a surprising result, since there has been much argumentsand
scepticism amongst the practitioners and Shadah scholars that AITAB resembles
conventional hire-purchase.However, this does not preclude the need for banks to
the
ensure authenticity of AITAB so as to comply with all the necessaryrequirements
specified by the Shadah principles, especially pertaining to issues like
documentation,possessionof assetand pricing to avoid any elementof rib!!.
Furthermore,Table 7.11 also depicts diverse responseson Statement4 which states:

"AITAB is too costly". Majority of respondents(49%) seem to be unsure about this
issue. There is a reasonablebalance of opinion amongst the respondentsbetween
those who agree (22%) and those who disagreed (29%). This result further
substantiates our earlier finding that customers do not really care much of the cost and
price issues, rather they care more about other aspectslike convenience and easein
the transactions.
When askedtheir opinion whether AITAB is a financing method of the last resort, the
majority (45%) disagree while only small minority agreewith the statement.Another
41% are indifferent. The mean for Statement5 is 2.58, while the standarddeviation is
1.004. It indicates, in general that, the respondents disagree that they commit to
AITAB as a last resort. In other words, it implies that the customers commit to
AITAB basedon their careful examination about the cost and benefit associatedwith
AITAB comparedto other products. This signals the potential of AITAB to appeal to
those customerswho really shop around for the most attractive products. Hence, as
argued before, bankers need to package AITAB in an attractive manner that can
183
StHnUlate the public interest towards the product, These include efforts such as
rigorous marketing, advertising and education programnics that can Further enlighten
the general public about the product and its benefits.
7.5.2 Mann-Whitney U-Test
that customers who prefer AITAB ranked higher for all tile statements
It IS PrCSLImecl
posed to thern than those who prefer conventional hire-purchase. Accordingly tile
Mann-Whitney U-Test is conducted. Since the U-Test is a two-tailed test, tile null and
alterriative hypotheses are stated as follows:
H,: The mean ranks of customers jvho prcfer AITAB and customers
ivho prcfer conventional hire-purchase are equal for all the

statements (Statement I to 5)
H,: The mean ranks of customers who prefer AITAB and custonters
it,ho prefer conventional hire-purchase are not equal for all the
statements (Statentent I to 5)
io, and ujo represents the mean ranks (mean degree of

It(,, 117, US,
Where it, It 7.111,114,115,
importance) Statement 1,2,3,4 and 5, for both customers who prefer AITAB and
thosewho prefer convcntional hire-purchaserespectvely. The results are presentedIn

Table 7.12.
TABLE 7.12:
Mann-NN"hitney U-Test of Association between each statement and

Preference for AITAB
I ean Std. Prefer I--I

Statement N Mean Rank Prob.
Score ,I Dev ? U
. z value Asym
value
AITAB is in accordance with AITAB 181 ul= 107.54
SharT'ah guidelines 4 15 0 765 - 987.5 0.000
. . CHP 22 -4.145
U2= 56.39
AITAB Is a good alternative AITAB
ITAB 181 U3=107.68
to purchase 4 08 0 709 96 3 0 0.000
. . CHP 22 . -4.298
U4= 55.27
AITAB is not much different AITAB 181 U5= 101.78
from conventional hire- 3 16 0 974 - 1951.0 161 0.872
. . CHP 22 -.
purchase I u6= 103.82
4 AITAB is too costlY AITAB 181 U7= 100 .14
2 88 0 931 1654.5 0.164
. . CHP
CP 22 -1.390
u8= 117.30
1
5 AITAB is a financing method AITAB 181 ug = 97 .30
of last resort 2 58 1 003 1141.0 3.444 0.001
. . 22 ujo= 140.64
Note: *1= stronqly disaqree; 5= strongly agree, N= 203
184
From Table 7.12 above, it is evident that customers who prefer AITAB to
conventional hire-purchase have higher mean scores for Statement 1 and 2 which
implies they agree more strongly with the two statements than those who prefer
conventional hire-purchase to AITAB facility. The z values for Statement 1 and 2 are
and -4-298 respectively which is higher than the critical valuesOf ZO. "'z 1.96.
-4.145 025
Hence, the null hypotheses that the mean rank of customers who prefer AITAB and
customers who prefer conventional hire-purchase are equal for Statement 1 and 2 can
be rejected. These variations on the mean ranks are likely to hold in the population,
since the observed probabilities (0.000) are lower than the 0.05 significant levels.
Therefore, it can be inferred that, only respondents who prefer AITAB to
conventional facility have strongly agreed with the Statement 1 and 2. In other words
customers who prefer AITAB are really concerned with the Sharlah-compliance
aspects of the product and perceive AITAB as a good financing alternative.
Furthermore, the results in Table 7.12 reveal that customers who prefer conventional
hire-purchase to AITAB have higher mean scores for Statement 5. This implies that
they only consider AITAB as the last resort for financing. The z values for Statement
5 is -3.444 which is also higher than the critical valuesOf ZO. 1.96.
-_
025 Hence, the null
hypotheses that the mean rank of customers who prefer AITAB and customers who
prefer conventional hire-purchase are equal for Statement 5 can be rejected. These
variations on the mean ranks are likely to hold in the population, since the observed
probabilities (0.000) are lower than the 0.05 significant levels. This finding can be
expected since the customers who do not really prefer AITAB would naturally opt the
facility as the last alternative.
On the other hand, Table 7.12 reveals no significant differences in opinion between
those who prefer AITAB and those who opt otherwise on Statement 3 and 4. This is
supported by the results of z values for Statement 4 and 5 which are -0.161 and - 1.390
respectively which is lower than the critical values Of ZO. "Z 1.96. Hence, the
025 null
hypotheses that the mean rank of customers who prefer AITAB and customers who
prefer conventional hire-purchase are equal for Statement 3 and 4 cannot be rejected.
These variations on the mean ranks are not likely to hold in the population, since the
185
Chapter 7 Custom(v, ' I I(viception of Al TAB in Malaysia
observed probabilities (0.872 and 0.164, respectively) arc higlicr than the 0.05
ifi
sIgm icant levels.
7.5.3 Respondents' Choice in the Future
As a concluding remark, the final question was posed to thern in order to Inquire the"'
preference in the future, whether to use AITAB or conventional hire-purcliase. The
results are illustrated in Table 7.13 below:
TABLE 7.13:
Cross Tabulation of Preference to Use AITAB or Conventional Hire-Purchase by

Experience of Using Conventional Hire-Purchase
From the abovetable, 89% OLItof 203 respondentsprefer AITAB; while only II IN,(22
respondents) said they are going to choose conventional hire-purchase. AnIong tile
respondents who prefer AITAB to conventional facility, 92% have experienced
conventional hn-e-purchase. This finding affin-ris the previous result of the Mann-
Whitney U-Test that a large majority of respondents (181) have indicated their
prcference of AITAB to conventional hire-purchase; while only 22 of than prefcr
otherwise.
The above results describe a large majority of respondents who have Lised AITAB
facility decide to apply for the sarnefacility in the future. The most significant finding
is, almost all conventional hire-purchase users are now thinking of subscribing
AITAB facility in their fUtUre financing application. These outcomes do not only
prove an increasing level of awareness of AITAB facility aniong the customers, but
also show that Islamic financial institutions have managed to provide competitive
Islamic products (In this case, AITAB facility) which are able to offer satisfactory
services and benefits to the customers' demand.
186
7.6 SUMMARY
This chapter has discussedresults of questionnaire survey conducted among 203

AITAB customers.The level of customers' satisfaction of AITAB is assessedin the
first section, which reveals that a large majority of them are satisfied with AITAB.
This shows a strong potential of AITAB to be further developed into a more
competitive and attractive Islamic banking product that can appeal to various groups
The
of customers. secondsection analysesthe perceptionof conventional-experienced
customerstowards the conventional hire-purchasefacility. Most of them appearto be
satisfied with the facility because it is convenient and absent from ambiguity in
documentation, procedure, processing and payment system. The third section
examines comparative views given by respondentswho have experiencedusing both

AITAB and conventional facilities. A vast majority of them feel that AITAB has
given more benefits as compared to the conventional facility, mainly becauseof its
compliance to Sharl'ah principles. Finally, the respondents'overall views of AITAB
are studied, whereby they highly regard it as Sharf'ah-compliant product and a good
financing alternative to purchase an asset. These encouraging views are further
supportedby their widely-held preferenceof using AITAB in their future dealings.
Overall, the results presentedin this chapterprovide a strong signal to the bankersthat
efforts need to be intensified in educating the public about the distinctive
characteristicsof AITAB and how it may suit the interest of customers in financing
their assets.There is a huge potential of AITAB to be marketed to various segments
of customerscomprising those who are concerned with the legitimacy of the facility,
and those who seek for convenience and less complicated transactions. This again
relates to the importance of simplified and ambiguity-free documentation and
procedures in the transaction. Banks must also ensure their staffs are adequately
trained to handle customers' enquiries and provide sufficient explanation about the
facility.
Following the above analysis, the next chapter will present an analysis of interview
data which involve AITAB providers and experts in Islamic hire-purchase
transactions.
187
Chapter 8
OPERATIONAL AND REGULATORY FRAMEWORK OF

ISLAMIC HIRE-PURCHASE IN MALAYSIA
(ANALYSIS OF INTERVIEW DATA)
8.1 INTRODUCTION
This is the core chapterwhich presentsan analysisof the legal framework for Islamic
hire-purchase (AITAB) business in Malaysia. The chapter analyses information
obtained from face-to-face semi-structured interviews which were carried out to

gather primary data for this study. The interviews were conducted from 1Ph May
2004 till 27thJuly 2004, involving forty-six respondents(details are given in the next
section). Interviews serve as the most significant data and essentialinformation in the
methodology of the study. The groups interviewed were all important individuals in
their organizations, which make them key persons and experts in their respective
areas.
The purpose of employing face-to-faceinterviewing is to get first-hand information
and clear insights into what the interviewees perceive from their experiences in
AITAB transaction, and their opinions in related issues. Perceptions of the
intervieweesrepresentdiverse observationsof interestedand disinterestedindividuals
AITAB operation in Malaysia128 The data to their is based
about . used explain opinion
on transcripts from interviews. Some interview questions are structured to generate
standard answerscapable of being quantified in terms of facts and figures. As a part
of interviewing, an examination of statutes is also made, with special reference to

Hire-Purchase Act 1967 and the draft of Muamalah Hire-Purchase Bill being
currently debated within the official circles in Malaysia. Both regulations are
in
examined order to identify their strengths, limitations, and possible impact on the
legal framework.
"' The intervieweescomprisedindividuals who directly and indirectly involve in Islamic hire-purchase
business.Some of them have special interest in the operation becauseof their involvement, either as
bankers,or Shadah advisors,or legal practitionersdealing with hire-purchasecases.
188
Chapter 8 Operational and Regulatory Framework of Islamic Hire-Purchase in Malaysia
8.2 INTERVIEWEES' CHARACTERISTIC
A series of 46 independent interviews has been carried Out with each one of' 46
Islamic banking experts from different institutions and positions who have
participated in the interviews. They are categorized into six groups, based on their
expertiseand involvement in AITAB transactionin Malaysia. The sample consistsof'

12 bank officers, 9 Shai-T'ahadvisors, 8 Shai-T'ahscholars, 8 economists, 6 legal
3
experts and goverriment officers. The researcher
could have done group interviews
with selectedinterviewees' group, but decidesto take their views individually so as to
get a maximum independent observation from each interviewee without being
illflUcriced by others. These independentobservationsand views will give a special

quality to the data provided by this study. Table 8.1 provides a breakdown of
by
interviewees group, position, and expertise.
TABLE 8.1:
Profile of Interviewees
Group Position Expertise

Bank Officer I Head, Islamic Banking Division Asset Financing
(12 officers) Deputy General Manager, IBD Non-Muslim customer of Islamic Banking
Executive Hire-Purchase (AITAB) Section AITAB (Islamic hire-purchase
Executive, Hire-Purchase Department Credit

Manager Islamic Banking Division
Manager Islamic Banking Division Consumer Financing
Manager (CMB) Amanah Finance
Assistant Vice President, Head of IBD Islamic Banking
Assistant President, Business Banking Unit, Islamic Banking
Islamic Banking Division
Senior Manager, Business Development IBD Islamic Banking
Sharf'ah Deputy Rector Student Affairs HUM Islamic Jurisprudence, Islamic Banking and
Advisor Finance, Shar0h, Islamic Medical Law
(9 advisors) Very Distinguished* Academic Fellow SharPah, Ma'afnalah
Ahmad Ibrahim Kulliyyah Of Laws HUM
Vice President ANGKASA Islamic Law, Islamic Bankingand Finance
Department of Private Law, Company& Securities,IslamicLaw ot
Ahmad Ibrahim Kullivvah Of Laws HUM Transaction,Islamic Bankinqand Finance
Ahmad Ibrahim Kulliyyah Of Laws IIUM Finance

Distinguished* Lecturer in Law, UKM Islamic Law
Head of Sharie Judge SharVah, Islamic Banking and Finance
Department of Shaffah Judiciary Malaysia
Director of Institute of Islamic Understanding Islamic Law, Islamic Banking and Firimico
Malaysia (IKIM)
Department of SharT'ah,LIM Muan?alah
-I
189
Chapter 8 Oper, itional ind Rvqul, itory Ff. mwwofk tit J, mm I Itif, I Itin lix., i(i M. ihy, o, i
se
Shari'ah Associate Professor, Islamic Jurisprudence, Islamic Transaction
Scholar Islamic Law Department HUM
(8 persons) Director, Professor in Islamic Jurisprudence, Islamic
International Institute for Muslim Unity Economics
Assistant Professor, Islamic Law, Islamic Transaction
Islamic Law Department HUM
Associate Professor,
Department of Shadah, UKM
Assistant Professor, Faculty of Economics & Islamic Jurisprudence, Islamic Law,
Management Sciences, HUM Islamic Economics
Assistant Professor, Faculty of Economics & Fiqh, Usul Fiqh, Siyasah Shar'iyyah
Head, SharT'ah and Economy Department, Islamic Law, Islamic Economics

um
Associate Professor, Centre for Islamic Islamic Jurisprudence, Islamic Banking
Economist Professor in Economics Islamic Economics, Bankinq and Finance

(8 persons) Professor, School of Finance & Banking Economics, Finance and Banking
Northern University of Malaysia
CEO IBFIM Islamic Transaction, Shwi'ah, Economics
internal Research Fellow for Centre of Fiqh Islamic Transaction, Shariah, Economics
Executive Director BIMB Securities Economics, Islamic Banking and Finance
Head of Islamic Banking and Finance, Finance, Islamic Banking

Faculty of Business Manaclement, UiTM
Bank Islam Malaysia Berhad (BIN

Legal Expert Associate Professor in Law, HUM Islamic Banking and Finance
(6 experts)
Associate Professor in Islamic Law, UM Islamic Contract, Succession, Zakat, Islamic
Law
Head of Sharie** Judge,
SharT'ahCourt, State of Kelantan
Project Manager IFSB, Corporate Islamic Banking and Finance, Corporate
Governance
Partner, Zul Rafique & Partners
- Government Bank Negara Malaysia Business and Economics
off icer JAKIM Prime Minister Dept Sharf'ah
(3 persons) Ministry of Domestic Trade and Consumerism Law
1111)- [,Jainc kanking,Oiiston
JIUM - Intcrilational Islamic (1111%clsity Malaysia
jjM -jjnivcrsityofMalaya
UKM - National ( Jnivcrsity ofMalaysia
tJi)M-I'Liti-atJiiici-sityot'Malaysia
I Ji'I'M- Institute 01"I-CCIIIIO]Ogy Malaysia
1131; IM- Islamic Banking and Finance Institute ofMalaysia
Distinguislicd lecturer is a special title given by Malaysia universities to senior and Outstanding acadernic staff'
Sharie is an adjective of Shart'ah
190
Chapter8 Operationaland RegulatoryFrameworkof IslamicHire-PurchaseIn Malaysia
8.3 THE STRUCTURE OF INTERVIEW DATA
Interview transcripts have been examined and analysedusing the study's research
objectives as basic guidelines, bearing in mind that the main objective of this study is
to examine the current concept and application of AITAB transaction in Malaysia

from legal, practical and social perspectives.Accordingly, this chapterwill presentthe
results of the interviews, based on a set of questions(refer to Appendix B). The results
are analysedand then summarised in the final section. The presentationof the results
is made within seven broad sections indexed by relevant interview questions. The
following discussion introduces basic interviewing questions to show their
consistencywith the researchobjectives and set the scenefor the interviewing result
as they are demonstratedin the later sections.
interview Question (1): "From your experienceand understanding,please explain

the operation of1slamic hire-purchase (AITAB) in generar'
This question is consistent with a research objective which aims to obtain a clear
insight of AITAB practices from the providers and experts in AITAB business in
Malaysia.129 Although Islamic hire-purchase (AITAB) is well-defined in the
literatures,yet it is a relativelynewproduct,andthereforeit is worthwhileconsidering
how it is viewed by different interviewees. The analysis of interviewees' opinion
reflects two broad categories of interviewees; practitioners and non-practitioners

dependingon the extent of their involvement in the actual operation of AITAB.
Interview Question (2): "From your opinion, to what extent has Islamic hire-
purchase (AITAB) beenacceptedby the bank customers?"
This questionwas already askedto the bank customersin order to examine the extent
of their of
awareness130 AITAB facility and their responsesare presentedin Chapter
7. It hasbeen found that majority of the customersstrongly acceptAITAB facility and
decide to continue using it in the future. In this chapter the same question is re-
129Refer to the research objective (a) in Chapter 1.

130This type of question is developed to several other questions
which are addressed to the customer in
order to know their ways of getting to know Islamic hire-purchase facility, their first impression
of it,
level of satisfaction with the facility, their possible choice between Islamic and
conventional facility in
the future etc.
191
addressedto the interviewees comprising the bankers and other experts in AITAB.
The objective is to assesstheir relative awarenessof the customers' acceptanceand
perception towards the facility and at the same time confirrn the previous findings
131Again, the results will show that the extent of their
about customer acceptance.
involvement with the public or users of AITAB facility does influence their opinions
in this issue.
interview Question (3): "Are there any pertinent problems arisingfrom the current
practice of Islamic hire-purchase (AITAB)? If yes, could
you please explain such problem(s)? "
This question is formulated in line with a researchobjective which aims to identify
problems faced by the customers and management in the provision of AITAB

132
transaction. Out of these responses,some problems have been clearly identified
with the implementation of AITAB; such as, negative customers' attitude,
inexperienced bank officers, non-cooperative dealers, strong competition in the
market and some pertinent issuesrelating to the basic concept of the facility.
interview Question (4): "How is Islamic hire-purchase (AITAB) legally operated

now? "
The interviewees' opinions on the legal implementation of AITAB in Malaysian

financial institutions starts from this section, which is then followed by succeeding
sections examining other legal issues in more detail. This question is based on the
research objective to critically analyse the implementation of AITAB in Malaysia in
legal 133It is interesting to how the interviewees
procedural and aspects. see perceive
the current legal framework of AITAB's operation, and the reasonsfor this situation.
Interview Question (5): "Do you find Hire-Purchase Act 1967 adequate to govern
the operation ofAITAB? "
The analysis of this question is basedon a researchobjective to prove the inadequacy
of Hire-Purchase Act 1967 as a mean to regulate a fully legitimate AITAB transaction
"I This questionis designedin line with the researchobjective (c).

132Refer to the researchobjective (e).
131Refer to the researchobjective (b).
192
to SharVah 134The result reveals that relatively half of the

according requirements.
intervieweesobserveHPA as inadequateregulation for AITAB transaction.From the
obtained, this section further examines the strength of Hire-Purchase Act

responses
1967 and its provisions which are in conformity with Shadah. It also presentssome
deficienciesof HPA within Sharf'ah application.
interview Question(6-9):
(6) "Do you think Islamic hire-purchase (AITAB) should be governed by a
specific Sharl'ah law? "
(7) "Nat is your opinion of the Bill?
(8) "Nat are your suggestionsto provisions that need to be included in the
Mu'amalah Hire-Purchase Bill? "
(9) "nat are the impedimentsof implementingMuamalah Hire-Purchase
Bill in Malaysia? "
Basedon the the

above questions, analysisis done in the light of researchobjective to
suggest a workable SharVah framework of AITAB transaction to be properly

implementedin the Malaysian financial 135
system. From the interviewees' responses,
the current position of the Muamalah Hire-PurchaseBill is highlighted, covering its
advantages, its impact on the Malaysia legal system and some practical impediments
of its implementation.
interview Question (10): "How do youforesee thefuture ofAITAB? "
Finally, the above question was askedin achieving the researchobjectives to inquire
into interviewees' opinions and expectationstowards AITAB in the future."" Their
responsesare diversified based on their involvement in the transaction,but all of them

are generally confident that the future of AITAB in Malaysia is very promising.
Having outlined the importance and expected contribution of each subject analysis,
the following chart describesthe flow of discussionin this chapter:
Refer to the researchobjective (g).

134
Refer to the researchobjective (h).
135
Refer to the researchobjective (d).
136
193
Chapter 8 Operational and RegLilatOly F rarnewoik (A Nmiw, I 0w Pur( in M. il, iy,, i; i
FIGURE 8.1:
Flow of Analysis Discussion
C tomers'Aftitude Deal
Non-cooperative
Documentation
ublic
Acceptance to
AITAB Competitionin Market
Operation of Ownership
Islamic
AITAB Problems of
Implementing Transferof
AITAB Ownership
Deposit
--------
INTERVIEW Latepenaltycharges
ANALYSIS
Future of Governing Law
Islamic for Islamic
AITAB Hire-Purchase
Hire-Purchase Mu'amalah
I Strengths Act 1967 Hire-Purchase
Bill
Shari'ah-compliant
Provisions
I Deficiencies I
Advantages Proposed Impact to
Provision Malaysian
Legal System
Impediment of
Implementation I
Current Position
194
8.4 OPERATION OF ISLAMIC HIRE-PURCHASE (AITAB)
This sectionprovides an overview of how AITAB is operatedand implemented from
the perspectivesof the interviewees. All interviewees were asked about the mode of
operation of AITAB as practiced by Malaysian financial institutions. Interview
question (1) is an open-ended question, thus giving a very wide room for the
interviewees to respond on the basis of their experience,knowledge and extent of
involvement in the transaction. Conveniently, their responsesare presentedfrom two
main perspectives; practitioners' and non-practitioners'. The practitioners consist of

137
bankers and SharVah advisors who involve directly in the operation of AITAB;
while the rest of interviewees are categorisedas non-practitionersdue to their indirect

involvement in the operation. Their respective opinions are summarized in the
following points:
8.4.1 Operation of AITAB from the Practitioners' Perspectives
The practitioners comprising bankersand SharVah advisorsperceive AITAB as a new
product that combines lease and option to purchase. They also describe it as hiring
ending with ownership whereby the ownership is transferred gradually to the
customer. It is widely applied in consumer and corporate financing, particularly in
vehicle and machinery financing.
The interviewees describe that in actual operation, when an asset is leased out, the
customer pays instalments, and at the end he will purchase the asset from the bank.
Before an application is approved, the bank usually examines background of
applicants and their credit rating before this facility is granted to them. Some banks
authorise their customers to find the asset supplier. The bank will assess the
application from managerial, technical, marketing and investment perspectives.
During the operation, the bank will not take any risk of getting it back becausethat is
not the intention of the transaction. Bank only aims to help the customer to own the
asset and at the end it will be passed to the customer by selling it at a nominal amount.
In someinstances,the monthly payment is treated as part of the purchaseprice which
137SharVah advisors directly involve in the operation of AITAB when serving for Islamic financial
institutions. They have a wide experienceand knowledge of Islamic banking system, the products,
regulation and the role of Central Bank as a supervisorybody.
195
the last instalment,in nominal amount, constitutesthe sale.The transfer of ownership

at the be
end can affected in two ways; firstly, as mentionedearlier, final payment is
treated as purchasing the asset,or secondly, upon satisfying final payment, asset is
given as gift (hibah). In determining a selling price, this facility applies the concept of
cost plus mark-up (murdbahah); for example, cost price of a car is 100,000 and profit
is 50,000, so the selling price is 150,000.If period of payment is 10 years, monthly
payment will be calculated by dividing the selling price with an amount that is
from timing the period of paymentwith 12 138
months .
resulted
The practitioners confirm their knowledge of the operation of any Islamic products,
including AITAB being supervisedby the Central Bank of Malaysia (Bank Negara
Malaysia). In fact, the Central Bank has put certain guidelines to financial institutions
offering Islamic products. If the institutions are to offer any Sharl-ah product, they
must obtain an approval from Islamic Banking Department of the Bank Negara.
However, finance companiesare not bound by this regulation, as they may have to
follow their own -SharVah advisors in any matter pertaining to Islamic products.
SharVah advisors should include experts who are able to supervise the operation of
the company, and report cash flow, sourcesand application of fund with auditors'
assistance.
The practitioners have assertedthat many financial institutions prefer AITAB contract
to conventional facility because there are additional documents authorizing them to
hold the ownership of asset until full settlement. Thus, bank acting as beneficial
owner and financier, will have an ownership claim over the goods. Today, most
financial institutions really want to be all-out in AITAB operation becauseit confers
more benefit to the institutions and customers, in terms of lower Islamic default rate
of only 2% and comparatively low overdue interest of 1%. In some institutions,

default rate is less than 1%, probably becauseof the religious element, for example, a
customer who plans to perform pilgrimage (qjj) will pay on time in order to have a
in
peaceof mind the pilgrimage.
To illustrate calculationof monthly payment;

Sellinji price 150,000 = LO
-= 12
(Periodof paymentx 12 months) (10 x 12)
196
8.4.2 Operation of AITAB from the Non-Practitioners' Perspectives
The non-practitioners (Shadah scholars, economists,legal experts and government
officers) view that the purpose of introducing AITAB facility is to give an Islamic
alternative to hire-purchase financing for bank customers, especially Muslims.

AITAB is usually applicable for a customerwho wants to buy very expensive assets,
for instancemachinery. By utilising AITAB facility, the bank will buy it on behalf of
the customer, and then lease it to him. However, some of the non-practitioners are
scepticaltowards AITAB as offered by banks today, because it is not in real sense,an
Islamic compliant product as it still bears elementof interest.A true model of Islamic
hire-purchasecan be a headacheto bankers.It requiresbank as owner to maintain the
asset and fulfil other obligations, including paying insurance, road tax and cost of
maintenancesuch as changeof engine oil, car park, exhaustpipe etc. However, if the
customer causesdamage to the asset through negligence, he shall bear the cost of
repairing it.
in term of comparisonwith conventional facility, the non-practitioners observedthat

there is not an essentialdifference between AITAB and conventional hire-purchase,
except for the following:
" formal prohibition of the interest element
" requirementfor a hiring contract at the beginning

" Requirementfor a sale contract at the end.
" Signing of an acceptanceletter (Aqd letter) to indicate the parties' intention of
acceptingthe terms of agreement.

However, they arguedthat the operation of AITAB as practiced today doesnot follow
the principles of SharVah due to non-existence of Islamic hire-purchase law. It is
strictly governed by Hire-Purchase Act (HPA) 1967, in which some terms are in
conflict with SharVah principles.
Economists who have experiencedworking with Bank Islam (first Islamic bank in
Malaysia) refer to the bank's involvement in AITAB transaction. Although Bank
Islam introduced AITAB facility, the bank doesnot continue operating the facility due
to someproblems. One of the problems is difficulty in operating a Sharl'ah -compliant
hire-purchasetransaction as the one which is currently operated is a form of finance
197
lease that is still debateableamong the Sharf'ah scholars. Alternatively, the bank
resorts to deferred payment sale concept (bay' bithaman djio in its car financing
scheme.
Government officers representing three government bodies139 are involved in

supervisionof the facility's operation.They assertthat they endeavourto improve and
develop the AITAB facility from conceptual and legal aspectsso that the facility
becomes more Shar-iah-compliant and at the same time, competitive to its
conventionalcounterpart.
To conclude, the above information reveals how AITAB is currently operated from
the practitioners' and non-practitioners' perspectives.
9 Practitioners have given a practical insight of the operation from the providers or
suppliers' perspectives. They prefer AITAB facility to others for the ability to
maintain ownership throughout the period of the transaction,making it possible to
repossess the asset upon default and also the lower rate of default among their
customers.
highlight somevital issuesin the transaction,like executingtwo
Non-practitioners
contracts in sequenceand intention of the party. They emphasizethe importance
of having a separate law for AITAB so that the transaction can comply with the
true spirit of ShaWah. They criticize the current operation of AITAB for not
observing the principles of Sharf'ah. They conclude that, unless the authority
comeswith a legal solution, this problem will continue to subsist.
139Ministry of Domestic Trade and Consumerism,Central Bank Malaysia

of and Islamic Development
Departmentof Prime Minister Department(JAKIM).
198
8.5 CUSTOMERS' ACCEPTANCE OF AITABFACIIATY
All interviewces were asked to give their views, based on their knowledge and
experience, on the extent Of CLIstorners'acceptance of AITAB facility. As mentioned
in the earlier section, the question airris to assess their relative awareness of
customers' acceptance and perception towards the facility. Tile interviewees are
offered a choice of three answers-, "well accepted", "not well accepted" and "don't
know". Table 8.2 below illustrates their responsesto the question.
TABLE 8.2:
Cross tabulation of Customers' Acceptance by Interviewees' Profile
Extent of Customers' Ac eptance

Interviewees Well Not well Total
accepted accepted Don't Know
Bank's Officers N 12 0 0 12
100.0 100.0
.0 .0
Shari'ah Advisors N 8 0 1 9
88.9 111 100.0
.0
Shau'ah Scholars N 8 0 0 8
0
/,o 100.0 100.0
.0 .0
1%, 100.0 100.0
.0 .0
Legal Experts N 3 1 2 6
50.0 16.7 33.3 100.0
Government Officers N 3 0 0 3
/0
100.0 1 100.0
.0 .0
Total N 42 1 1
3 46
91.3 2.2 6.5 1000
1
The majority (91'//(,) \,ic\\, that this facility has been well accepted by the customers;
which are unanimously agreed by bank's officers, Shtn-Vah scholars, economists and
bank officers. This result confinns the previous findings that 87% of tile customers
AITAB facility. 140 oil tile hand,
are satisfied with other only 2% observes that the
facility is not well accepted. Apart from the above views, nearly 7% interviewees are
unaware of customers' acceptance to the facility. They include a ShtiWah advisor and
ShtirT'ah judges. According to them, their duty as judges and SharT'(Ih advisor who
decide plenty of cases or Shw-T'ah rulings do not expose them to such details as the
extent of customers' acceptance to AITAB facility.
14"Detail analysis of customers' acceptance to AITAB has been discussed Chapter 7.

in
199
During the interview, the interviewees illustrate in more detail the extent of
customers'acceptance to AITAB facility. Their opinions are summarizedas follows:

(a) Islamic hire-purchase or Al-Ijdrah thumma al-bay' (AITAB) is a name
which capture a public acceptance.Muslim customers,who accept and

its it
understand operation, request as an alternative to conventional hire-
purchase.They will come to an institution which they know offering such
Islamic product. For example, many corporate customers come to Bank
Pembangunan (Development Bank) to purchase machinery through
AITAB facility, becausethey know the benefits that the facility has to
offer, for example, full margin of financing and lower penalty for late
payment.
(b) AITAB also gains support from the non-Muslims. In some institutions,
60% of their customers are non-Muslims, comprising the Chinese in
majority. They can seethe advantageof signing up AITAB, which is 1%

penalty for late payment, as compared to conventional hire-purchase
which imposes 8% penalty.141
(c) Apart from the above-mentionedtwo groups of bank customers, most
others,do not really care what schemethey apply or have applied, whether
Islamic or conventional products. The interviewees believe that many
customers are only interested to own a car and concerned with profit
margin of financing, not the natureof the financing contract. This could be
partly due to lack of awarenessand partly due to the pragmatic nature of
customerswho downplay the jurist value of the contract.
Some banks and finance companies do make effort to hold public awareness
campaignsto explain the benefits of Islamic products. The campaign is also aimed at
making dealers, who are the first contact group with the customer, aware of the fact
that almost all banks offer Islamic products. Some dealers and customers wrongly
think that only Islamic banks (Bank Islam and Bank Muamalat) offer suchproducts.
` This issuewill be discussedin the next section.
200
From the above discussion, the majority of the interviewees (91%) believe that
customersaccept the AITAB facility very well. They consist of all bank officers,
Shart-'ahscholars,economistsand governmentofficers. A very small number of them
(7%) who are not involved with customers are not aware of it. Three patterns of
customers' acceptanceare described; first, a well-informed Muslim customer prefers

AITAB to conventional facility; second, the facility also captures the non-Muslim
customers;third, uninformed customers usually disregardthe nature of facility as they

are more concerned with getting the goods as soonest as they could and the lowest
amount of payment offered by any facility. Therefore, the interviewees remark that
awareness campaign of Islamic products must be intensified for the purpose of
increasing public understandingand at the same time promoting Islamic banking to
the public.
8.6 PROBLEMS AND ISSUES IN IMPLEMENTING AITAB FACILITY
This section highlights the interviewees' opinions of problems faced by the parties
involved in AITAB business,comprising financial institutions, customersand dealers
in the course of implementing AITAB facility in Malaysian financial institutions.
Interviewees have expressedtheir concern with the manner of operating AITAB
facility. There are a number of crucial issuesrelating to the provision and conceptual
nature of the facility. Problems in the provision of AITAB facility include:
customer's attitude towards the facility,

inexperiencedbank officers,
non-cooperativedealers,
documentation,and
in
stiff competition the market.
In addition, focal issues relating to the conceptual nature of the facility are also
expressed by the interviewees. They cover such issuesas;

ownership
methodsof transferring ownership
depositpayment
in
penalty caseof default.
201
8.6.1 Customers' Attitude
This issue has been in

mentioned the previous chapterwhile assessingthe customers'
towards AITAB facility. Most interviewees, especially the bankers show
perception
their similar concernsin the issue. According to them, one of the problems faced is
customer'sattitude towards the product; some customersdo not really understandthe

basic differencesbetweenAITAB and conventionalhire-purchasefacility due to their
close similarity in the operation, documentationand legal action. Customers are also
in that AITAB is Shadah-compliant and how it
unable to comprehend what way
would provide them with a better scheme and prospect. Some customers say that
AITAB is anotherway of imposing interest, except for its name (al-ijiirah thumma al-
bay ) which soundsmore 'Islamic'.
8.6.2 Lack of Experience among Bank Officers
Bankers and SharVah advisorsreveal that lack of experienceamong bank is

officers a
in the operation of AITAB facility. The interviewees emphasize
prevailing problem
the importance of having a sufficient knowledge of the facility, in terms of how it
works, its differences from conventional facility, procedure in executing the

documents, and some advantages it offers. With sufficient knowledge and
information, bankerswill be able to explain to their customersas well as the dealers
the benefits they would gain if they sign up the Islamic facility.
8.6.3 Lack of Awareness and Cooperation among the Dealers
A dealer acts as a middleman between a financial institution and a customer. The
customer usually approaches the dealer first for the purpose of purchasing a particular
vehicle before applying hire-purchase facility at a financial institution. Bankers and

some SharVah advisors explained that the customer's choice between conventional
and Islamic financing facility depends mostly on the dealer's explanation and
recommendation of either the two facilities. A dealer of the Islamic facility will
mostly suggest AITAB to the customer and explain how the facility works, its
advantagesand differences from conventional facility, unless the customer decides

otherwise. However, not all dealers have such awareness,while others may simply
suggest using conventional facility because they view AITAB as unnecessarily
202
complicated. Realizing the importance of dealers' role and influence on the
prospective customers, some financial institutions which actively promote Islamic
banking regularly organisetraining or briefing sessionsfor their appointed dealersfor

the purposeof increasingtheir in
understanding the Islamic products.
8.6.4 Documentation
Tenn and conditions in AITAB agreementare designedby lawyers on the basis of the
Hire-PurchaseAct 1967 and principles of contract law, except for some modifications
made to these documents to comply with SharVah requirements. Therefore, the

documentation requirements of AITAB may seem more complicated than that of
conventional facility, because it involves additional document; acceptance (aqd)

142
letter Documentsmust be presentedbefore the customerin sequence;first, leasing
.
(y5rah) agreement,second, sale and purchaseagreement.The officers must explain
the terms, conditions, rights and liabilities in the agreement,the commencementand
expiry of agreement.If the customer understandsand agrees with the terms of the
agreement, he may then sign the The

agreement. customer must also be made aware
of the consequencesof signing every document, so that he understandshis rights and
obligations under the Islamic hire-purchase agreement. Some banks require a
customer to complete a bulk of documentsrelating to the facility. Such requirements
often burden the customer, especially when there is an error or mistake made by the
customer, which may cause delay in the processing of the application. This is one of
the reasons why some dealers recommend conventional hire-purchase in order to
speedup their customer's application.
8.6.5 Competition in the Market
Another challenge faced by AITAB facility is in the issue of competition vis-A-vis
conventional hire-purchase.The main issue here is how to penetrate into a market

which has been already occupied by the long-establishedconventional hire-purchase
142'Aqd letter is a supplementarydocument to the main Hire-Purchase Agreement. It contains the

descriptionof assetand undertakingsby the finance companyand customerin the following matters:
(a) that the AITAB transactionwill be bound by the Hire-PurchaseAgreementand Schedule2 of HPA,
(b) that the asseton hire-purchaseshall be usedfor purposeswhich do not contravenethe Shadah,
(c) agreethat Hire-PurchaseAct 1967shall be governedand is applicable to the transaction,
(d) that other provisions in HPA a1967 which do not contradict the Shadah will remain in effect for
both parties.
203
product. This is particularly true in the case of car financing whereby conventional
hire-purchasehas already established its name and reputation for so long in the
market. This naturally poses an enormouschallenge for AITAB to penetrate into the
market to appeal to customers who already familiar and have confidence in the
conventional product. The problem is further exacerbatedespecially when many

customers still perceive AITAB is really no different from conventional product
except in their use of religious or Arabic name to disguise the current established
143 Similarly, the dealers and bankers are more accustomed with
practice.
conventional hire-purchase mechanism. With the lack of religious conscience, they
may opt to offer customer the conventional product instead of Islamic one, not only
becausethey are more familiar with the conventional transaction and mechanism but
also they feel both products are actually identical, hence, less complication and more
convenience. Another arising issue with respect to competition is cost-efficiency.
Naturally, as a relatively new product, AITAB faced a challenge on how it can be
offered at a lower cost compared to its counterpart. Since AITAB requires more
documentsand paper works to be filled by both parties, the cost issue will pose an
inevitable challengeto banks.
8.6.6 Ownership
In Islamic hire-purchase,bank is required to hold the ownership of the assetbefore
renting it out to the customer. Ownership is vital as it representsthe extent of rights

and liabilities of the parties involved in hire-purchase agreement.As an owner, the
bank will have to be a purchaser of the asset which requires certain marketing
expertise. The bank will also have to maintain the asset, bear all costs associated
therewith, and dispose it
of when the asset is no longer needed. According to the
interviewed SharTah scholars, any leasing contract that absolves the bank from all
these activities will violate the Shadah principle of leasing (Ydrah) and thus, should
be avoided; otherwise, it will fall into the category of conventional financial leasing
which is not permitted in Sharl'ah. Also as a consequence of holding the ownership,

bank will assumecertain risks, responsibilities and liabilities that most banks would
attempt to avoid them as much as possible. In the current AITAB practice, almost all
"' This fact is confirmed by one of the findings in Chapter7 that many customers
realize both AITAB
and conventional hire-purchasefacilities are identical.
204
liabilities and risks attached to the asset are borne by the customer. The clearest
example is maintenanceresponsibility which is undertakensolely by the customer,

while the bank only acts as a financier.
When this issue is posed to the bank officers, they argued that their customers'
ultimate objective of engaging in hire-purchase is to own an asset, particularly a
motor vehicle, not merely to hire it for certain period of time. In fact, the customer is
acknowledged in the document of title as a legal owner of the asset.Bank only acts as
a beneficial owner which has an ownership claim over the assetuntil full payment has
144
beenmade. Therefore,it is reasonablefrom the bankers' perspectivesto require the
customer to maintain the asset since he is the one who uses and utilizes it. Yet, the
customer has a right to sue the bank if he found that the assetis defective in a way that
results in failure of rendering intended benefits. If the customer repairs the defective
asset, he is entitled to claim the cost of repair from the bank. The situation would be
different if the defect is causedby the hirer's negligence.In this, case,he will bear the
cost of repairing the asset.
According to 88 % of SharVah 145

scholars , the owner is responsible in maintaining
the leased asset,but in practice this responsibility is passedto the hirer. However,
44% of Shadah advisors and 12% of SharVah scholarshold that this condition does
not nullify the AITAB contract becausethe practice is based on 'urf (local custom)
and market practice in Malaysia. Thus, they believe that there is a room for a more
flexible interpretation of AITAB. When askedabout how to resolve the above conflict
of interest, they explain that the duty to maintain the leased property must be made
clear to the contracting parties and put in clear terms in the agreement. It is unlikely to
put all maintenance responsibilities onto the owner. The responsibility can be
mutually determinedin a way that each party owes certain duties as to make sure that
the property will continuously render specified benefits which is paramount in the
Yarah contract.
'" In the Malaysian practice, bank holds beneficial ownership of the asset(usually a motor vehicle)
the customer, having his name in the document of title, becomes the legal owner. The bank will
while
usually have to register its ownership claim over the title of the asset and have it endorsed in the
registration card (Davies 1995). Thus, the customer cannot dispose of the assetas he wishesbecausehe
doesnot have absoluteownershipover the assetyet until the bank's beneficial ownership is releasedby
executinga sale and purchase contract. This signifies a complete transfer of ownership to the customer.
145Theseopinions are expressedby 7 out of 8 Shad'ah scholars.
205
8.6.7 Transfer of Ownership
The interviewees, most particularly Shadah scholars observe that method of

transferringthe assets'ownership is a vital issuewhich needsseriousconsideration.If
the hirer exercisesthe option to buy the leasedasset,the manner of transferring the
ownership must be mutually ascertained and documented. This issue is also
emphasizedby the Sharl'ah advisors who assertthat there must be a stipulation in the
contract stating the manner in which the transfer of ownership takes place. For
example, if the transfer of ownership is affected by sale, the asset is purchased at a
nominal amount which is mutually agreed by both parties. The price need not
be based on market condition and the real value of the property 146 The
necessarily .
bankers confirm the mechanismof transfer in the current practice whereby the final
payment or last instalment is automatically considered a purchase price. In this

situation, valid intention of the parties in the practical level becomes a problem;
whether both bank and customer are aware that they are executing a sale contract
when the customer completed his final payment. One of the solutions is to explicitly
spell out the intention in the agreement, such that the intention to hire during the first
period is included in leasing (Yarah) contract, and then intention to buy is put in a
separatecontract of sale in the latter period.
In concluding their remarks on this issue, the interviewees stress the importance of
stipulating in clear terms how transfer of ownership takes place, and that such terms
must be understoodand agreedby both parties. In deciding the terms and conditions
of the contract, cautious considerationmust be made in terms of Shadah compliance,
practicality and convenience of the contractingparties.
8.6.8 Deposit Payment
It has been a common commercial practice to pay a deposit before starting to use any
newly acquired asset.Deposit servesas a security against future loss or misconduct
causedby the hirer. Article 7/1 of the AAOIFI Shadah Rules for IjItrah and Ijarah
Muntahia Bittamleek (2000) regardsa deposit made by the hirer as a security for the
rental payments or security against loss of leased asset caused by the misuse of
negligence of the hirer. In this study, the issue of deposit payment is posed to the
Refer to the legitimacy of Islamic hire-purchasein Chapter3.

146
206
interviewees in order to explore their opinions about its legality and purposes. Most
interviewees give a general remark of deposit payment as stated earlier, but a few of
them have provided constructive responses which give valuable contribution to the
147
study.
In Malaysia's practice a deposit payment of 10% is required in AITAB transaction
which is the same as conventional practice. The issue arising is only pertaining to the
function of deposit and its legality from Shar-Iah point of view. The main concern is
the position of deposit-payment made to the vendor (seller), not to the bank, which is
a common practice everywhere. In this case, members of National SharVah Advisory
Council have decided that the deposit paid by the customer to the vendor must be
perceived as a payment made on behalf of the bank, causing the following contractual
liabilities 148:
(i) As between the bank (owner) and vendor (seller), the deposit is
consideredpart of the purchaseprice of the assetpaid by the bank to the

vendor.
(ii) As between the customer (hirer) and the bank, the deposit is considered
the first rental payment and will be accountedin determining the monthly
rental payment.
Majority of the interviewees accept deposit payment as no big issue becausemost
parties involved in the transactionagreeto perform this obligation. However, Shar! ah

emphasize that in Islamic transaction, the intention and purpose of the
scholars
payment must be made much clearer, especially to the customer, to ensure that the
customerfully the
understands purposeof deposit payment and function it serves.
8.6.9 Penalty in Case of Default
In this issue, there are two conflicting reactions from the interviewees. Some of them
including Sharl'ah scholarsand economistsreject penalty for late payment of rentals
Their argumentsare basedon the followings:
asnot permissible.
Due rentalsbecomea debt obligation payable by the hirer.
147They include some of governmentofficers, bankers,Sharl'ah advisors and Sharl'ah scholarswho

members of technical committeethat is in chargedof examining Muamalah Hire-PurchaseBill.
are
148This information was obtained from a government officer and some SharTah advisors who are
among the Council's members.
207
(ii) If the penalty is meant to add to the income or generateprofit for the
owner, is not acceptableby the Sharl'ah.

(iii) A monetary charge from a debtor for his late payment is exactly an
interest (ribd) prohibited by the Holy Qurdn. Therefore,the owner
in
cannot charge an additional amount casethe hirer delays payment of
the rent.
They suggestimprisonment as a penalty for default insteadof charging an amount of
money, but it seemsthat this kind of sentencewould involve higher cost to the bank.
On the other hand, practitioners (bankersand Shadah advisors)who constantly deal
with the moral hazard problem believe that unless such penalty is imposed, dishonest
customers would exploit the situation to their best advantages.To avoid adverse
consequencesresulting from the misuse of Shadah prohibition against interest, other
alternativesmust be sought to. Members of the Malaysian National SharVah Advisory
149
Council argued that the late penalty chargesought to be imposed on defaulters in
Islamic financing becausethe default is a kind of oppression(zalim) to investors, and
be
must penalised.
In order to standardizethe penalty imposition, the Central Bank of Malaysia has

150
decided to enforce 1% penalty for the purpose of protecting the banks and other
financial institutions from taking any advantageon their customer by charging them
149Members of the Malaysian National Sharl'ah Advisory Council have been included in the
interviews.
150Resolution of the National Shad'ah Advisory Council of Bank Negara Malaysia (Central Bank of
Malaysia). The imposition of penalty was made effective on 1" January 1999. The Council ruled out
that the customer shall pay to the bank the sum equivalent to the costs incurred by the bank in the
maintenance on such default amounts or such rate as prescribed by the Bank Negara Malaysia. The
mechanisms of imposing the penalty are outlines as follows (BankNegaraMalaysia 1998):
(a) If the default happensbefore the maturity period, a penalty of 1% per annurn will be
imposedon the overdueinstalments.
(b) If the default is causedafter the maturity period, the rate of penalty must be based on
Islamic money market rate.
(c) The maximum penalty amount for late payment cannot exceed 100% of outstanding
balanceof purchaseprice. For example, if the balance purchaseprice is RM50,000 the
amountof penalty cannotexceedRM 50,000.
(d) Penalty for late paymentmust be put into Bank accountas profit and divided betweenthe
bank and investorsaccordingto the agreedprofit ratio.
The penalty will commencefrom the date of the first default until the date of actual receipt of payment
by the bank. Provided to thatthe bank must considersome special casesand problems suffered by the
defaulters,for exampleunavoidablefinancial difficulty, or having not misusedany of financing amount
for other purposesnot provided by the Letter of Offer, or any caseon merit to disqualified from paying
the costs to the bank at absolute discretion of the bank.
208
excessivelyand misusing the money. Moreover, it is difficult to ascertainthe quantum

of actual loss is
which resulted from a default. Hence, the 1% penalty is intended to
serveas a deterrentto the customersand to cover part of administrative costs incurred
as a result of default, including postal and services.
The intervieweesgenerally concludethat the late penalty chargesshould be prescribed

in order to prevent a moral hazardamong the customers.The penalty aims to penalize
the intentionally defaulted customersas well as to compensatethe actual loss (tawTd
or indemnities) suffered by the bank and investors, thus, the charges should be
distributed among them accordingly. Some intervieweesgive their remarks in a more
specific way. Shadah scholarssuggest the best way of managing the chargedmoney
15
1
is to give to the charity. Economistsopine that the penalty should not be fixed to
it
1%, but it should be basedon actual cost incurred. Half of them recommendthe banks
to check the background and financial eligibility of their customersfrom all sources,
which are not limited to application form only, but they should gather as much
information concerning the customersas they could possibly do. Legal practitioners
stress that the imposition of penalty must be clearly stated in the contract and the
is
customer madeawareof it.
From the above discussion, the practitioners (bankers and Sharf'ah advisors) have
mainly highlighted problems in the provision of AITAB; while other interviewees,

particularly the Shadah scholar are more concernedwith conceptual and legality of
the facility. The practitioners, having been dealing in the actual operation of AITAB,
appear to understandthe problems in its provision and operation involving the main
players of the transaction; financial institutions, customers, and dealers. The
government officers seem to be cooperative in furnishing valuable information
relating to its latest development.
"' This practice has not been exercisedby any financial institution in Malaysia. It's
worth mentioning
that most Islamic banks outside Malaysia do not act in accordance with financial penalty against
defaulters.In the rare caseswhere it is done,the proceedsof the penalty are dispensedin charity.
209
Chapter 8 Operational and Requkitory Fuirnework of Isloinic Him I'mch, r, o! in M; il. iy,. i, i
8.7 GOVERNING LAWFOR AITAB TRANSACTION
In order to know the CUrrcnt position and implementation of AITAB trallsact loll, .111
experts who participated in the interview were inquired about ]low AITAB is legally
operated in Malaysian financial institutions. Their responses are Illustrated in Table

8.3 below.
TABLE 8.3:
Cross Tabulation of AITAB Operation by Respondent's Profile
Operation of AITAB From Legal Asp ct

Respondent's Profile Conventional Principles 6f
Hire-Purchase lj-irahand sale Not sure Total
1yo 66.7 16.7 16.7 100.0
Sharf'ali Advisors N 6 3 0 9
% 66.7 33.3 100.0
.0
Shan'ah Scholars IN 7 0 1 8
% 87.5 1 12.5 1 100.0
.01
% 1 75.0 1 1 25.0 1 100.0
.0
Legal Experts N 6 10 1
1
% 100.01 .0 .0
1 100.0
Government Officers N 3 0 3
M 100.0 .0
1
.0
1 100.0
Total N 36 5 5 46
1 (11"1 78.3 10.9 100.0
__10.9
generally shows that 78% of tile interv

The above table C) ' iewecs opine that tile operation
of AITAB is based oil conventional hire-purchase concept; only 11% believe that it
follows the Shai-Fah principles of jarah and sale. Another I I% comprising
JJ a i-cw
bank officers, economists and a Shm-T'ah scholar are uncertain of whether AITAB is
legally based on conventional concepts or SharT'ah principles. Looking at their area of
expertise, it is not sm-prising to find a lack of legal awareness arnong thern although
they possess a wide knowledge of the facility. In other words, although tile bankers,
andShm-T'ah scholar know very well ]low AITAB works in practice; they
economists
do not necessarily understand how it operates within its legal framework.
All legal experts and government officers unanimously agree that the operation of
AITAB Is based on conventional concept. These opiinions
I denionstrate their legal
awareness and frequent exposure to hire-purchase cases in their official works.
210
SharVah advisors give two contrasting opinions; 67% view the operation follows
conventional concept, while 33% believe that such operation is based on SharVah
principles. These responses are based on the interviewees' actual experience in
dealing with issues relating to AITAB transaction which result to two conflicting
observations; firstly, two-third of them probably have to admit the application of

conventional hire-purchase conceptto the Islamic transactiondue to the non-existence
of Islamic legal alternative. Secondly, the remaining SharVah advisors who respond
otherwise, possibly because they observe that AITAB facility is progressively
developing towards being a Shadah-compliant product. 88% of SharVah scholars
and 75% of economists appear to admit the application of conventional concept to

AITAB operation.The relatively high responsesfrom both groups are most likely due
to their observation to the current operation which does not entirely follow the
SharT'ahprinciples of ijdrah and sale.
Responsesfrom bank officers are rather interesting, where 67% agree with Islamic
AITAB's inclination to conventional concept; 17% opine otherwise; and the
remaining 17% are not sure of the current legal position. The secondview of AITAB
operation is basedon SharVah principles are probably resulted from the bank officers'
observation on positive development of AITAB facility and increasing Islamic
awareness among the bankersin some financial institutions.
According to the majority interviewees, there is a visible inclination of AITAB
operation to conventional concepts, which is due to several factors including the

followings:
Absence of proper and standard Islamic hire-purchase regulation, thus
practitioners in AITAB transaction have no other legal recourse except the

conventional hire-purchaselaw; Hire-PurchaseAct 1967 (HPA).
2) Operation of AITAB is similar to conventional hire-purchase;the only

difference is in the issue of interest (ribil) and issuance of acceptance(aqd)
letter. As regards to determination of fixed rate, standard documentation, and
formation of agreement,AITAB transactionfollows the samespirit of HPA.
3) Conventional hire-purchasebusiness has been in the market for quite a long
period of time and has establishedits rules and policy, thus its operation appears
be in
to much easier practice.
211
4) Legal institution (civil court) that handles commercial and mercantile matters
will decide a casebasedon existing rules of law. Jurisdiction of civil courts also
covers Islamic banking transactions. Since there is no legal authority for
AITAB transaction,any caseconnectedto it will be referred to HPA.
5) As statedin the earlier part, motor vehicles are the most demandinggoods under
AITAB facility, and consumer goods are also in demand.Both types of goods
are bound by the HPA Thus, any institution offering thesegoodsmust abide this
law.
6) Full understandingin Islamic law among the practitioners has not been attained
yet.
The majority interviewees confirm that AITAB is operated on the basis of
conventional concepts because presently, there is no written Shadah law which
specifically regulates the operation of AITAB. The only existing regulatory Shar! ah
on the facility can be found in SharVah Rules for Investment and Financing
rules
Instruments, Accounting and Auditing Organization for Islamic Financial Institutions
Bahrain (AAOIFI)152. In Malaysia, because there is no specific regulations
of
AITAB, institutions offering this facility tend to impose rules in the spirit
governing
of Hire-Purchase Act 1967 and Contract Act 1950. This section highlights the
importance of Hire-Purchase Act 1967 in the operation of AITAB business. HPA will
be further analysed in the following section in which interviewees' opinions of the

HPA and other arising issues thereof will be presented.
8.8 STRENGTHS AND DEFICIENCIES OF HIRE-PURCHASE ACT 1967
This section provides key contributions of this researchto the current dialogue about
the adequacy or otherwise of the Hire-Purchasc Act 1967 to govern the operation of
AITAB. Hire-Purchase Act 1967 is the main regulation governing hire-purchase
transaction in Malaysia. Detail description of the law has been made in Chapter 4
which outlines its scope and application, contents, formation of agreement,rights and
obligations of parties and repossession.In this section, HPA is further analysedwith
respect of its strength and deficiencies in the light of the interviewees' opinions. In
order to inquire into the interviewees' state of mind in this issue, they were asked
152AAOIFI SharTah Rules for Iji5rah and Ijdrah Muntahia Bittamleek at page 31 to 46.
212
Chapter 8 Operational and Regulatory Framework of Islamic Hire-Purchase in Malaysui
whether or not HPA is sufficient to govern the operation of AITAB. 'FlIcir responses
are prescntcd in 'Fablc S.4 below.
TABLE 8.4:
Cross tabulation of Adequacy of Hire-Purchase Act 1967 by

Respondent's Profile
Adequacy f Hire-Purchase Act 1967

Respondent's Profile Yes NO -Not-sure - Total
% 58.3 33.3 8.3 100.0
SharVah Advisors N 1 8 0 9
011) 11.1 88.9 100.0
.0
SharVah Scholars N 1 6 1 8
% 12.5 75.0 12.5 100.0
Economists N 2 4 2 8
% 25.0 50.0 25.0 100.0
Legal Experts N 3 2 1 6
% 50.0 33.3 16.7 100.0
Government Officers N 1 2 0 3
0/ 33.3 66.7 1. 1
.0
Total 15 26 5 46
32.6 56.5 10.9 100.0
Generally, almost 57"o of the interviewees observe that Hire-Purchase Act 1967 is 'lot
adequate to govern and regulate AITAB transaction. On the other hand, 33')/()of thern
perceive HPA is sufficient and treat it as a comprehensive law that can be used to
govern the operation ofAITAB; only 11% are not sure of the adequacy of the HPA's
application to AITAB business.
ces, who uphold the adequacy of Hire-Purchase Act 1967 as a

Most of the inter-viexN,
goveming law of AITAB, are the bankers (58%). As providers of Islamic hire-
purchase facility, they constantly refer to HPA in order to ensure that the operation of
AITAB is made within the pi-oper legal framework. Other main reason is to secure a
legal protection and remedy which the HPA provides.
There are mixed responseswithin the bankers' group. 58% of the bankers agree that
Hire-PUrchaseAct 1967 is sufficient; 33% of thern think otherwise; while 8% are not
sure of the position in question. These responsesappear to be Consistentwith their
earlier responses to the issue of governing law for AITAB '-'

trarisaction. Two
153Refer to para 2 at page 2 11.
213
plausible reasonsmay account for such diverse First,

responses. since AITAB is a
relatively new product and still evolving, it is anticipated that many issues will
naturally emerge as time goes by. Hence, it is not surprising that bankers who are
directly exposed to these various issues will have different views on the matter.
Secondly,the level of knowledge and experienceof the bankersmay also contribute
in part to suchdiverseopinion.
A relatively high opposition to the adequacyof HPA is made by 89% of Shari-ah
advisors and 75% of SharVah scholars.The from

responses the Shari-ahscholars are
not surprising because they are more concerned with the facility's concept that must
be in line with Sharl'ah requirements,which are not completelyprovided by the HPA.
For this reason,they observe that Shadah rules are neededto fill in the loopholes
within the HPA. Unexpectedly, the responseof the Shadah advisors appearsto be
different from their previous pragmatic observationson AITAB operation. Similar
responsesare also shown in the previous discussion.This situation is most likely due
to two reasons; first, they constantly work on the HPA when dealing with legal
matters relating to AITAB facility; this experience exposes them to some

inconsistencies in the law. Secondly, they may probably give this opinion
independentlybasedon their individual experience,without being restricted by their
formal position.
The most remarkable finding is that at least 10% of the Shadah scholars are not
adamant about resorting to Sharf'ah alternatives. Two possible explanations for this
situation; firstly, they may acknowledge the adequacy of HPA in regulating the
AITAB transaction becauseHPA has already been accommodating many similar
154
featuresof Sharl'ah ; and secondly,due to their limited experiencein dealing with
legal matters, they are probably not sure of the legal framework governing the
transaction,hence,are not able to the
assess adequacyof HPA.
Most of the intervieweeswho are not sure of the adequacyof HPA are the economists
(25.0%). This is not a surprising result considering their backgrounds which make
154
Refer to discussionon 'Provisions of Hire-PurchaseAct 1967 which are in conforrrAty to Sharl'ah
in the proceedingsection.
214
little emphasison legal issuesrather focusing much on the economic and theoretical
aspectof the contract.
Having known the interviewees'different standsin the issueof adequacyof Hire-

PurchaseAct 1967,the following subsectionsdiscusstheir opinionsin more detail.
Thosewho maintainthat HPA is a sufficient governinglaw of AITAB transaction,
providejustificationsin respect
of strengths
of HPA, someof which are in conformity
to Sharf'ah.58% of themarebankersandhalf of the legalpractitioners.On the other
hand, the intervieweescomprising majority of Shadah advisors and Shadah
33%
scholars, of legal practitionersand 67% of government
officers arguethat HPA
is inadequate.They list some of HPA's deficiencieswithin legal and Shadah
application.
It is important to note that, discussionon the HPA's strengths,including its SharTah-
compliant provisions and its deficiencies are mainly provided by the legal
practitioners and supportedby researcher'sthorough examination of the HPA 1967.
8.8.1 Strengths of Hire-Purchase Act 1967
Hire-PurchaseAct 1967 is the only legal mechanismavailable in Malaysia to regulate

hire-purchasetransaction. Its main objective is to protect the hirers and guarantors
against unscrupulous dealers who directly handle the transaction. Such protection
constitutes a major strength of the HPA. By substantial amendments to HPA,

procedure for entering into hire-purchase agreementsis tightened up by imposing
several requirements and penalties against non-compliance. These requirements

include the following:
(a) Before entering into hire-purchase agreement, the prospective owner or its
representativemust give a Notice in the form prescribed in Part I of the Second

Scheduleon the details of the prospectivehirer's financial obligations.This
requirement gives documentary evidence to the hirer a discrepancy arises
between the details in hire-purchase agreement and in the proposal form
155
section
155section 4(l)(a)
215
(b) A dealer representingthe owner must also give the hirer further notice in the
form prescribedin Part II of the SecondScheduleto show that the prospective
owner has consented to become the owner of the goods in the proposed
transaction. This condition identifies the actualownerfrom the very beginning,

156
so that the hirer will not mistakenly regard a dealer
asthe real owner
(c) In the issue of repossession,the hirer will not be charged with the costs of
repossession and storage if he returned the goods within 21 days of the owner
intention to repossesson him 157
serving notice of .
(d) The owner is required to give the hirer an option to purchasethe repossessed
goods before a sale to anotherparty can be made. This is to prevent a sale at an
158
under-valueto related parties to the prejudice of the hirer
(e) Requirement for separateagreementswith respect to every item of goods is
enforced in order to overcome problems relating to the appropriation of

payments to separate goods in cases where the hirer is unable to fulfil all his
159
obligations .
In addition to the above there

requirements, are various provisions incorporating rules
protection of parties to hire-purchaseagreement.
and
Part 2 of the Hire-Purchase Act 1967 containsprovisions illustrating fonnation and
*
contents of hire-purchase agreements.All related procedure and formalities of
entering into the are

agreement explained in the provisions.
part 3 guaranteesthe protection of hirers and guarantors by applying implied
warranties in respect of the goods in hire-purchase
conditions and agreement and
liability of the owner for misrepresentation. For example, there shall be an implied
that the are of merchantable quality 160 If the hirer the
condition goods . signed
and then found that the goods are defective, the owner will be liable for
agreement
the hirer has a right to rescind the 161
and
misrepresentation, agreement
4
part statesrights and duties of the hirer during the hire-purchasetransaction and
in the event of repossession.
156
Section4(l)(b)(ii)
157
Section 16A
158
Section 18(4)
159Section4D
160
Section7(2)
161
Section8(l)
216
9 Part 5 further spells out rights and liabilities of guarantors which include rights
against the owner as well as the hirer.
Part 6 governs matters relating to insurance, comprising contents of insurance
contracts and power of courts in that respect.

Part 7 provides various general rules, including limitation on terin charges,
minimum deposits. issue of receipt in respect ot-payments, powers ofcourt, service
ofnotice. penalty etc.

Finally. Part 8 governs powers of enforcement when a hire-purchase case is
brought to the court.
FIGURE 8.2:
Strengths of Hire-Purchase Act 1967
Protection of Hirers and Guarantors
Hire-Purchase Imp lied LGuHirer's

l and
L Insu nce RGeneral Powers of j Penalty for
Agreement Condit ions & t arantor's _ u les Enforcemen Non-
Warra nties Rights compliance
I
T D
L I Procedure of
Financial Hire- RepossessOn Inspection&
Statement
as Purchase Seizureof Goods
Documentary Transaction
Evidence f
Owner's
of
FConsent resp
Owner
MotorVehicles:
Written& Signed 1,1year
r I fl
agreement Limitation o,
-
on Terms
OtherGoods: Charges
Separate Costincludedin
agreementfor Hire-Purchase
- Price
everygoods
e of the
s F Quiet
Possession
Merchantable
Quality -7
Goods
Goo Frree
Ifrom
e
Encu brance
r
Fitnessfor
Purpose
cum
m
The above provisions state specific rules in every stage of hire-purchase transaction.
Hence, I-fire-Purchase Act 1967 appears to strongly govern all hire-purchase business
goods listed In the First Schedule. In respect of' the contract, hire-
which involves
agreement which follolxs rules set in Part 2 of tile Act will become binding
purchase
217
to all parties to the transaction.Any person who is found guilty of an offence under
162
the Act is liable to penalty of either fine or imprisonment or both . It appearsthat
Hire-PurchaseAct 1967 maintains its strength by providing proper procedure and
formalities of a hire-purchasetransaction, spelling out rights and liabilities of the
owner, hirer and guarantor and, prescribing legal remedy as well as penalty for the
claimant and offender respectively.
8.8.2 Provisions of Hire-Purchase Act 1967 which are in conformity to SharVah
About 33% of intervieweeswho uphold the adequacyof Hire-PurchaseAct 1967 have
shed light on the fact that hire-purchase law as regulated by the HPA does not entirely
contradict Shadah principles. For instance,the following provisions of the HPA are,
in fact, in harmony with the spirit of Shariah:
(a) The preparation and service of statements in Part 1 of the Second
Schedule HPA. By this written statement,a customerdisclosesparticulars
of the goods, his financial obligations and particulars relating to payment

to be madeunder the proposedhire-purchaseagreement.This requirement
is deemedto be in line with Shadah becauseit results in clear supply of
information relating to goods and customer's obligation, and such
information is documentedin a standardform for future reference.
(b) The preparation and service of statements in Part 2 of the Second

Schedule HPA. This statementis preparedby a dealer in order to obtain
consentfrom prospectiveowner (financial institution) of the goods to be a

party in the proposed hire-purchase agreement. A clear indication of
consent (riIo) by a party to a transaction is a vital pre-requisite in a
contractual transaction. However, unlike the 163
principles of contract , the
party's consent cannot be simply presumed in Islamic law of contract. It
must be made by
expressly either an oral statement,or conduct,or even
put into writing. This SharTah requirement is very important as it
prevents confusion (ghardr) relating to parties to a hire-purchase
162Section46 of Hire-PurchaseAct 1967 prescribespenalty for an offence committed under the Act.
The penalty includes a fine not exceedingRM3,000 (GBE409.25),or to imprisom-nentfor a term not
or both.
exceedingsix months
163In the Law of Contract, the existenceof a contractual obligation can be presumed by nature of
between the parties in questionand their intention to createlegal relations (Alsagoff 1996).
relationship
218
Chapter8 Operationaland RegulatoryFrameworkof IslamicHire-PurchaseIn Malaysia 0
transaction;where most customerswrongly view a dealer, instead of the

financial institution, as the owner of the goods.
(C) Requirements relating to the formation of hire-purchase agreements

(section 4,4A, 4B, 4D and 5). Suchrequirementsinclude strict imposition
of preparing the Second Schedule forms as discussedearlier; the hire-

purchase agreement must be in writing and signed by all parties to the
agreement;a separatehire-purchaseagreementmust be prepared for every
item of goods; and a copy of the agreementmust be served on the
customer and guarantors within fourteen days after the making of the
agreement.These procedural requirementsare necessarily encouragedby
the Sharl-ahin order to avoid misleading information which will cause
dispute mnongthe parties in the future.
(d) Contents of hire-purchase agreement (section 4Q. The HPA requires
every hire-purchase agreementto specify in detail the commencement

date, number and amounts of instalments,time for payment, description
and location of the goods, description of the consideration to be provided

otherthanin (if
cash any)and otherparticularsascontainedin the written
statementsin the SecondScheduleof HPA. If the hire-purchaseagreement
it will becomevoid andthe ownerwill be
theserequirements,
contravenes
guilty of an offence under the HPA. The specific contentsof hire-purchase
as
agreement provided by the HPA are in fact, in line with the Sharl-ah
requirements of contractual transparencyin agreementswhich must be

spelt in detail to avoid any ambiguity and potential dispute.
(e) Conditions and warranties for the protection of hirers and guarantors
(Part 3). In addition to the earlier express contents of a hire-purchase
agreement, the HPA also provides implied conditions and warranties

which are imposed onto the owner in order to safeguardthe interest of the
customer(hirer) and guarantors.The protections cover:
Warranty to have and enjoy quiet possessionof the goods throughout
the period of hire-purchaseagreement. If the owner wants to inspect
the goods, he must obtain the hirer's permission and do so during the
219
time specified by the hirer. This warranty is an important provision of

leasing which guaranteespeaceful possessionand privacy to the hirer,
henceconformsto Shar-lah principle of ijarah.
Condition that the owner has a good title in the goods so that he is able
to sell it to the hirer at the end of hire-purchase agreement. This
is
requirement compatible to SharVahrule of transferring an ownership
from the legal and absoluteowner of the goods.
Warranty that the goods are free from any chargeor claim by the third
party before the ownership is transferred to the hirer. The SharVah

views that this encumbrancewill affect the hirer's absolute ownership
and complete enjoyment of the goods, thus violating the principles of
ijdrah.
Condition that the goods must be of merchantable quality that is
valuable for the hirer's use and worth for selling to other parties. This
condition is warranted by Shadah principles of Ydrah and sale in
which the subjectmatter must have somevalue.164
Condition that the goodsmust be fit to render benefit for hirer's use is
upheld by the SharTah. If the goods cease to provide the intended

benefit, the purpose of renting it is not attained, hence, the hirer may
terminatethe contract.165
If the above requirementsare not specified in the agreement,they can be

invoked if the owner does not comply with any of them. If there is a
misrepresentation by the owner or dealer in respect of the goods and the

earlier-stated requirements, the hirer shall be entitled to rescind the
agreementand claim damages.
Theserequirementsprotect the user (hirer)
164The subject matter of sale must be somethingwhich satisfies the characteristic of property or mill
(Rahman 2001) which are as follow:
(a) It must have somevalue.
(b) It must be a thing which provides lawful benefits. In other word, the subject matter must be a
lawful property in Shariah, thus saleof liquor or casinobuilding is prohibited by Sharl-ah.
(C) It must be possessed,meaningthat the subjectmatter is a lawful property of the seller.
The subject matter of leasemust have a valuable use.Therefore, thing having no usufruct at all cannot
be leased(Usmani 2002).
165Malikis and Shaflis view that arah is terminatedby a defect (ayb) affecting the leasedobject,
and
if the purpose of the lease has disappeared. Hanbalis hold an opinion that the termination takes
also
if the leased object is destroyed or affectedby a material defect. (Salleh 1986).
place
220
Chapter8 Operationaland RegulatoryFrameworkof IslamicHire-Purchasein Malaysia
of the goods against injustice dealings and oppression, thus are in line
with the Sharl-ah principles.
(0 Rights and obligations of hirer. Part 4 of the HPA provides statutory

rights to a hirer (customer) which include, right to a copy of a statement
relating to his financial position, right to early completion of agreement,
right to terminate agreement, right on repossession by owner and many
more. The hirer also owes principal obligations including, to place the
goods in the place as specified in the hire-purchase agreement, to pay
regular instalments and not to sell or dispose the goods to other party.
These rights and obligations give the hirer complete enjoyment of the
goods and convenient dealing in a commercial transaction which are
paramount considerations in the Sharl'ah.
(9) Rights and obligations of guarantors (Part 5). Sections21 and 22 of the
HPA deal with the extent of guarantors' liability in respect of hire-
purchaseagreement; section 23 spells out rights of guarantor against the

owner, while section 24 stateshis right against the hirer. These provisions
also aim to protect a party to hire-purchase transaction, which are
by
encouraged the Shadah.
Rules for repossession. Sections 16 to 20 of HPA contain detailed
provision spelling out the rights and obligations of both hirer and owner in
the event of repossessionof the goods. Among the hirer's rights are
entitlement to be servedwith notice before and after repossessiontaking
place; exemption from paying cost of repossessionif he returns the goods;
requirement for owner to redeliver the goods or sell it to any person
introduced by the hirer; and entitlement to recover from the owner the
difference in amountwhere the value of the goods exceedsthe debt. These
rights do not, in principle, contradict Sharl-ah principles in the treatment

of debtor by which he must be given sufficient and reasonabletime to pay
his debt.
221
Chapter 8 Operationaland RegulatoryFrameworkof IslamicHire-PurchaseIn Malaysia
(i) Insurance liability on the owner (Part 6). A very significant rule relating
to insuranceresponsibility which is in conformity to Shadah principles is
found in section 26 of the HPA. Section 26(l) puts an obligation onto an
owner tolake out insurance cover in the name of the hirer. In case of
motor vehicles, the obligation is limited to the first year of the agreement;
the hirer will have to renew the insurancefor the subsequentyears. For
other goods, the owner is obliged to bear the insurance cost for the
duration in which the goods remain under hire-purchaseagreement, and
such cost is included in the hire-purchaseprice. The owner cannot insist

on the hirer to insure with a particular insurer, thus, the hirer has complete
freedom to choose an insurance company which he desires. Non
compliance with this rule on part of the owner or hirer will constitute an
offence under the HPA.
0) Avoidance of the agreement if any of the above-mentioned

requirements are not met (section 34). The protection of hirer is
by
strengthened section 34 which declares certain provisions in a hire-
purchase agreementto be void. These provisions attempt to remove or
reduce-rights conferred on the hirer by the HPA, for example, a provision
requiring the hirer to pay more than a fixed rate on overdue instalments.,
(k) Collection of payments is an important stage in any commercial

transaction.In Islamic transactions,payment constitutesa consideration of
contract; ignoring it will amount to avoiding the contract. In this respect,
the HPA appearsto be in harmony with the Sharlah rule of transactionby
putting down certain rules for collection of hire-purchase payments.
Section 36A prohibits any collection of payment other than those listed in
the SecondScheduleof the HPA, or statedin the hire-purchaseagreement.
Section 36B again prohibits any collection of payments by persons other
than owner, dealer, agent or other authorised persons. Section 36C
requires the collector of hire-purchasepayment to issue a receipt to the
hirer in relation to every payment collected; if he does not do so, he shall
be guilty of an offence under the HPA. Section 36D further requires the
owner to infonn. the hirer if the dealer or other authorised collector has
222
ceased to be to
authorised collect payment, thus, no payment should be
made to such dealer or collector.
(1) The imposition of penalties for violation of the above requirements.

Section46 of the HPA spells out punishmentfor any person who is found
guilty of an offence under the HPA. The punishment covers a fine not
exceeding three thousand ringgit or imprisonment for a term not
exceedingsix months or both fine and imprisonment.
The above HPA provisions clearly spell out proceduralrules and requirementswhich
aim to make a hire-purchasetransactiona success, and at the sametime, to protect the
hirer and guarantorsby imposing certain duties onto the owner. Detail discussionson
proceduralmatters,rights and obligations of parties and requirementsof hire-purchase

have been dealt with in Chapter4.
agreement
The interviewees emphasizethat above discussedrules are in line with the spirits of
Sharl'ah which promote justice and forbid oppression while engaging in a
transaction. Therefore, AITAB facility should not be prevented from
commercial
these rules and incorporating them in the agreement. Even in term of
adopting
it is permitted to refer to the conventional hire-purchase and the
management,
practice (urj) at a particular place, as long as such practices are not against
prevailing
the Sharf'ah principles.
8.8.3 Deficiencies within Shartah and Legal Application
As discussedin the earlier sections,Hire-PurchaseAct 1967, being the only existing
rule for hire-purchasetransaction, possessessome advantageous features.

governing
Despite having numerous advantages,HPA, like any other law, is not completely
does contain certain loopholes, either in SharVah or legal requirementsof
perfect and
The interviewees 166 deficiencies
Islamic transaction. mention some which are
identified in the following aspects:
`6 They comprise 89% Sharl'ah advisors, 75% SharFah scholars, 33% legal experts and 67%
officers who maintain that HPA is inadequateto govern AITAB operation.
government
223
Chapter8 Operationaland RegulatoryFrameworkof IslamicHlre-PurchaseIn Malaysia
o Deficiencies within SliarTah requirements
(a) In Islamic contract, intention and understandingof parties entering into a
contractual obligation are paramount requirementsfor a valid contract. In

AITAB transaction, the parties must know and understand the nature of
leasing (Ydrah) and sale (bay ) contract,the effects and consequenceswhich
result in different relations, rights and obligations. Hire-PurchaseAct 1967,

however, fails to specify this vital requirement;it merely emphasizeson the
formation and contentsof a hire-purchasecontract.
(b) AITAB agreementshould specify precisely terms of leasing Qjdrah) and
sale (bay 1; when these contracts become effectives; and how contract of
leasing (YCvah)is turned into sale (bay ), in order word, how transfer of
ownership takes place. In this instance, HPA is completely silent in

distinguishing between both contracts. It only acknowledges some
requirements, formalities and contents of a standard hire-purchase

agreement.
(c) One of the important deficiencies of HPA is making the hire-purchase
facility as a financial lease(full pay-out lease).A true model of Islamic hire-
purchase does not totally adopt the financial lease concept because of its
167
contradicting principles to leasing (Ydrah) and sale (bay) contract
(d) The HPA does not only allow interest (ribii) but also to a certain extent
makes provisions for it, for example, section 4C requiring the amount of
term charges to be stated in the hire-purchase agreement; and section 34
stating about paying an interest on overdue instalments. In respect of term
charges, although HPA guaranteesa fixed rate of annual charges, the
calculation of the charges is made based on a pre-determined interest-
bearing benchmark 168 The dependenceon interest-based mechanism in
.
commercial transactionsis againstthe principles of Sharl-ah.
(e) Hire-PurchaseAct 1967 provisions fail to specify the extent of the parties'
I
rights and responsibility and the consequenceof transferring any right or
167Among featuresof financial leaseare its non-cancellablenature, hirer's liability for full rent even
though the goods ceases from renderingits benefit and constructionof future sale.
168The Sixth Scheduleof HPA provides the calculation of term charges,and the Seventh Schedule
statesthe calculation of annualpercentagerate.
224
Chapter8 Operationaland RegulatoryFrameworkof IslamicHim-PurchaseIn Malaysia
responsibility from one party to the other. For example, the transfer of
maintenance and insurance responsibility from the owner to the hirer
(customer) for a particular considerationis often not explained to the hirer.
In practice, maintenanceand insuranceresponsibility are usually passedto
the hirer in consideration of reducing the amount of payment paid to the
bank (owner). As such, the hirer can save the cost of maintenance and
insuranceby utilising the most reasonabledeal that he could afford from the
market. Therefore, this matter must be clarified to the hirer or it will amount
to uncertainty and unknown (ghardr and jah5lah) elements which could
invalidate a hire-purchaseagreement.169
(0 Legal documentation of AITAB has been drafted to suit the HPA in a
manner that mixes up between lawful and unlawful elements.For example,

the transaction is effected under a single agreementcomprising tenns that
invariably provide that-
a The owner shall lease the goods to the hirer for an agreed
duration. During that time the owner still retains full title to the
goods subject to the right of the hirer to possessand use the same
so long as the rental or instalments are duly paid by the hirer on
time.
m Upon payment of the final instalment by the hirer to the owner,
the hirer shall becomethe absoluteowner of the goods.
The first term spells out a leasing contract and the second one describesthe
manner of concluding a sale contract between the owner and the hirer. Both
contracts are lawful in Shadah; but because of improper procedure of
executing them without indicating clear offer and acceptance QjCIb and
qabuo, the transactionbecomeunlawful.
169Al-Sanhuri explains the difference betweenghardr andjahillah; jahillah means to sell something
but its quantity is unspecified,and gharar meansto sell something whose availability is
which exists
unknown. Both gharar andjahC71ah may rendera contract void or voidable. Thus, a contract should not
ghardr orjahWah because
contain any element of either otherwise, the contract will become void or
depending on the degreeof gharar or jahalah respectively (MaIddir
voidable al-Haqq ft al-Fiqh al-
Islami, vol. 2, p.232) (Bakar 2000).
225
o Deficiencies within Legal requirements
(a) Hire-PurchaseAct 1967 is known to be a very rigid law. It applies strong
restrictions in law and agreement, in which any contravention or non-

compliance will invalidate the agreementor amountto an offence under the
Act. Even a minor procedural offence will invoke a penalty as prescribed in
section 46 of HPA. For example, an owner and dealer who do not comply
with a requirement to serve on the hirer a written statement of financial
obligation, they will be guilty of an offence. If convicted, they will be liable
to a fine not exceeding RM3,000 or to imprisonment for a term not
exceeding six months or to both penalties.
(b) The strict rules of the HPA 1967bind strongly the hire-purchaseagreement,
to the extent that if there is any inconsistencybetween the agreement and
HPA, a party may challenge the validity of the contract and apply to the
court to nullify the whole transaction.For example,an Islamic hire-purchase

agreementcontaining the additional provision of offer and acceptancecan
be strictly regardedas inconsistentwith HPA. This strict rule may enable an
irresponsible customer to nullify the agreementin order to avoid further
obligation in the transaction, thus, may cause injustice to the other parties
like the bank and guarantors.
(c) Limited application to certain goods is another drawback of HPA Hire-
PurchaseAct 1967 shall only apply to goods specified in the First Schedule,
170
which covers consumer goods and motor vehicles. The later goods
comprise invalid carriages,motor cycles, motor cars including taxi cabs and
hire cars, goods vehicles and busses. These goods are usually used for
transportation,either for personalor public use. Other types of vehicles will
not be subject to HPA. To illustrate, in case of MBf Finance Bhd. v. Ting
Kah Kuong & Anor. 171 the issue was whether a particular heavy lifting
,
machine, for instancea crane or forklift, can be regarded as a motor vehicle,
Section 2(l) of the 1967Act defines cconsumergoods' as goods purchasedfor personal, family or
householdpurposes.Accordingly, goodsthat are normally regarded as consumergoods but purchased
for business purpose are excluded from the 1967 Act. By virtue of section 2(l), goods
also include any
by the hirer of any part or parts and any accessoriesaddedby the hirer during
replacementsor renewals
the period of hiring.
171[ 1993]Malayan Law JournalVolume 3 page73
226
and thus subject to the Hire-PurchaseAct 1967.The court held that a forklift
was not a motor vehicle and therefore the agreementwas not subject to the
Hire-PurchaseAct 1967.
(d) Another recognized loophole in HPA is section 22 which exempts a
guarantor from his liability as a consequencefrom limited application of

HPA. Section22 expresslyprovides that a guarantoris not bound to perform
in
an obligation respectof goodsother than the goodscomprised in the First
Schedule of HPA. Hence, if a hirer who enters into a hire-purchase
agreement in respect of industrial equipments,in the event of default, the

is
guarantor not responsibleto make any paymenton the hirer's behalf. The
reasonbeing, the industrial equipmentsare not included in the list of goods
which are coveredby the HPA.
The aboveanalysis has expoundedsomedeficienciesof the HPA 1967 within Shadah
and legal application which prove that the HPA is not a complete law to regulate
AITAB transaction. Majority of interviewees (57%) observedthat, the inadequacyof
HPA can be remediedby having a Shadah regulation providing a complete rule for
the transaction. It is important to note that, some of the points raised in this section
have been discussedin Chapter 4 when analysing Hire-Purchase Act 1967 and the
comparison of the HPA and Muamalah Hire-PurchaseBill.
The next section will look into the newly proposed Muamalah Hire-Purchase Bill
which has been drafted by some government bodies in Malaysia as an alternative to

Hire-purchaseAct 1967.
227
Chapter 8 Operational and Regulatory Framework of Islamic Hife-Purch., me in Malaysia
8.9 THE PROPOSED MU'AMALAH HIRE-PURCHASE BILL
This section provides a sharperfocus on the proposedMu'alnalah Ylli-c-Purchase11111
which is a reSLIltOf effort

COI1tII1LIOUs by early Islamic banking practitioners Ili
Malaysia who feel that AITAB facility needs to have its own governing law. Thc
introduction of Mu'atnaluh Hire-PurchaseBill is believed to be due to the Inadequacy

or difficulty in applyini.;Hire-PurchaseAct 1967 that conforms to Shai-T'ah principles
relating to hire-purchase.This section analysesinterviewees' opinions of' flic 13111
In
respectof the following matters:
" The of
advantages the Bill
" The interviewees' suggestionto terms and provisions of the Bill

" The impacts of the Bill to Malaysian legal system
" Impedimentsofits implementation and Its fUtUreprospectand;
8.9.1 Interviewees' Opinion of the Mu'amalah Hire-Purchase Bill
Firstly, the study seeks to identify the interviewees' opinion oil whether AITAB
transaction needs to have a specific law to govern its operation in the light of
SharT'ah. Their responses are provided in Table 8.5 below:
TABLE 8.5:
Cross tabulation ot'Whether AITAB should be governed by SharTah Law

by Respondent's Prorile
Whether Islamic Hire-Purchase should be

Respondent's Profile governed b Sharthih Law
Yes No Total
Bank Officers N 9 3 12
0"1 75.0 25.0 100.0
SharT'ahAdvisors N 9 0 9
, 100.01 .0
100.0
SharPah Scholars N 8 0 8'
100.0 100.0
N 6
.0
Economists 2 8
11 75.0 25.0 100.0
/0
Legal Experts N 6 0 6
0/
1
/0
100.0 .0
o_vernmeTntoff
icers N 3 10 13
0//0
1
100.0 .0
100.0
Total N 41 5 46
% 89.1 10.9 100.0
228
From the above table, almost 90% of the intervieweesopine that AITAB transaction
be by a specific Shad'ah law. Only 11% view otherwise consisting of

must governed
25% bank officers and 25% economistswho think the operation of AITAB is fine
the existing Hire-PurchaseAct 1967. Referring to the previous analysis on the

under
Hire-Purchase Act 1967, the most striking finding is that about 33% of
adequacyof
the intervieweeswho initially opine that the HPA is to
adequate govern AITAB have
that the transaction should be governed by a Shadah law. These

now viewed
views are mostly expressedby the following interviewees' group:
conflicting
(a) 67% of the legal experts, possibly becausethey realize that some Shad'ah
issuescannot be dealt by HPA alone although HPA is deemedsufficient in
regulating AITAB transaction in procedural aspect. Reference should

therefore,be madeto Shadah regulation.
(b) 42% of the bankers probably observe that by having a Shadah law for
AITAB, the customers will be more attracted and convinced in using the
facility. 172
(c) Similar opinions are expressedby 33% of the government officers, most
likely becausethey are actually working on the Bill and decide ways to
implement it.
After that, this study seeks to obtain the interviewees' opinion of the Bill. Almost all
interviewees are aware of the Bill, but only 35% of them have actually looked into it,
thus, they are able to give a more detail comparativeview of it and the Hire-Purchase
Act 1967 (HPA). Generally, the interviewees assert that the Bill is more or less a
copy of the HPA; the only differences are in matters of contract ("aqd) and
carbon
of interest (ribd) elements. The 89% of interviewees, who opine that
elimination
AITAB should be governedby a specific Sharl'ah law, give their full support to the
Bill. They outline the following views and suggestions:
(a) The Bill is based on Hire-Purchase Act 1967 with some modifications for
which are in conflict to SharVah. The Bill uses a very simple
certain provisions
language, but some provisions are difficult to understand because they are
172Referring to the customers' overall reasonsof dissatisfactiontowards AITAB facility as illustrated

in Chapter7,15% of them view that the facility is not 100% SharVah-compliant.
229
translated from conventional hire-purchase.However, the translation 'doesn't

bring up the samemeaningas that of conventionalhire-purchase.
(b) If the Bill is successfullyimplemented, it will need a very strong commitment
by all parties involving directly or indirectly in AITAB transaction. Parties to
AITAB agreementwill be bound by Sharf'ah rules that will not be challenged
by civil law any longer. Even both Shadah and civil rules can be equally
in
accepted the court.
(c) A law-enforcement body must be established to facilitate the Islamic hire-
purchase law. Unless there is a respectedenforcementbody, the law will be

impractical.
To passa law, any law contradicting to it must be repealed,and any uncertainty
and questionable(shubhah)elementsmust be eliminated.
According to the interviewees,the public generally acceptAITAB facility and regard

it as an alternativeto conventional facility. Furthermore,the Central Bank of Malaysia
has no objection against implementing the Bill, besidesthey carry out a research to
look into the future effects of Islamic hire-purchase law. Yet, the process of
implementation of Islamic hire-purchaselaw has taken much time. It has been delayed
for severaltimes.
In addition to the above views, the interviewees propose two ways of implementing
Islamic hire-purchase law; firstly, it must be independent from Hire-Purchase Act
1967, because Islamic and conventional hire-purchase are based on different

secondly, Islamic hire-purchase must have separate rules and regulation
principles;
spell out the true concept of yarah, liability in an,event of default, rights of
which
hirer and owner and many more.
On the otherhand, the 11%of intervieweeswho suggestthat AITAB transactiondoes

Shadah law put forwardthe following arguments:
not needa specific
(a) Act 1967is sufficientto supportthe operationof AITAB.
Hire-Purchase
(b) Hire-PurchaseAct 1967mustbe examinedthoroughly'.If somesectionsprove
to be inconsistent
with SharVah requirements,such inconsistenciescan be
modified without the need for a new law.
230
(c) Hire-PurchaseAct 1967 can be amendedor someprovisions are added to make

HPA general and flexible so that it can be applied to both conventional hire-
purchaseand AITAB transactions.
(d) So far, AITAB operations are based on conventional hire-purchase financing

it
and works very fine. Moreover, AITAB financesthe sameitems as in the First
Scheduleof HPA.
To conclude this analysis,there are generally two oppositeviews on the issue whether
AITAB transaction should be governed by a specific Shad'ah law. Majority of
or not
the interviewees (90%) support a self-governing Islamic hire-purchase law so that
AITAB practice can be properly implemented in the light of Shad'ah. Only 11%
intervieweesobserve that the existing law is fine; if not completely sufficient, efforts
be to tackle those insufficiencies only. They agreedthat a special law is
should made
for AITAB, but this doesnot mean 1hateverythingneedsto be changedjust to
needed
with the Shadah. Hence, they hope that the harmonization of Islamic
comply strictly
law will bring a positive impact to developmentof Islamic law from
and conventional
within conventionalpractices.
8.9.2 Advantages and Positive Impact of Muamalah Hire-Purchase Bill
During the interview session, some of interviewees mention the advantages and
impacts of Muamalah Hire-Purchase Bill on AITAB transaction. Their opinions are
in the following points:
compressed
1) The Bill, if later becoming a governing law, will affect a total change in rules
governing hire-purchasetransaction. The transaction will have an independent
legal framework of its own without having to rely on conventional legal
framework which has some inconsistencies with SharTah principles.
Accordingly, this law aims to avoid conflict of principles between SharVah and
conventional framework which may lead to disputes.
2) One of the most significant advantagesof Muamalah Hire-Purchase Bill is its
wider scope of application as compared to conventional hire-purchase. The law
applies to all goods stated in the First Schedule.In addition to consumer goods
and motor vehicles, the Schedulein the Islamic hire-purchase law also includes
housesof not more than RM250,000 and machinery equipments. In the current
231
Chapter 8 Operationaland RegulatoryFrameworkof IslamicHire-PurchaseIn Malaysia
practice, houses are purchased using an interest-based financing; while
machinery equipments are usually offered through industrial hire-purchase
financing.
3) Due to its wider scopeof application, a specific advantageof the Bill applies to
the customerand developerin house-financing.Under SharVah concept of hire-
purchase,only completed housescan be used as a subject of the transaction. In
other word, the house must exist before the hire-purchase transaction takes
place. Hence, when a customer enters into a hire-purchaseagreement, he can

physically possess and live in the house without having to wait for several years
until the house is completed. Indeed, this facility gives an opportunity to low-
income groups to buy houseswithout having to bear 173
much cost .
4) This law protects the customer against unscrupulous developers who tend to
misuse the deposit money paid by the customer. They either use low quality
construction materials which later cause defects to the house; or in the worst
case,abandon the uncompleted construction works. The customer often suffers

monetary loss and is also unable to own a dream house. By requiring the house
to be in existencefirst before any transactiontaking place, this law enablesthe

I customer to inspect and choose the house before making any decision to
purchaseit.
5) As far as developers are concerned,the law does not negatively affect their
business.They can apply for financial assistancefrom any financial institution
for the purpose of constructing houses or residential area. When completed,
only then they can sell the houses to the customer. This kind of arrangement
indirectly imposesa duty onto the developerto build a good quality houseto the
customer's demand.
6) In respect of international relationships, the existence of Islamic hire-purchase

law is vital in order to gain confidence from other Islamic countries operating
the sarne facility. Based on Malaysia's previous experience during financial
crisis in 1997 and 1998, when the country applied for funding some projects
(including lease and hire-purchase based projects) from the middle-east
173Buying a houseusually burdensthe low income group, becausethey have to pay for uncompleted
house for certain period of time, and at the same time they also need to pay monthly rent for their
rented home.
current
232
its
countries, requestwas refused by Saudi Arabia becausethere is no governing
Shar! 'ah law which look into Islamic banking business.
Havinglisted someadvantages andpositiveimpactsof Islamic hire-purchase law, the

importanceof having the law become more crystallised.The following section
discusses forwarded
somesuggestions by the interviewees
in respectof provisionsof
the Muamalah Hire-PurchaseBill.
8.9.3 Interviewees' Suggestionsto Muamalah Hire-Purchase Bill
One of the most important questions addressed to the interviewees is an attempt to

their ideas pertaining to matters that they think should be inserted in the
explore
Bill. The interviewees 174 Shad'ah advisors and
Mu'amalah Hire-Purchase , mainly
bank officers have put forward some proposals to the Bill which are categorised'as
follows:
(a) Clear provision stating basic concepts of Islamic hire-purchase

Firstly, the interviewees have emphasizedthat the Muamalah Hire-Purchase
Bill must not simply be a duplicate of Hire-PurchaseAct 1967. It can refer to
HPA in respectof procedural mattersbut should not that contradict to SharVah.
The Bill should be bound by Sharl-ahrules; if there is any contradiction to the
sharVah principles, it will be automatically invalidated.
Basically, the Bill has to specify that any AITAB transactionmust be carried out
basedon two main SharVah requirements;firstly, avoidanceof interest-bearing
(ribil) elements; for example, imposing minimum amount of penalty for late
payment to purposely compensate the actual loss and overcome the moral
175
hazard among the customers. Excessive amount of charges will amount to
charging an interest. Secondly, avoidance of contractual ambiguity and
uncertainty (gharar) elements; for example, repossessioncannot be exercised
unless its legal implications have been made clear to the hirer in the earlier
stage.
174About 78% Shadah advisors,75% bankers,38% Shadah scholars, 17% legal experts and 13%
have given their suggestions to the Bill.
economists
175A penalty of only 1% p.a. is imposed onto defaulters in Islamic hire-Purchasefacility. This late
is far lower than that's prescribed by conventionalfacility of 8% p.a.
penalty charge
233
(b) AITAB documentation

Documentation of AITAB transaction is the second important matter that is
frequently mentioned by the interviewees. The Bill must specify that the
documentationshall comprise two distinct contracts(aqd); leasing (Ydrah) and
sale and purchase contracts. The sequenceand procedure of entering the

contracts must be clearly stated so that the contracting parties understand how
the transaction works, when transfer of ownership takes place and how to
indicate proper offer and acceptance.In addition to the general procedure, the
Bill needsto spell out contents of AITAB agreement.Generally, an agreement
is drafted based on provision of laws and it must have legal effect to the
transaction.Its contentsmust be concise and substantive.In respect of transfer
of ownership, the AITAB agreement must explain clearly whether it is
automatically affected upon full settlementof purchaseprice, or by other way

agreedby both parties. If the owner intends to transfer certain ownership risk,
such as maintenance, to the customer in return of granting a rebate and

flexibility in the transaction,he must also insert the terms into the contract and
make known thoseterms to the customer.
(c) Islamic hire-purchase Goods

Mu'amalah Hire-PurchaseBill should cover a wider range of goods, hence is
not limited to consumergoods and motor vehicles only. The goods under hire-
purchase transactionmust fulfil certain conditions, such as, the purpose of using
the goods must be specified, the goods must be utilised in compliance to
SharF'ah principles and the goods must be in existence in order to avoid
hardship and oppressionto the customer.
Monetary matters
The Bill must state clearly the purpose, calculation, method and procedure of
payment and other essentials relating to monetary matters. They cover the
following items:
9 Calculation of profit margin

o Penalty payment, for example,penalty for late payment
e Pre-payinentor deposit
234
o Feesand charges,for example, administrativefees, stamp duty charges

etc.*
o Rebate(ibril ) payment.
Certain monetary matters like profit margin, deposit and fees must be included
in the contentsof ageement.
(e) Rights and liabilities of parties

All parties involved in the hire-purchase transaction must have distinct rights
and liabilities which are necessarily provided by the Bill. The customer's right
as well as the bankers' must be protected by inserting certain conditions and
warranty in the law. The responsibility towards insurance and maintenance must
also be ascertained by the law, whether it should be borne by the bank or

customer, or shared by both parties. In most cases, this responsibility is
transferred to the customer because he will be the owner soon. This matter
should therefore, be clarified in the law and the agreement so that both parties,
especially the customer, are aware and understand the extent of their rights and
responsibility in a hire-purchase agreement. Beside owner and hirer, the
transaction involves a dealer who is appointed as an agent by the financial

institution, as such, the concept and liability of agency (wakiilah) must also be
explained in the Bill.
(f) Power of Enforcement
There must be an appropriate enforcement of law so as to make the law
effective and its implementation a success.The enforcement body must be

properly formed consisting enforcers who have a background or at least, a
minimum knowledge of Islamic law and procedure. Control of the transaction
should be necessarily undertaken by the enforcers in order to avoid any
oppression onto the customer or guarantor. Therefore, the Bill should provide
clear description of the enforcer or controller of AITAB to ensure they fulfil
I required qualification to managethe transaction.
In addition to the above, the Muamalah Hire-Purchase Bill must have social
It
element. should look to practicality aspectby assessingthe established local
practices (urj) and extent of public acceptanceto the law. Another vital aspect,
235
the procedureof the transactionmust be clearly drawn up. With clear rules and
procedure,the law enforcer would be able to observeand control the transaction
efficiently.
As it follows from the above, most intervieweesput more emphasison the concept
and documentation of AITAB transaction becauseboth are significant matters that

distinguishAITAB from its conventional counterpart.Additionally, other suggestions
cover wider scope of goods, monetary matters, rights and liabilities of parties and
characteristicof enforcementbody.
The following section will discuss the impact of Islamic hire-purchase law on the
Malaysian legal systemand someimpedimentsof enforcing the law in the system.
8.9.4 Impact on the Malaysian Legal Framework
According to the interviewees, the Muamalah Hire-PurchaseBill will have certain

impacts on the Malaysian legal framework. The law, if successfullyimplemented and
will be a comprehensive SharVah -compliant regulation that works side by

enforced
with conventional law. It will mark a positive impact towards upgrading the
side
Shadah law and institutions in Malaysia. It is also expected to become a
position of
for other area of law to come with a Sharl'ah alternative in order to
milestone
a truly dual legal system in the country.
promote
On the other hand, some interviewees view that if the Muamalah Hire-PurchaseBill
is to be passed, it would be redundant with Hire-Purchase Act 1967, as in case of
Islanlic Banking Act 1983 (113A)and Banking and Financial Institutions Act 1989
(BAFIA). The IBA is said to be a carbon copy of the BAFIA. MA is also not an
law governing Islamic banking businesses in Malaysia. Many references in
exhaustive
and documentation are still made to the BAFIA. Likewise, Wamalah
procedural
Hire-Purchase Bill appears to be very similar to the Hire-Purchase Act 1967, except in
76
certain aspects' .
176'A comparison of Muamalah Hire-PurchaseBill and Hire-Purchase Act 1967 is thoroughly

discussed in Chapter 4. An examination of the Bill and HPA reveals some identical and conflicting
featuresbetweenthe two regulations.
236
8.9.5 Impediments of Implementation of Wamalah Hire-Purchase Bill
Having realized the possible impact of Wamalah Hire-Purchase Bill to the
Malaysian system, the study inquires the interviewees' opinion about obstacles and
of implementing the Bill in the country. The interviewees' responses cover

challenges
issues relating to possible loophole in the Bill, institutional involvement,
several
of law and public reaction. Their observations on the matter are
enforcement
compressedin the following points:
(a) The provisions in the Bill still refer to conventional law in many areas. Thus,
implementationbasedon the Shadah law will be limited. If there is a loophole

in the Islamic law, referenceis usually madeto the Hire-PurchaseAct 1967.
(b) The Bill is silent in many provisions significant to safeguardthe interest of the
hirer. For example,the hirer's right during repossessionas provided by the HPA
in the following respects:
" Hirer's exemption from paying cost of repossessionif he returns goods

177
within the prescribedperiod.
" Some of the hirer's other rights and immunities when good repossessed,
including right to require the owner to sell the goods to any person
recommended by the hirer and right to recover certain amount from the
178
owner.
in 179
Power of hirer to regain possessionof goods certain circumstances.
The Bill's failure in providing such protection amountsto obvious inadequacies
which will affect public confidencein it, hence,will impede its implementation.
(c) Another potential impediment of executing the Bill is with respect to a possible
ambiguity in determining the profit margin of the Islamic hire-purchase
transaction. The Bill merely provides a statement indicating that the profit
has to be calculated based on the concept of cost-plus sale (bay' al-
margin
without specifying any formula or elaborating on its mechanism.
murabahah),
This would indeed be insufficient for a law that is going to be the main reference
the operation of AITAB. Hence, the determination of profit-margin
governing
to be clearly defined and delineated in the proposed Bill especially with
needs
respect to its definition and calculation methods. This is important to avoid any
Section16Aof HPA.
177
"' Section 18(1) and (2) of HPA.
119Section 19 of HPA.
237
confusion and misunderstandingespecially when it comes to interpretation of

the Bill and executingit.
(d),, The Bill fails to provide a proper legal structureto decidethe dispute with
certainty and flexibility based on Shad'ah principles. A legal structure is a
specialised law enforcement body which comprise police, prosecution and
judiciary. This drawback restricts the law to be implemented successfully,
because a law without a proper legal structure or enforcement body hardly
obtains public confidence and assurance.Thus, whenever there is a violation of

law, but the law cannotbe enforced,the public will not respectthe system.
(e) There is uncertainty as which court should have the final decision in deciding the
Islamic hire-purchasecases.At the moment, High court is the forum for Islamic
banking disputes (including hire-purchasecases)and the basic law used to try
Islamic banking casesis the Law of Contract. In case of AITAB transactions,
reference is made to the existing Hire-PurchaseAct 1967, thus, the case which
may involve Shadah issues will be decided according to the civil law, not
Shad'ah principles.
There is inadequacyof expertsin AITAB transactionincluding officers, lawyers
andjudges who are in charge of enforcing Islamic hire-purchaselaw. These law-
enforcers should possess a minimum knowledge of Islamic law and

jurisprudence beside necessaryexpertise in the area banking and finance. Lack
of these experts will certainly impede the efficiency of Islamic hire-purchase

law.
Realizing the above impeding factors, the interviewees submit that the law-maker
deal with these impediments by taking them into consideration when drafting
should
the Muamalah Hire-PurchaseBill. They view that a law without proper enforcement
will be useless.
238
8.9.6 Current Position of the Muamalah Hire-Purchase Bill
According to someintervieweeswho have beeninvolved directly in the committeel8oI

the governmentviews that the Bill needsto be thoroughly examinedbefore passing it
as a governing law. This examinationhas been carried out for nearly five years. A few
of interviewees question the efficiency of persons in charge of conducting the

examination and drafting the Bill which has delayed the implementation of the Bill.
The latest situation concerns with an issue whether or not Islamic Bill is really
necessary to control the operation of Islamic hire-purchase.

If not, another issue needs
to be considered; whether or not Hire-Purchase Act 1967 should be amendedto make
it more consistentwith SharVah principles. According to the interviewed government
officers, the government is likely to amend the HPA because there are only few
provisions of the HPA which are inconsistent with Shar! ah principles. Other main
reasons are, to promote a harmonization between conventional and Islamic
regulations, and to avoid redundancyof laws in the Malaysian legal system.
However, some other interviewees opine that for the long run, it is not a good idea to
Hire-Purchase Act 1967 for the purpose of harmonising the law becausethe
amend
will not bring a big impact to the development of AITAB. If the system
amendment
from such amendment fails and causes injustice, Islamic hire-purchase law
resulting
be condemned. Thus, it will not lead to full implementation of Islamic hire-
will
law but probably a part of it. It is worth noting that the above matter is still
purchase
The debateis ongoing, either to include provisions of Islamic hire-purchase
pending.
into the Hire-Purchase Act 1967, or allow it to exist as a separatelaw independently.
The researcherobservesthat the question of either to implement Islamic hire-purchase
Bill or amend the HPA needs a thorough examination. The advantages and
disadvantages,positive and negative implications of either matter do need serious
before deciding the best legal approach to AITAB transactions. The
consideration
stand in this issuewill be presented in the next chapter.
researcher's
181The committeewho is in chargedof conductingresearchand examination of the Mu 'amajah 11ire-

purchase Bill. They consist of officers from the Central Bank of Malaysia, Attorney General
Chambers, Ministry of Domestic trade and Consumerismand membersof National SharVah Advisory
Council.
239
Chapter8 Operationaland RegulatoryFrameworkof IslamicHlre-PurchaseIn Malaysia
8.10 FUTURE OF AITAB
Having understood the operation and application of AITAB from interviewees' point
finally, this section discussesthe future of AITAB. It takes into account the
of view,
interviewees' observations and expectations towards the facility. In general, all
interviewees are optimists that the future of AITAB in Malaysia is very bright and
The future of AITAB is very bright becausethe facility has improved a lot
promising.
is by the public. There are many Muslim customers in Malaysia, and the
and accepted
of Islamic products is increasing among the non-Muslim customers as well.
awareness
because it better features181
AITAB facility receives a strong acceptance provides
to hire-purchase.
compared conventional
Economists observe that AITAB business promises a very bright future for trading
They give an example of furniture traders like Courts Mammoth, Tesco,
company.
Carrefour, moneylender and others that adopt hire-purchase concept in their
businesses.Therefore, AITAB can be a competitive facility that can be utilized by all

not be limited to financial institutions only.
and should
Realizing the potential of AITAB, some banks increase the number of branches which
the facility. Encouraging initiative is even taken by a bank to widen the scope of
offer
in to include non-national cars182 which has in December 2003.
financing order started
They also admit that a strong commitment by the Central Bank of Malaysia has led to
growth of Islamic products. According to the Central Bank's direction, every

a rapid
financial institution in Malaysia must have a total Islamic loan base at 10% by 2005;
20% by 20 One
10183. bank managedto make a total Islamic loan base at 16%
and at
in 2004; while one finance company had reached 15% of total loan base in the same
In order to comply with the direction, financial institutions have no other mean
year.
to fully mobilize their Islamic products, the most practical one is AITAB
except
facilitY.
'81For example,a low chargesfor late paymentof only 1% p.a.

182Certain banks offer AITAB facility for financing of national cars only. But, becauseof increasing
demandto the facility, they start to include the foreign-manufactured cars.
183This requirementaims to encourageevery financial institution to promote Islamic banking scheme
become more active in providing Islamic banking products to the public.
and
240
The interviewees emphasizethat AITAB needs more improvement in order to be
more Shariah-compliant, practical and flexible. There is a need for a standard

regulation to govern and standardize its operation in all financial institutions. They
view that the current operation of AITAB will be more standardized and well-
if
organised an Islamic hire-purchaseregulation can be implemented.
Finally, the interviewees observethat the AITAB facility needsto lie on preposition
of true concept of (leasing) ijdrah and sale contract. It should not totally adopt what
has been applied in conventionalhire-purchase.In other word, AITAB is perceived as
similar to conventional hire-purchase, because new and distinct concepts of Islamic

hire-purchase are yet to be introduced. According to them, as long as both are
identical, there is no point of talking about the future of the facility. Therefore, more
research in the area of Islamic hire-purchase must be carried out in order to suggesta
true and practical concept of Islamic hire-purchasewhich has distinctive featuresfrom
conventional facility.
8.11 SUMMARY
This chapter analysesdata comprising interviewees' opinions and observationson the

implementation of AITAB businessin Malaysia. Their responsesproduce significant
data which are categorisedinto seven sections.The mechanism of AITAB operation
in Malaysia is discussedfrom practitioners' and non-practitioners' perspectivesto get
a clear insight into the operation from the two different views. Problems and crucial
issues in AITAB transaction are analysed from two aspects; firstly, provisions and
of the facility; and secondly,its conceptualnature in view of Sharl-'ah.
operation
issues on the adequacyof Hire-PurchaseAct 1967 are examined from its strengths
and weaknesses. Detail analysis shows that the bankers as main practitioners accept
HPA as a comprehensivelaw governing hire-purchaseoperation; while the SharVah
advisors and Shadah scholars oppose to the adequacyof HPA because according to
them, HPA does not provide sufficient Shadah-compliant rules regulating AITAB
practice.
241
An analysis is made to the proposedMuamalah Hire-PurchaseBill, in respect of its
advantages, impacts to the Malaysian legal framework and impediments of its

implementation. Interestingly, majority of the interviewees,including those who have
been comfortable with Hire-PurchaseAct 1967, support a self-governing Islamic hire-
purchase law. Their main reason for supporting the Bill is that AITAB practice can be
properly implemented in the light of SharVah.
From the above analysis,this study observesthat the intervieweesgenerally are well-
aware of the current operation of AITAB and the legal implications to the transaction.
Those who are involved directly in the operation as bankers and Sharl'ah advisors
(practitioners) appearto give a very valuable insight of AITAB practice. Others like
Sharl'ah scholars, economists, legal experts and government officers have also
this study by providing substantialinformation relating to SharVah and legal
enriched
issues,and scenarioof the Malaysian legal framework.
This chapter has contributed in understanding the real situation and extent of
implementation of AITAB in the Malaysian financial institutions. Most important, the
chapter revealed the significant position that AITAB holds on part of the providers
(financial institutions) aswell as the users (customers).Analysis of interview data also
manages to present the position of two vital regulations relating to Islamic hire-
in Malaysia, namely Hire-PurchaseAct 1967 and Muamalah Hire-Purchase
purchase
Bill. These analyses will certainly give valuable contributions to the practice of
Islamic banking and finance in Malaysia particularly.
242
Chapter 9
CONCLUSION AND RECOMMENDATIONS
9.1 SUMMARY OF THE STUDY
This researchhas presented an in-depth study on Islamic hire-purchasein the light of

the Malaysian It a
experience. constitutes preliminary attempt at gaining a holistic and
understanding of Islamic hire-purchaseboth from the theoretical and
comprehensive
legal framework as well as providing valuable empirical evidence based on in-depth
interviews and questionnaire surveys. Compared to other Islamic financial products,

Islamic hire-purchase is a relatively new innovation. Since its first inception in
Malaysia more than 10 years ago, Islamic hire-purchase or popularly known as

AITAB has expandedtremendously partly due to the overwhelming acceptanceand
increaseddemandby customers,either individuals or corporations including the non-
Muslims. The continuoussupport of Malaysian governmenttowards AITAB also adds
to its flourishing development.
Notwithstanding its heightened popularity and demand, AITAB is still lacking in
terms of regulatory framework as it adopts conventional rules enunciated by the Hire-
purchase Act 1967 (hereafter HPA). It has been observed that if AITAB is
controlled by the HPA, it has to face three basic problems; first, HPA
continuously
does not provide a Sharl'ah-compliant agreementwhich clearly spells out contract of
iprah and contract of sale; secondly, HPA contains provision of interest-bearingterm
is prohibited by the Shadah; and thirdly, HPA is known
chargeswhich clearly as a
law hence could affect the validity of Islamic hire-purchase agreement. 184To
rigid and
these shortcomings,the Malaysian governmenthas recently proposed a new
overcome
Bill known as Muamalah Hire-Purchase Bill (Muamalah Bill). The proposed bill is
to remedy the inconsistencies in certain HPA provisions particularly when

expected
dealing with Sharl'ah issues arising from AITAB transaction. A thorough review of
Islamic hire-purchase agreement has been modified to comply with Sharl'ah, but such modification
to the statutory form in hire-purchase agreement as per HPA 1967. If argued in the
renders a violation
Court, the Judge may hold it as a violation of the HPA and thus, HPA rules does not apply to the
hire-purchase transaction because it does not conform to the rules for the formation of
Islamic
by the HPA.
agreementasprovided
243
Chapter9 Conclusionand Recommendations
the HPA and the new Muamalah Bill reveals trivial differences in terms of overall
contentsand procedural rules. Potential discrepancies between the two regulations are
found only in their respective concepts and interpretations, agreements and
arrangementof provisions.
To get a better insights into the actual scenarioof AITAB in Malaysia especially with
respect to its legal and operational issues on the ground, the study provides empirical
evidence based on in-depth interviews and questionnaire surveys which has been
conducted on the providers of AITAB facility (financial institutions), users of the

facility (bank customers)and experts in Islamic hire-purchasebusiness in Malaysia.
There are 46 respondents involved in the interviews representing different
backgrounds ranging from Islamic bankers, Sharl'ah advisors, Shadah scholars,
economists, legal experts and government officers. The interviews cover pertinent
issues such as the legal frameworks governing AITAB practice, mechanism and
operation of AITAB, its strength, problems and weaknesses, and the extent of public
acceptance to the product. Additionally, a questionnairesurvey has been carried out
among 203 bank customers to elicit their perceptions and expectations towards
AITAB. Overall, the findings reveal that customersof AITAB have positive views of
the facility. One of the most important reflections of their positive attitude is that their
level of satisfactiontowards the product is very high.
reported
9.2 MAJOR FINDINGS OF THE STUDY
Since this study is the first attempt to discuss and examine Islamic hire-purchase in
the light of its current practice in Malaysia, it producesmajor findings on the basis of
theoretical justification and empirical data which contribute in filling an important gap
in Islamic banking literature and regulatory framework. It also offers suggestions
have practical relevance in the Islamic banking industry. This section reviews
which
the major findings of this study.
9.2.1 SharTah Framework of Islamic Hire-Purchase (AITAB)
Based on the comparative review of Hire-Purchase Act 1967 and Muamalah Hire-
purchase Bill as well as the feedbacks obtained from expert interviews, it is observed
that AITAB should have a distinct legal framework in order to make its Shad'ah-
244
basedoperation more efficient and effective. However the main question is, whether
this Shadah framework should be expressedin terms of an independentregulation or
to simply incorporateits principles within the existing regulation. Obviously, there are
advantagesand disadvantages
associatedto either option.
if the decision is to opt for an independentregulation, it certainly requires a specific

Shad'ah Code and structured legal institutions (Shadah Court) which have an
appropriate hierarchy with sufficient authority to decide and make a final decision in a
dispute. For this purpose,necessaryamendmentsmust be made to the Civil Law Act
1956 and Federal Constitution185 to give an effect to the proposed framework. The
establishment of this framework will result in a dual system of laws which may give
more legal certainty and variety. This regulation if successfully implemented, may
give more choices to the public to submit themselves to either civil or SharVah laws,
whichever suit their affairs. However, such endeavour is nearly impossible as it

involves huge costs and problems of red-tapes.The enactmentof a new law is not as
easy as one might perceive since it has to go through many stages, either in pre-
parliamentary or during parliamentary stage (refer to Appendix F). A proposed law,
before being passed and gazetted as a law must have a strong administration and
enforcement body. This poses some serious impediments since the current status of
the Shadah courts is far below the civil courts in terms of its limited jurisdiction to
hear and have final decision in most cases. This is due to the prevalence of
law in Malaysia. Moreover, the proposedamendmentsto both 'supreme'
conventional
laws (Civil Law Act 1956 and Federal Constitution) are believed to be almost
impossible becausesuch amendmentswould need full support from the government,
legislative andjudiciary bodies.
comprising executive,
In view of these in
major obstacles the way of establishingan independentShadah
law for AITAB, the studyviews that anotherpossibleandviable way of establishing
the SharVah principlesof AITAB is by incorporating
them into the existinglaw. This
115Civil Law Act 1956, by virtue of section 5 permits the application of English Law to banking and
mercantile mattersin the absence of any specific regulation. Federal Constitution is the supremelaw of
the land which provides that mattersrelating to Islamic law are under the state list (not federal list) and
limited to personal matters such as betrothals, marriage, custody etc. Thus, as Islamic law is a state
the law and its administration vary from stateto state.
matter,
245
necessitatesfew modifications and adjustmentsto the Hire-Purchase Act 1967186 to

it
make compatible with all Shadah requirements.In case of minor incompatibilities,
certain modification to the law can be made by inserting supplementaryprovisions to
give effect to the Shad'ah principles. Alternatively, the SharVah rules can be
incorporated into a 187
Schedule of the HPA. The Schedule will become an
independentrule, and the parties to AITAB agreementmust submit to the rule under
this Schedule. This option of implementing Sharf'ah principles to the AITAB
operation is believed to be more feasible, realistic and less complicated as compared

to establishing an independentShadah law. Furthermore, cases involving AITAB
transaction can benefit from the existing administrative and legal institutions of HPA
which have been established for a long period of time.
9.2.2 Prospect of AITAB in Malaysia
In addition to the issue of Shadah regulation discussedabove, the empirical study

provides instructive information pertaining to the future prospects of AITAB in
also
Malaysia. Basedon the results of interviews and questionnairesurveys,it is found that
AITAB is very well acceptedby the customers.A large majority of respondentsare
homogenously satisfied with AITAB facility offered by financial institutions in
Malaysia irrespective of their differences in terms of age, level of education,
occupation, gender and marital status. A close scrutiny into their reasons of
that the religious factor along with convenience aspects such as
satisfaction reveals
ambiguity-free and uncomplicated transaction with respect to documentation,
procedure, processingand payment system, are perceived as important factors in their

decision of AITAB. This result implies the pragmatism of Malaysian
patronage
who are religious-conscience but at the same time insist on convenience
customers
dealing with SharTah-based instrument. When investigating customers who
when
have experienced both AITAB and conventional hire-purchase facilities, a vast
majority feel AITAB has given them more satisfaction than conventional product. The
186Although it is understandablethat HPA suffers a deficiency of rigidity as mentioned earlier, it still

has a possibility of permitting the incorporation of the Shad'ah principles into it. As a result, the
of AITAB will be securely protected by the HPA and at the same time, adheresthe Sharl'ah
operation
rpirements of AITAB.
18 A scheduleis an important componentin a legislation which provides supplementarymatters that
not covered by the main provisions. There are currently seven Schedules in the HPA containing list
are
of goods, documents and notices and manners of calculating the term charges and annual percentage
Theseschedules are effective and enforceable under the HPA.
rate.
246
main reason given was its Shadah -compliant nature and hence fulfilling their
religious obligation in avoiding riba. This result certainly implies that Islamic
financial institutions operating in a competitive dual-banking system like Malaysia
can still create their own niche in the market for those who are committed and
concernedwith ribil-free financial instruments.
9.2.3 Problems of AITAB in Malaysia
Despite the positive results obtained from the findings as presentedabove, AITAB is
not without a problem. Based on the interviews and questionnaire surveys, it is

discovered that there are many pertinent problems associatedto AITAB operation
expressed by the respondents. Among the focal issuesemphasised are issues relating
to the conceptual and operational aspectsof AITAB such as ownership, methods of
transferring ownership, deposit payment and penalty in case of default. Other
pertinent operational problems highlighted include the lacking of experienced and

well-trained personnel, non-cooperative dealers,complicated documentation and stiff
in the market. Some of the problems highlighted by the interviewees also
competition
to the findings from customers' questionnairessurveys. For example, for
correspond
customers (13%) who dissatisfied with AITAB, indicated their reasons for
some
dissatisfaction due to the complicated documentation and inefficiency in the
and processing. They also feel that AITAB does not fully comply with
procedure
Sharf'ah principles. This result suggeststhe lack of consistencyin service quality due
to the inexperienced and incompetent personnel particularly when they interact with
clients and fail to furnish them with a satisfactory explanation regarding AITAB
As a result, unconvincedcustomersbecome confused about the system.
contract.
9.3 RECOMMENDATIONS FROM THE FINDINGS OF THE STUDY
Based on the major findings discussedabove, this study proposes several important
recommendations.
1. The Shariah frameworkfor AITAB should be basedupon the HPA 1967

since it has been shown that not all provisions in HPA 1967 contradict the
SharT'ah. In fact, most of HPA's Provisions are acceptable and within the
spirit of SharVah. It is more feasible to work on the existing law, instead of
247
Chapter 9 Conclusion and Recommendations
introducing a new hire-purchase law which will certainly encounter many

bureaucratic problems in the course of implementing it. However, the
proposed framework could not be a successunless it is enforced by well

structured legal institutions and procedural rules based on the spirit of
Sharf'ah.
2. To support the above proposal, efforts to improve the jurisdiction of Sharf'ah

courts in handling Islamic banking and commercial matters (in this case,
AITAB) must also be given seriousconsideration. The jurisdiction of court to
try Islamic banking casesis still an unresolved issue. Civil court is currently
given power to try Islamic banking disputes,which include AITAB cases.In
this respect, three matters relating to the procedure of handling Islamic
banking caseswhich invoke Shadah issuesare proposed; first, since banking
matters fall within the jurisdiction of the civil court, the court must introduce a
specific procedure for Islamic transactions(Muamalah). With the procedural
rules, the court will be more cautious when making decisions in Islamic
banking matters. They may also begin to understand and appreciate Islamic
banking concept.Secondly, the judge who hearsan Islamic banking casemust
have some basic knowledge of Islamic contract and Islamic transaction
(Mu'amalah). Thirdly, a qualified Shadah judge can be put in the sitting of
the civil court wheneverthere is a caseinvolving Sharl'ah issues.
3. There is needto standardisethe procedurefor all financial institutions offering

AITAB. The study observesthat 'lease ending with sale' and 'lease ending
with hibah' are the best mechanismsto be applied in the present operation
becauseboth have been used by many financial institutions, besides their
procedures are easy to understand.The study proposesthat clear and standard

guidelines must be drawn up to explain how these instruments work in the
light of legal and Sharl'ah framework. The guideline must specify that the
parties have two choices to own the leased asset; firstly, by way of sale at an
agreedprice or treating the final instalment as purchaseprice; and secondly,
by way of hibah upon payment of all instalments. As such, the study opines
that the operation of Islamic hire-purchaseis more suitable to be called Al-
248
f Conclusionand Recommendations
Chapter9
Ij5rah al-Muntahiyyah bil al-Tamlik (AIMAT), instead of Al-Ijarah Thumma

Al-Bay'(AITAB).
4. A documentation
standard of AITAB to be usedby all financial institutions is
also viewed as an important aspect that needs to be considered for more

effective implementation of AITAB. It is proposed that 'aqd (acceptance)
letter and document evidencing the transfer of ownership (sale and purchase
agreement) need to be standardised by all financial institutions offering

AITAB facility. 'Aqd letter should give sufficient notice to the prospective
customer on how AITAB works and the extent of HPA's application to the
transaction.The sale and purchaseagreementmust clearly specify the methods
and conditions of transferring ownership either by way of sale or hibah as
agreedby both contractingparties.
5. In view of the feedbacks obtained from respondents, there is a need for

financial institutions to improve their servicequality. This necessitatesthem to
provide sufficient training and adequate knowledge about various Islamic

financial products in general and AITAB in particular to their personnel. This
will certainly enable them to deal with customers of AITAB effectively and
satisfactorily.
6. Another important aspect is to strategically market AITAB through rigorous
publicity, not only to attract potential customersbut also serve as an effective

tool for educatingthe public about AITAB. As shown in our findings, many
customers are not aware the benefits of AITAB especially with regards to its
fixed-rate facility in which they could plan aheadthe payment of instalments
and manage their resourcesmore efficiently. Additionally, some customersare

confused about the actual operation of AITAB. Therefore, endeavours to
educateand inculcate the understandingamong customers and public through
various means of marketing tools may alleviate their confusion and scepticism
about the authenticity of AITAB vis-a-vis Shadah principles.
7. It is also necessaryfor financial institutions to widen the operation of AITAB

to include house financing as opposedto the current restrictive practice that
249
Chapter 9 Conclusion and Recommendations
confine to motor vehicles and consumer product financing. Even though the
Shad'ah regulation in still an unresolved issue, the financial institutions may
consider offering such facility as part of their social responsibility to

accommodateand facilitate lower income group who will benefit most from
such arrangement.
9.4 LIMITATIONS AND FUTURE RESEARCH
Despite our efforts to provide an instructive conceptualisation of Islamic hire-
purchasein the light of Malaysian experienceand examine it from various respondent

the researchis not without limitations.
groups' perceptions,
Firstly, problems are encounteredduring the empirical works. Since the main focus
this researchis the operation of Islamic hire-purchaseand its regulatory framework,
of
interview is the best research tool for the said purpose. Though it guarantees
and accuracy of data, it has proved to be costly, time-consuming and very
reliability
tiring. 46 face-to-face personal interviews involving six different groups of experts,
have been a real challenging experienceto the researcherwho has to be prepared for
cancellation or possibility of getting insufficient data from
any postponement,
respondents, and immediately work on other plan of action, for example,
respective
a back-up list of potential respondents. Accordingly, the future researchcould
prepare
on a particular group of interviewees so that their observations and
concentrate
in particular issues of Islamic hire-purchase can be assessedin more detail.
reactions
The second limitation of the is

study providing a satisfactory representation of the
The ideal sampling frame would be the lists of all customers of
survey sample.
AITAB of all financial institutions under study. The availability of such lists would
enable the researcherto sample the population through the use of a table of random
numbers which could ensure random sampling and prevent biasness. However,
developing such an ideal sampling frame would have been almost near to impossible,
as time and resources were the main constraints to this study. Furthermore, to gain
access to information of respondentswas also a problem since all banks are bound by
duty of secrecy as prescribed by Banking and Financial Institutions Act (BAFIA)
250
1989. To overcome this difficulty, many channels were used to administer the
questionnaireswhich include conducting surveys at various banks' premises, schools

and various government institutions. Thus, future researchon customers' perception
to
may want concentrateonly on few financial institutions and getting their approval
to conduct surveyson their customersat their premises.
Thirdly, the study is limited to the operation of Islamic hire-purchasc in thirteen

financial institutions in Malaysia; leasing companiesare excluded. Thus, we cannot
generalise the results to the leasing companies that also provide the Islamic hire-
purchase facility. Future research may reach these companies and examine their
experience in Islamic hire-purchascbusiness,and then make a comparative study to
the experienceof Islamic financial institutions.
Finally, due to specific interest and focus on the operational and legal aspect of
AITAB facility, it is beyond the scope of this study to examine other related areasP
particularly, Islamic hire-purchase bond (Sukuk AITAB) which is the latest

development in AITAB facility. Thus, it is worth considering this issue for future
research, especially when the government seemsto be very serious in promoting and
developing Islamic banking products.
Despite its caveats and limitations, this study has yielded preliminary attempt and
evidence evaluating the operation of Islamic hire-purchasein Malaysia from different

It provides important insights into the various issues relating to the
perspectives.
of Islamic hire-purchasefrom three important components in the industry,
operation
mainly the user (customers),providers (financial institutions) and the experts. Most
importantly, becausethis study representsa pioneering work in the operational and
legal aspectsof Islamic hire-purchaseboth from theoretical and empirical viewpoint,
it is believed that its findings encouragethe interest for future research.
251
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264
GLOSSARY
substitute,compensation, indemnify, consideration,return or

al-ajr
countervalue
'aqd contract
'ayb : defect,imperfection, shortcoming,disadvantage
'ayn : corporealobject
'Urf : local custom,prevailing practice at a particular place
baY' : sale
bay'al- istisna a contract of acquisition of goodsby specification or order,
where the price is paid in advance,but the goodsare
manufacturedand deliveredat a later date.
bay'al-salam a contract of saleof goodswhere the price is paid in advance
and the goodsare delivered in the future.
bay'bitl unlawful sale
bay' bithamanajill this contractrefers to the saleof goods on a deferredpayment
basis. Equipmentor goodsrequestedby the clients are bought
bay'mu'ajjal
by the bank which subsequentlysells the goodsto the client at
an agreedprice which includes the bank's mark-up (profit).
The client may be allowed to settle the paymentby
instalmentswithin a pre-agreedperiod, or in a lump sum.
Similar to a murdbahahcontract,but with payment on a
deferredbasis.
fatwd Legal rulings
flqh / usfilfiqh Islamic jurisprudence/principlesof Islamic jurisprudence

deception.Bay'al-ghardr is an exchangein which there is an
ghardr deception
element of either through ignoranceof the goods,
the price, or through faulty description of the goods
ghayr munaqid not by concludedbargain
hibah gift
Iladi-th Prophet'sTradition
*dl-th)
laji Pilgrimage to Makkah
Yal,51 Permissibleaccordingto Shadah
a exchangeof money for money
rf
ibra' rebate
: offer
prah Leasing.A contractunderwhich a bankpurchasesandleases
out equipmentrequiredby its clientsfor a rental fee.The
durationof the leaseandrentalfeesareagreedin advance.
Ownershipof the equipmentremainsin the handsof the bank.
ydrah wa-iqtinil 7 leaseendingwith acquisition,or leaseandthenpurchase,or
thumma al-bayl leaseendingwith ownership
al-ydrah
al-ydrah al-muntahiyyah
bit-tamlik
ymj, : consensusof scholars
jah, ilah : ignorance,to sell somethingwhich exists but its quantity is
unspecified
kitib al-bay' : the book of sale
kitdb al-ydrah : the book of letting
MCI/ : property or commodity
manfa'ah : usufruct of the property
: public interest
maslakih
mu'amalah : transaction
mu'ayir : lessor
m4drabah : an agreementmade betweentwo parties: one which provides
100 percent of the capital for the project and another party
known as a mularrib, who manages the project using his
entrepreneurial skills. Profits are distributed according to a
predetermined ratio. Any losses accruing are borne by the
provider of capital. The provider of capital has no control
over the managementof the project.
mun'aqid a concludedbargain
Inurdbalah a contract salebetweenthe bank and its client for the sale of
goodsat a price which includes a profit margin agreeby both
parties. As a financing technique,it involves the purchaseof
goods by the bank asrequestedby the client. The goods are
sold to the client with a mark-up. Repayment,usually in
instalmentsis specifiedin the contract.
5rakah
niush, a partnershipcontractbetweentwo parties who both
contribute capital towards the financing of a project. Both
parties shareprofits on a pre-agreedratio, but lossesare
sharedon the basisof equity participation. Either parties or
just one of them may carry out managementof the project.
This is a very flexible partnershiparrangementwhere the
sharingof the profits and managementcan be negotiatedand
pre-agreedby all parties.
Yir lessee
Musta
Salialldhu 'alayhi : Peacebe upon him (ProphetMuhammad)
(U-)
1asallam
qabfil : acceptance
lasan : benevolentloan, an interest-freeloan given mainly for
qard-al
welfare purposes.The borrower is only requires to pay back
the amountborrowed. In somecases,a minimum
administrative fee may also be chargedto the borrower.
Literally meansan increaseor addition. Technically it denotes
rib,!
in a loan transactionany increaseor advantageobtained by
the lender as a condition of the loan. In a commodity
exchangeit denotesany disparity in the quantity or time of
delivery.
rilo consent
SharVah lit. the path to water - the sourceof all life, the clear
path to
be followed and the path which the believer has to tread in
order to obtain guidancein this world and the deliverance in
the next. Technically, it meansa set of norms, values and
laws that govern Muslim's lives.
shubhah uncertainty and questionableelement
266
Literally meanscustom;the habits and religious practices of
sunnah
the ProphetMuhammad,which were recorded for posterity
by his companionsand family and are regardedas the ideal
Islamic norm.
ta'w? indemnities
ujrah of Ydrahcontract
a rent asa consideration
al-wadt-'ah : Saving account
wakdlah agency
zalim oppression
267
APPENDICES
APPENDIX A:
HIRE-PURCHASE ACT 1967
APPENDIX B:
SAMPLE OF INTERVIEW GUIDE
APPENDIX C:
SAMPLE OF QUESTIONNAIRE
APPENDIX D:
COVER LETTER OF INTERVIEW
APPENDIX E:
COVER LETTER OF SURVEY
APPENDIX F:
PROCEDURE FOR THE ENACTMENT OF A LAW
APPENDIX G:
DETAILS OF SHARPAH ADVISORS AND SHARI'All. SCHOLARS
268
APPENDIX A
LAWS OF MALAYSIA
ACT 212
HIRE - PURCHASE ACT 1967 (REVISED - 1978) [REPRINT - 20011
latestamendment- P.U.(A) 16312005
Incorporating
First enacted 1967 (Act No. 24 of 1967)
1)ate of coming into operation 15 April 2005, [P.U.(B) 119/2005]
Revised up to 1st January 1978
1)ate of publicationin the Gazetteof revised edition 26th October 1978
[)ate of coming into operationof revised edition 1978 (Act 212) 15th November1978
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APPENDIXB
Univ'ersi
The Operation Of
HIRE PURCHASE-i (Islamic Hire-Purchase)

Also Known as
AL-IJARAH THUMMA'AL-BAI'(AITAB)
In The Malaysian Financial Institutions
(interview Guide)
NurdianawatiIrwani Abdullah
Departmentof Economics,LoughboroughUniversity
Loughborough,Leicestershire
LEII 3TU ENGLAND
N.I.Abdullah(d-)Iboro.
ac.uk
0 10
1) From your experience and understanding, please explain the operation of Islamic
Hire-Purchase (AITAB) in general.
2) From your opinion, to what extent has Islamic hire-purchase (AITAB) been
accepted by the bank customers?
r-1 Well accepted

M Not well accepted
M Don't Know
3) Are there any pertinent problems arising from the current practice of Islamic hire-
purchase (AITAB)? If yes, could you please explain such problem(s)?
4) How is Islamic Hire-Purchase (AITAB) legally operated now?
Based on conventional hire-purchase concept

Based on principle of ijarah and sale
Not sure
5) Do you find Hire-Purchase Act 1967 (HPA) adequate to govern the operation of
Islamic hire-purchase (AITAB)?
Yes
No
M Not sure
6) Do you think Islamic hire-purchase (AITAB) should be governed by a specific

Sharl'ah law?
E] Yes
F-1 No
7) What is your opinion of the Bill?
8) What are your suggestions to provisions that need to be Included In the Musmalah
Hire-Purchase Bill?
9) What are the impediments of implementing MuAmalah Hire-Purchase Bill In

Malaysia?
10) How do you foresee the future of Islamic hire-purchase (AITAB)?
11) Additional information and issues pertaining to the operation of AITAB (Islamic
Hire-Purchase) in Malaysia.
0 20 a
0 Name
9 Institution
0 Position
" Specialization
" Other Involvements:
Years with the present institution:
[] Less than 1 year

M 1-5 years
Ej 6-10 years
Fj More than 10 years
0 Years in the present position:
M Less than 1 year

Fl 1-5 years
Fl 6-10 years
n More than 10 years
Thank you for taking the time to complete all questions In this survey.
Your assistance in providing this information is very much appreciated
If you would like a summaryof results,pleasewrite your e-mail address below.
E-mail:
For office use only
QuestionnaireNo. Date of Interview

Date of Delivery Started at
Date of Receipt Finishedat
0
-1
APPENDIX C Lou hb ugh
Uni rs
A Survey on The Operation Of
HIRE PURCHASE-i
(Islamic Hire-Purchase)
Also known as
AL-IJARAH THUMMA AL-BAP

(AITAB)
In The Malaysian Financial Institutions
Confidential
NurdianawatiIrwani Abdullah
Departmentof Economics,LoughboroughUniversity
Loughborough,Leicestershire
LEII 3TU ENGLAND
N.I.Abdullah(c-b-lboro.
ac.uk
FOR OFFICE USE ONLY
QuestionnaireNo.: Date of Delivery: im / r3c3

/ 2004
Date of Receipt cm/ oo / 2004
GENERAL INSTRUCTIONS AND INFORMATION
1. All individual response to this questionnaire will be kept STRICTLY

CONFIDENTIAL.
2. Based on your experience, please give your honest impressions of the current practice
and implementation of Hire Purchase-i (Islamic hire-purchase)) in Malaysia. Islamic hire-
purchase is also known as Al-Ij5rah Thumma A[-Bai'(AITAB).
3. There is nothing you need to go and "look up". Thus, there is no right or wrong answer.
Please do not worry about questions that seemingly look alike. If you do not have the
exact answer to a question, please provide your best estimate by ticking the appropriate
boxes in the questions. Your answers are very important to the accuracy of the
study.
4. If you wish to make any comment, please feel free to use the space at the back of the
questionnaire.
Thank you vety muchl

SECTION 1: OPINION ABOUT AITAB
(Pleasetick (,4)an appropriatebox)
1) How did you get to know AITAB (Islamic hire-purchase)?
Advertisement
Bank's prospectus
Conferencesand seminars
El Friends and colleagues
All the above
No answer
Others (pleasespecify):
2) Which bank or company did you sign for AITAB?
m Affin Finance
(: ] AmFinance
ED Bank Muamalat
171 Bank Pernbangunan
Bank Rakyat
EON Finance
171 Hong Leong Finance
171 HSBC
Mayban Finance
Public Finance
Southern Finance
E] Others (pleasespecify):
3) Are you satisfied with the procedure of entering into AITAB (Islamic hire-
purchase)?
M Satisfied
n Not satisfied
4) If you are SATISFIED with the procedure, is this because
D Convenientpayment system
[] Standard AITAB contract
E3 The procedure has been made clear to you before you entered into AITAB
transaction
Uncomplicatedpreparationof documents
E3 All the above
M Do not care
El Other reason (please
specify):
5) If you are NOT satisfied with the procedure, is this because
F1 No standard set of AITAB contract

El The AITAB contract(s) is lengthy and confusing
M The procedureis confusing
[:] Very complicatedterms and conditions
r-I Not compliancewith SharT6hrequirements
M Do not care
[] Other reason (pleasespecify):
SECTION 2: OPINION ABOUT CONVENTIONAL HIRE-PURCHASE
(Pleasetick (-4)an appropriatebox)
6) Have you ever used CONVENTIONALhire-purchase?
Yes (pleasego to the next question)

No (pleasego to Section4)
7) Are you satisfied with conventional hire-purchase?
F'l Satisfied
E] Not satisfied
8) If you are SATISFIED with the facility, is this because:
M Convenient payment system

[3 Standard hire-purchase contract
E3 The procedure has been made clear to you before you entered into hire-purchase
transaction
E3 Uncomplicated preparation of documents
Fj All the above
[: ] Do not care
F1 Other reason (pleasespecify):
(Pleasego to question10)
9) If you are NOT satisfied with the facility, is this because:
n No standardset of hire-purchasecontract
F-1 The hire-purchasecontract(s)itself is confusing and lengthy
E] The procedureis confusing
E] Very complicatedterms and conditions
[] Interest-basedscheme
F-1 Do not care
E] Other reason (piease
specify):
2
SECTION 3: HIRE-PURCHASE COMPARED
Please tick (\) an approptiate box
10) If you have used both AITAB (Islamic hire-purchase) and Conventional Hire-
Purchase before, which one has given you MORE benefits?
F-1 AITAB (please go to the next question)

F-1 Conventional Hire-Purchase (please go to Question 12)
11) If AITAB (Islamic hire-purchase) has given you more benefits, do you agree with
the reasons below:
Stiongly Modemtdy Do Not Mod(! [Itely stmnqly

Agree Agree Know Dl!, Iywe Di,,; i we
" Free processing 0 0 0 C1 El

" Free consultation and enquiries 0 Lj D 11 11
" Speedy processing and approval 0 13 13 0 13
" Attractive financing terms and conditions El 1:1 1:1 LI 1)
" Friendly customer service n r-1 13 11 C1
Lower rates of Bank's return El LI EJ LI LI
Longer financing period 0 13 13 13 1:1
Easy instalment payments El 11 El 1:1 11
AiTAB is based on Sharkih principles 11 0
Other reason (specify): 1-1 171
(Please qo to Question 13)
12) If CONVENTIONAL hire-purchase facility has given you more benefits, please
indicate to what extent you agree or disagree with the reasons provided below.
Strongly Moderzitely Do Not Moderately Stroncily

Agree Agree Kiiow Disagree Disagree
Clear procedure 0 0 n El
Low monthly instalments U LI LI I!
Lower rates of Bank's return E3 0
Free processing F1 I
Free hire-purchase consultation and M
enquiries
Speedy processing and approval
I I i I
Attractive financing terms and
El 0
conditions
Friendly customer service 1
Easy instalment payments
Other reason (specify).
3
SECTION 4: CONCLUDING REMARK
Please tick (\) an appropriate box,
13) Please indicate your overall view on AITAB (Islamic hire-purchase) facility.
StIon(JIV Modemtely Do Not Moder, ltolv Stfoll(Ily

Aqw(' Ayw(, kI ww
" In accordance to SharT(ih guidelines U 1.1 E] E,

"A good alternative to purchase Ii (
" No much different from conventional 0 El 0
hire-purchase
" Too costly El Ll Ll U II
" Financing method of last resort n n 0 n
" Better than nothing 11 F] F1 II
" No view o 0 0 El 0
" Other view (specify) El El U] F1 II
14) Finally, if you were given a choice to use either AITAB (Islamic hire-purchase) or
Conventional hire-purchase, which one do you prefer?
AITAB
Conventional Hire-Purchase
4
SECTION 5: PERSONAL INFORMATION
Pleasetick (7) an appropriatebOX.
Gender:
M Male
[] Female
Age:
f-1 Below 20
EJ 20-30
F-1 3140
El 41-50
r-I Above 50
MaritalStatus:
F1 Single
Fl Married
0 Occupation:
M Manager El Businessman/Trader
F1 Professionals F-1 Clerical/Supportstaff
M Academician El Unemployed
M Housewife FI Retired
r] Student F1 Others
Educational Background:
f-1 Secondary and lower ProfessionalQualification
Ej Diploma/A-Level Mastersor Ph.D
n Bachelor (First Degree)
Thank you for taking the time to complete this questionnaire.

Your assistance in providing this information is very much appreciated.
If there is anything else you would like to tell us about this survey or other comments you wish
to make that you think may help us to understand the operation of AITAB and Issues arising
thereof, please do so In the space provided below.
If you would like a summaryof results,

pleasewrite your e-mail address below.
E-mail:
Please return your completed questionnaire to:
Nurdianawat! Irwani Abdullah

Researcher
Department of Business Administration, KENMS,
International Islamic University Malaysia,
53100 Kuala Lumpur.
Tel: 03-2056 4663/4758 Fax: 03-2056 4850 email: [email protected]
5 -,I
Department of Economics
Loughborough University Leicestershire LE1 1 3TU UK
Switchboard: +44 (0)1509 263171 Department: +44 (0)1509 222701
APPENDIX D
Loughb.orough
UniVersity
Datc: 171May 2004
44JJ 1c-
Dear Sir/Madam,
RESEARCH ON THE OPERATION OF ISLAMIC HIRE-PURCHASE IN

MALAYSIA
I am currently conducting a researchproject aboutthe operation of Al-Ijarah YhummaAI-Bai'

(AITAB) or Islamic Hire-Purchasein Malaysian Financial Institutions. The main objective of
this research is to analyse,the perspectives and impressions of financiers and experts in
AITAB operation.
Therefore it would be very grateful if I could discusswith you some issuesarising from the
implementation of AITAB (please refer to the attached Interview Guide). Your assistance
will provide invaluable input to this research, and is very important to the accuracy of the
study. The outcome of the study will be very significant for the legal development of Islamic
banldng systemin Malaysia.
Your responsesto the questionnaireswill be treated as highly CONFIDENTIAL and used for
academic purposes only. If you would like a summary of result please write your e-mail
addresson the enclosedinterview guide.
Your cooperationand support are very much appreciated.
Thank you.
YopL%jait fully,
Nurdiani W-atiIrwani Abdullah

Researcher
Departmentof Economics, LoughboroughUniversity
LeicestershireLE 11 3TU
United Kingdom
Email: N. I.Abdullalinalboro.ac.uk
Departmentof BusinessAdministration
Kulliyyah of Economics and ManagementSciences
International Islamic University Malaysia
Tel: 03-20564663/4758
Fax: 03-2056 4850
,-I
Department of Economics
Loughborough University Leicestershire LE1 1 3TU UK
Switchboard: +44 (0)1509 263171 Departrnent: +44 (0)1509 222701
Loughb.orough
APPENDIX E Uniiersity
Dear Sir/Madam,
We are currently conductinga researchproject aboutthe operationof Al-Ijarah ThummaAI-Bai'

(AITAB) or Islamic Hire-Purchasein Malaysian Financial Institutions. Our main objective is to
analyse the perspectivesand impressions of persons who are involved in AITAD either as
customersor financiers.
We would be very grateful if you could complete this questionnaireand return it as soon as
possible.Your participation will provide invaluable input to this research,and is very important
to the accuracyof the study. The outcomeof the study will be very significant for further legal
developmentof Islamic banking systemin Malaysia.
Your responsesto th6 questionnaireswill be treated as highly CONFIDENTIAL and used for
academicpurposesonly. If you would like a summaryof result pleasewrite your e-mail address
on the enclosedquestionnaire.
Your cooperationand supportare very much appreciated.
Thank you.
Yours faitMIly,
Nurd*anawati Irwani Abdullah

Researcher
Department of Economics, Loughborough University
Leicestershire LE1 1 3TU
United Kingdom
Email: N. I. Abdullali@lboro. ac.uk
Assoc.Prof. Dr. Seif El-Din Tag El-Din ProfessorJohnR. Presley

Supervisor Supervisor
Markfield Institute of Higher Education Departmentof Economics,Loughborough
Ratby Lane,Markfield University
LeicestershireLE67 9SY LeicestershireLE 11 3TU
United Kingdom United Kingdom
Email: sta.Reldin@hotmail. com Email: J.R.Presleyalboro.ac.uk
-kk
APPENDIX F
PROCEDURE FOR THE ENACTMENT OF AN ACT OF PARLIAMENT
" Government proposal

Pre-Parliamentary " Meetings between relevant
Stage government authorities
" Drafting of Bill by Parliamentary
Draftsperson
" Cabinet approval of Bill
Parliamentary First Reading Minister formally introduces

Stage the Bill in the Dewan Rakyat*
by having its short title read
Second Reading Debate on the general

principles of the Bill,
followed by a vote
Committee Stage Detailed examination of the Bill

and consideration of amendments,
1=71, followed by a report on the Bill to
the Dewan Rakyat
Third Reading Further debate on the general

principles of the Bill, followed
by a vote
Dewan Negara** 1' Similar procedures as in the

Dewan Rakyat. If passed,
-zaamm= the Bill is referred back to the
Dewan Rakyat
Royal 7j
Assent The Yang di-Pertuan Agong***
affixes the Public Seal within
thirty days of presentation. Bill
becomes an Act
Publication Act comes into force
Note:
Dewan Rakyat House of Representatives
Dewan Negara House of Senate
Yang di-Pertuan Agong The Royal Highness, Constitutional Head of Malaysia
Source: An introduction to the Malaysian Legal System (Hamzah and Bulan, 2003)
APPENDIX G
Details of Shadah Advisors
Interviewees Formal Position Specialization Institutions Advised

Assoc.Prof. Dr. Mohd. DeputyRectorStudent IslamicJurisprudence, CentralBank of Malaysia,
DaudBakar Affairs InternationalIslamic IslamicBankingand SecuritiesCommission,
UniversityMalaysia Finance,Sharl'ah,Islamic DowJones
MedicalLaw
Dato'HashimYahya Very Distinguished SharTah,Muamalah CentralBankof Malaysia,
AcademicFellow IslamicDevelopmentBank
AhmadIbrahimKulliyyah
Of Laws International
IslamicUniversityMalaysia
Dr. Ali Baharum Vice PresidentANGKASA IslamicLaw, Islamic Bank Muamalat
(NationalCo-operative Bankingand Finance
Organisationof Malaysia)
Dr. EngkuRabiah Departmentof PrivateLaw, Company& Securities, Bank Muamalat
AdawiahEg. Ali AhmadIbrahimKulliyyah IslamicLaw of Transaction,
Of Laws International IslamicBankingand
IslamicUniversityMalaysia Finance
Dr. Aznan Hasan Head,IslamicLaw IslamicTransaction, Bank Muamalat,
Department IslamicBankingand AmanahrayaBerhad
Finance
Dr. Abd. Halim DistinguishedLecturerin IslamicLaw Bank Muamalat,Securities
Muhammady Law Commission,Bank Rakyat,
MARA& ANGKASA
Dato'ShelkhGhazaliAbd. Headof Sharie*Judge SharFah,IslamicBanking CentralBank of Malaysia,
Rahman Departmentof SharTah and Finance SecuritiesCommission,
JudiciaryMalaysia Bank IslamMalaysia
Berhad
DatukDr. Abdul Monirbin DirectorIKIM(Instituteof IslamicLaw, Islamic CentralBank of Malaysia
Yaacob IslamicUnderstanding Bankingand Finance
Malaysia)
Prof. MadyaDr. Hailani Depa mentof Sharrah, Muamalah Affin Finance
MujiTahir NationalUniversityof
Malaysia I I
IVUIMM; INdLIVII41 II Ubt %-UUIIL; li
* Sharieis an adjectiveof Shariah
--
Details of SharVah Scholars

Mahmood Mohamed Associate Professor, Islamic Jurisprudence,
Sanusi Islamic Law Department Islamic Transaction
Ilum
Prof. Dr. Sano Koutoub Director, Professor in Islamic Council of International
Moustapha International Institute for Jurisprudence, Islamic Fiqh Academy, OIC
Muslim Unity Economics Assembly of Muslim Jurists
in America
Board of Trustees AAOIFI,
Bahrain
Assoc. Prof. Dr. Shafaai Assistant Professor, Islamic Law, Islamic Advisor to Waqf institution
Musa Islamic Law Department Transaction
HUM
Sit! Zalikhah Hj. Mohd. Associate Professor, Islamic Law, National Technical
Noor Department of Sharl'ah, Islamic Economics, Islamic Committee,
UKM Jurisprudence Sharie Lawyer
Dr. Samsuri Sharif Assistant Professor, Islamic Jurisprudence, ShaHah Advisor EON
Faculty of Economics and Islamic Law, Finance, CIMB, Southern
Management Sciences, Islamic Economics Bank
IlUM
Dr. Mohd. Parid Sheikh Assistant Professor, Fiqh, Usul Fiqh, Siyasah SharVah Advisor CIMB,
Hj. Ahmad Faculty of Economics and Shariyyah Hijrah Unit Trust
Management Sciences,
ilum
Prof. Abdullah Alwi Head, Sharrah and Islamic Law, Islamic SharVah Advisor, Al-
Economy Department, UM Economics Hidayah Investment Bank
(Labuan) Ltd and IBFIM
Dr. Osman Sabran Associate Professor, Islamic Jurisprudence, SharT'ahAdvisor
Centre for Islamic Studies Islamic Banking Cooperative Society
and Social Development,
UTM
Hum: InternationalIslamicUniversityMalaysia
UKM: NationalUniversity of Malaysia
UM: Universityof Malaya
UTM: TechnologyUniversityof Malaysia
IBFIM: IslamicBankingandFinanceInstituteof Malaysia
CIMB: CommerceInternationalMerchantBankersLimited
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Islamic Hire-Purchase in Malaysian Financial Institutions: A Comparative Analytical Study

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Islamic Hire-Purchase in Malaysian Financial Institutions: A Comparative Analytical Study

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Loughborough University

A Doctoral Thesis. Submitted in partial fulfillment of the requirements

for the award of Doctor of Philosophy of Loughborough University.

Metadata Record: https://dspace.lboro.ac.uk/2134/7756

Please cite the published version.

For the full text of this licence, please go to:

IN MALAYSIAN FINANCIAL INSTITUTIONS:

A Comparative Analytical Study

NURDIANAWATI IRWANI ABDULLAH

A DoctoralThesis submittedin partialfulfilmentof the requirementsfor the award of

@ Nurdianawati Irwani Abdullah

Our dearest son,

Our newborn daughter,

First and foremost, it is a pleasureto acknowledgethe considerabledebt of gratitude which I

Acknowledgementsare also due to ProfessorTom Weyman-Jones,the Head of Economics

My thanks also go to our fhends in the United Kingdom and Malaysia

Nurdianawati Irwani Abdullah

Islamic hire-purchase(Ydrah wa-iqtind) is one of the latest innovative products of Islamic

consumerdurables and motor vehicles. No wonder, this transactionis not acknowledgedin

much criticism amongstthe practitioners and Shadah experts,who assertthe insufficiency of

certain limitations of HPA.

This study aims to examinethe Islamic hire-purchaseoperation and its framework

scholars,economists,legal expertsand governmentofficers. This is further complementedby

CHAPTER 2: ISLAMIC HIRE-PURCHASE (AITAB) IN MALAYSIA

CHAPTER 3: CONCEPT AND OPERATION OF

CHAPTER 4: REGULATION OF ISLAMIC HIRE-PURCHASE

CHAPTER 5: RESEARCH METHODOLOGY

CHAPTER 6: PROFILE ANALYSIS

CHAPTER 8: OPERATIONAL AND REGULATORY FRAMEWORK OF

8.9.4 Impact on Malaysian Legal Framework 236

CHAPTER 8: CONCLUSIONS AND RECOMMENDATIONS

9.1 Summaryof the Study 243

1.1 BACKGROUND OF RESEARCH

worldwide acceptance, as it offers a wide range of products and facilities to

alternative financial instruments which are compatible with Shariah. These

alternative instruments include various contractual arrangements such as cost-plus

services for the suppliers and users of Islamic banking operation.

much more sophisticatedand cover a wider range of servicesthan products offered in

a single Islamic system. The stiff competition with sophisticatedand long-standing

sophisticatedcustomers.Hence, more diversified and sophisticatedfinancial products

One of the latest innovative approachesis the Islamic hire-purchase instrument,

commonly known as yarah wa-iqtind. In general, ijilrah wa-iqtind' resemblesthe

commercial banks in Pakistan. Different countries use different terminology in

abbreviatedin the commercial practice as AITAB. It combinesleasecontract and sale

1.2 STATEMENT OF PROBLEM

AITAB is currently implemented in the light of Hire-PurchaseAct 1967 (hereinafter

referred to as HPA), since there is no independentIslamic law governing the practice

approach enunciatedby HPA seemsto be in conflict with the SharVah principle of

1The term "conventional" is

pertaining to the practice of AITAB which need to be discussed thoroughly.

study will give a clear picture of Islamic hire-purchasepractice in the Malaysian

1.3 RESEARCH HYPOTHESES

possibility of implementing an Islamic hire-purchaselaw to remedy the loopholes in

These hypothesesare best addressedin tenn of well-defined objectives as they are

now given below.

1.4 OBJECTIVE OF THE STUDY

purchase transaction (AITAB) in Malaysia from legal, practical and social

perspectives.The specific objectives of this study are: