Hire Purchase Musharaka Mutanaqasa (HPMM)

Hire Purchase Musharaka Mutanaqasa (HPMM)

Hire Purchase Musharaka Mutanaqasa (HPMM) Introduction, Theory and Application
Mode of Investment in Islamic Banking
Markup Based
Bai Muazzal
Bai Murabaha
Bai Salam
Bai Istisna
Rental Based
Izara
Hire Purchase/Izara Bill Baia
Hire Purchase Musharaka
Mutanaqasa (HPMM)
Hire Purchase Shirkatul
Melk (HPSM)
Sharing Based
Mudaraba
Musharaka
Rental Based Finance
Ijara Bil Baia/ Hire Purchase
Ijara Muntahia Bittamlik
Hire Purchase Musharaka Mutanaqasa (HPMM)/ Hire Purchase Shirkatul Melk (HPSM)
Hire Purchase Musharaka Mutanaqasa (HPMM)/ Hire Purchase Shirkatul Melk (HPSM)
Hire Purchase Musharaka Mutanaqasa (HPMM)/ Hire Purchase Shirkatul Melk (HPSM) means purchasing and acquiring ownership of asset by sharing in equity and paying rents for the rest of the equity held by the Bank or other party. It is a synthesis of three contracts:
Musharaka Mutanaqasa or Shirkat or Shirkatul Melk.
Ijarah
Sale
Under this mode, the Bank and the customer on contract basis jointly purchase vehicles, machineries, building, apartment etc. The customer uses the portion of the assets owned by the bank on rental basis and acquires the ownership of the same assets by way of paying banks portion of the equity on the assets on installments together with its rents as agreed upon.
Key Features

• An agreement is executed between Hiree (Bank) and Hirer (Customer) stipulating the actual prices, monthly rents, price of the bank’s portion of the asset, payment schedule and installment amount and the nature of the security etc.
• Bank rents out its own portion of the asset to the customer under the terms & conditions of agreement and the customer.
• In Hire Purchase under Musharaka Mutanaqasa Agreement, the exact ownership of both the Hiree (Bank) and Hirer (Client) must be recognized. 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 Musharaka Mutanaqasa Agreement.
• The customer (Hirer) pays off bank’s portion of equity in installments as per the terms and conditions of the agreement.
• As the ownership of hired portion of the asset lies with the Hiree (Bank) and rent is paid by the Hirer (Customer) against the specific benefit, the rent is not 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.
• Ownership of asset transfer to sole owner from joint ownership.
• The customer acquires full ownership of the asset after payment of the entire dues of the bank.
• Bank will not share the loss of business as this is not the mode of sharing profit or loss.
• Even though if a loss is incurred due to Act of Allah, the loss may be shared as per agreed ratio.

Fixation of Rent

• Rent will be fixed as per agreement between Bank and Customer.
• Rent on rent cannot be charged.
• Rent will be paid from the date only upon the asset is in usable condition.
• Any default of paying rent will increase the total rent.
• Charging of rent on grace period is highly objectionable as the asset is not         generating income.
• Rent may be charged in gestation period if the asset is delivered in useable condition.
• Bank may recover the loss of gestation period by increasing the rate of rent for the remaining period or by revaluing the asset of the  completion of the grace period.
• The amount of rent will be decreasing proportionately with the decrease of hirer’s ownership and increase of hirer’s ownership on asset as per Diminishing Balance Method.

Differences among Ijara, Hire Purchase and Hire Purchase Musharaka Mutanaqasa (HPMM)/ Hire Purchase Shirkatul Melk (HPSM)

• HPMM is not only hire purchase but also it is the sharing of ownership.
• As HPMM/HPSM is sharing of ownership it differs with the conception of single ownership of asset purchase like Ijara.
• HPMM/HPSM is the sharing of ownership on asset not sharing of profit or loss like Musharaka.
• HPMM/HPSM is not diminishing Musharaka as the mentioned method implies the sharing of ownership not sharing of profit.
• The question of sharing of loss will only arises out from ownership risk.
• This ownership of risk will arise out only under act of Allah.

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