Hire-purchase

A variant of the hire-purchase system may be used in financing purchase of machinery and equipment as well as purchase of consumer durables in economically justifiable circumstances. Under this system, banks may finance the purchase of these items under a joint-ownership arrangement subject to provision of security or surety3. They would receive, in addition to repayment of the principal, a share in the net rental value (after allowing for depreciation) of these items in proportion to their outstanding share in total investment. The items may also be insured and the cost of insurance may be shared between the bank and the other party proportionately on the basis of their outstanding investment. However, unforeseen repairs may be entirely the responsibility of the user of the equipment.

Source: Money and Banking in Islam, Ziauddin Ahmed; Munawar Iqabal; M. Fahim Khan. Republished with permission.