Conforming With the Sharia
Gulf Cooperation Council countries — Saudi Arabia, United Arab Emirates, Kuwait, Oman, Qatar, and Bahrain — enjoy some of the highest per capita incomes in the world. With rising oil prices, improving roads, booming economies, trade liberalization and a growing population, it is no surprise that the auto sector is growing rapidly.
In the United Arab Emirates, in particular, car sales have been riding high, with easy access to car loans greasing the skids.
Surprisingly, small car sales have surged in the UAE. In 2007, Honda sales in the region grew by more than 30% due to strong demand for its key products — Civic, Accord, and CRV. The growing popularity of compact and small engine cars is new, probably triggered by rising fuel price, traffic jams, more female drivers, and a shortage of parking spaces.
However, luxury car sales continue do well in the UAE and in the Middle East as a whole. The UAE is the fourth-largest market for Rolls-Royce Motor Cars worldwide. In 2007, Rolls-Royce sales in the Middle East increased by 40%, but in the UAE by 70%.
Banks are enjoying high liquidity which, in turn, is fueling a rising number of car loans. Banks are willing to lend on very easy terms and at highly competitive rates.
A measure of the dynamism of the UAE auto finance market in that some 60% to 70% of motor vehicles sold there are financed through installment schemes. Of the 48 commercial banks operating in the UAE, 15 provide some form of auto financing. Business Monitor International, print and online publisher of business information about emerging markets, estimates the value of the UAE auto finance market to be $2.3 billion.
“Auto finance covers around 75% of the value of total sales in the Gulf region, where automotive sales amounted to around 1.1 million units last year, with a higher proportion of premium brands than most developed markets,” said Dan Brett, a London-based independent consultant on the auto sector, whose clients include Business Monitor International. He estimates the value of the auto finance market to be around $30 billion.
The ready availability of auto finance is extraordinary given the ban on usury in Islamic law, or sharia. Under Islamic law, a fixed rate of interest is forbidden, and Islamic banks can only charge interest tied to their profits: Muslims are not allowed to earn money without working for it. Investor returns must come only from sharing a business’s risk.
In November 2002, the Egypt-based Al-Azhar institute, the highest theological institution in Sunni Islam, approved the use of fixed interest rates. According to Al-Azhar theologians, Islam permits the sharing of profits between contributors, so banks should be allowed to pay interest on deposits, which are used in commercial deals. “Scholars have devised ways that allow banks to lend and gain a return without contravening religious strictures,” said Brett.
The method of financing is known as murabaha, in which a client requests that a bank purchase a good, such as a car, and sell it back to him at cost plus a profit for the bank. This allows Muslims to purchase cars in installments. The two sales are executed almost simultaneously, but because the bank takes possession of the car for a brief period of time, the transaction is in accord with sharia.
“This means there are no variable rates in car loans,” Brett explained. “In a market where interest rates are stable, murabaha is relatively risk-free for a bank and can be offered at a competitive rate. For the consumer, it provides peace of mind as well as satisfying them that their purchase is religiously sanctioned.”
Dubai Islamic Bank has launched Al Islami Auto Finance Ramadan promotion that allows new vehicle buyers to benefit from a very attractive offer during the Holy Month. The promotion offers competitive profit rates starting from 3.99%, financing up to 72 months, first payment after 60 days and an attractive insurance and service contract.
”By 2025 shariah-compliant banking will amount to 12% of the world’s banking,” Brett said. “A sizable amount of that will be in the Gulf region. With cars being the most expensive item a household can own after a house, Islamic car loans in the Middle East will represent a significant proportion of global Islamic loan portfolios.”
—George Szamuely
