Lease Purchase

The lease purchase or lease that ends with possession, is a new mode innovated by the Islamic banks. What distinguishes this transaction is that the bank does not hold assets on its own, instead it purchases the asset on request from its customer who is interested to own an asset through lease that ends with possession. At the end of the lease period, ownership is transferred to the lessee.

The bank mostly calculates total rentals on the basis of the cost of asset plus the profit. Rentals are payable over a period of time as agreed between the bank and the customer.

In practice, there are two basic forms through which the asset becomes the property of the lessee at the end of the lease period.

The first form: A lease contract with a promise to grant the asset to the lessee after paying all the rental installments. The grant must be obtained in a separate contract.

The second form: A lease contract with a promise to sell the asset to the lessee in exchange for a nominal or actual price, the lessee pays at the end of the lease period in addition to paying all the rental installments agreed upon.

FEATURES

1. Minimum lease amount $150,000/-
2. Ownership clause.

THE PRACTICAL STEPS OF LEASE PURCHASE OPERATION :

1. The purchase contract of assets:

The bank: In pursuance of the customer's desire to draw a contract of lease ending with ownership, the bank purchases the asset from the seller, pays the price and gets its possession.

The seller: Agrees on the sale, signs the bill and agrees with the bank about the place of delivery.

2. Delivery and receipt of the commodity:

The seller: Delivers the asset to the bank directly or to any party designated by the bank in the contract.

The bank: Authorizes its customer to receive the asset and demands a notification of arrival and satisfaction of the required specifications.

3. The lease contract:

The bank: Leases the asset to the customer and promises customer the possession of the asset if he pays all the rental installments (a promise to grant or a promise to sell for a nominal or actual price).

The lessee: pays the rental installments at the agreed upon periods.

4. Transfer of ownership:

The bank: after the end of the lease period and after the lessee pays all the installments due, the bank assigns the asset to the benefit of the lessee as a grant or sale as promised.

The lessee: ownership of the asset transfers to the lessee.

AREAS OF APPLICATIONS

The Islamic banks use the lease with option to purchase especially real estate, computers, machinery and equipment. By so doing the Islamic banks give their customers a freedom of choice to acquire the assets they need from the sources they select in the light of their experience and personal evaluation.

The lessee in this case enjoys the possession and use of the asset during the lease period and it is certain that ownership of the asset will be transferred to it at the end of the lease period. The bank also, retains the ownership of the asset and it assigns it to the lessee only on receipt of rental installments agreed upon.

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