Hire Purchase under Shirkatul Melk (HPSM)

Hire Purchase under Shirkatul Melk is a Special type of contract which has been developed through practice and approved in sharia. Actually it is a Synthesis of three contracts:

  • Shirkat
  • Ijarah and
  • Sale

These may be defined as follows:

SHIRKATUL MELK :

Shirkat means partnership. Melk means in ownership. When two or more persons supply equity, purchase asset and own the same jointly and share the benefit as per agreement and loss proportion to their respective equity, the contract is called Shirkatul Melk.

IJARAH :

The term Ijarah has been derived from the Arabic words Ajr (Ujrat) which means Consideration, Return, Wages or Rent. This is really the exchange value or consideration, Return, Wages or Rent of service of an Asset. Ijarah has been described as a contract between two parties, the lessor and lessee where the lessee (customer) enjoys or reaps a Special service or benefit against a specified consideration or Rent from the Asset Owner by the Lessor (bank). It is a lease agreement under which a certain asset is leased out by the lessor (bank) to a lessee (customer) against specific rent or Rentals for a fixed period.

Related Terminologies or Elements of Ijarah :

  • According to the majority of Islamic Scholars, General detailed elements of Ijarah are-.
    • The wording: This includes offer and acceptance.
    • Contracting parties : This includes a lessor, the owner of the property and a lessee, the party that benefits from the use of property,
    • Subject matter of the contract: This includes the rent and the benefit.
  • The Lessor (Muajjir) - The individual or organization leases/rents out the property or service is called the lessor (Muajjir).
  • The Lessee (Mustajjir) – The individual or organization hires/takes the lease of the property or service against the consideration / rent / wages / remuneration is called the lessee (Mustajjir).
  • The Benefit (Maajur) – The service which is leased / rented out is called the Benefit (Maajur).
  • The Rent (Ajir or Ujarat) – The consideration either in monetary terms or in quantity of goods fixed to be paid against the benefit of the asset or service of the assets is called the rent or Ujrat or Ajir.

Sale:

This is a contract between a buyer and a seller under which the ownership of certain goods or asset is transferred by seller to the buyer against agreed upon price paid / to be paid by the buyer. Thus, in Hire Purchase under Shirkatul Melk mode both the Bank and the Client supply equity in equal or unequal proportion for purchase of an asset like land, building, machinery, transports etc., purchase the asset with that equity money, own the same jointly; share the benefit as per agreement and bear the loss in proportion to their respective equity. The share, part or portion of the asset owned by the Bank is hired out to the Client partner for a fixed rent per unit of time for a fixed period. Lastly the Bank sells and transfers the ownership of its share / part / portion to the Client against payment of price fixed for that part either gradually part by part or in lump sum within the hire period or after the expiry of the hire agreement.

 

Purpose:

Under this mode Bank may invest or supply equipment, goods, and retail products (such as car or House) on rental basis.

Features

  • In case of Hire Purchase under Shirkatul Melk transaction the asset / property involved is jointly purchased by the Hiree (Bank) and the Hirer (Client) with specified equity participation under a Shirkatul Melk Contract in which the amount of equity and share in ownership of the asset of each partner (Hiree & Hirer ) are clearly mentioned.
  • In Hire Purchase under Shirkatul Melk Agreement, the exact ownership of both the Hiree (Bank) and Hirer (Client) must be recognised. However, if the partners agree and wish that the asset purchased may be registered in the name of any one of them, jointly or in the name of any third party, clearly mentioning the same in the Hire Purchase Shirkatul Melk Agreement. However, in TBL, no third party registration shall be allowed.
  • Rent can not be considered as price or part of price of the Asset.
  • In the HPSM agreement Hiree does not sell or Hirer does not purchase the asset but they promise to sell and purchase the same part by part only.
  • The promise to transfer legal title by the Hiree and undertakings given by the Hirer to purchase ownership of the hired asset upon payment part by part as per stipulations are effected only when it is actually done by a separate sale contract.
  • As the portion of the Bank is sold and transferred part-by-part, the rent will be reduced proportionately. As soon as any part of Hiree’s (Bank’s) ownership of the asset is transferred to the Hirer (Client) that becomes the property of the Hirer and hire contract for that share / part and entitlement for rent thereof lapses. However, for convenience & as cost effective measure, legal transfer of ownership may be done once on full payment of share.
  • In Hire Purchase under Shirkatul Melk Agreement, the Shirkatul Melk contract is effected from the day the equity of both parties deposited and the asset is purchased and continues upto the day on which the full title of Hiree (Bank) is transferred to the Hirer (Client).
  • The hire contract becomes effective from the day on which the Hiree transfers the possession of the hired asset in good order and useable condition to the Hirer.
  • Ownership risk is borne by both the Hiree and Hirer in proportion to their retained ownership / equity.
  • Under this agreement the role of Hirer is one that of a trustee, the hired asset being a trust property in his hands; he will manage, maintain the asset in favour of the interest of the Hiree at his own cost (all costs including insurance & legal expenses) as the exact subject of hirer except in cases of any accident due to any event entirely beyond control of the hirer and natural calamity/disaster (acts of Allah) to be determined by the Bank after proper investigation within the knowledge of the hirer. If the asset is damaged or destroyed due to mismanagement, corruption, negligence, transgressions, default, etc. of the Hirer, he shall be responsible to compensate the Hiree (Bank) for that.
  • The Hirer cannot, without obtaining prior written permission of the Hiree (Bank) make any changes in the exact item of the hire, and / or remove it from its place of installation and transfer it to another location.
  • Hire Purchase under Shirkatul Melk facilities may be for medium-term or long-term period which may be utilized for the expansion of production and services, as well as housing activities. The duration of Hire Purchase under Shirkatul Melk contract shall not exceed the useful life of the subject / asset of the transaction.
  • If, for any reason, the hire contract is revoked prior to the transfer of full title of the asset to the Hirer, then the title of the asset will be shared by both Hiree and Hirer – the Hirer will share that part of title which has been transferred to him against payment and the Hiree will share the remaining part.
  • The Hirer to secure the Bank (the Hiree) may pledge / hypothecate / mortgage his portion / part / share in the asset (acquired / to be acquired) and or any other asset / property of his own / third party guarantor to the Bank to fulfill his all liabilities / commitments including the accrued rental, if any.