Islamic Hire Purchase Debts

In December 2001, Cagamas introduced a scheme for the purchase of Islamic Hire Purchase (IHP) debts originated by Islamic banking institutions (IBI) under the Islamic principle of Al-Ijarah Thumma Al-Bai (AITAB). The IBI are required to execute a Master Agreement and Master Servicing Agreement before offering IHP debts for sale to Cagamas. The IHP debts are purchased based on the book value of the IHP debts less unearned profit, if any, on a fixed rate basis for review periods ranging from 3 to 7 years.

After the sale, the debts will continue to be in the custody of the IBI, which also continue to administer the debts. The IBI will repurchase from Cagamas IHP debts that become defective and offer to sell to Cagamas an equivalent amount of IHP debts as replacements for the repurchased debts on a quarterly basis.

The IBI will remit to Cagamas on a monthly basis, the Cagamas instalment computed based on the instalments payable by the respective customers net of the agreed service fee payable by Cagamas to the IBI for servicing the debts and providing the recourse function. The service fee is agreed to at the time Cagamas purchases the debts. At the end of the contracted review period, the IBI have the option of either continuing the contract for a further review period at the service fee prevailing then or to repurchase the remaining balance of IHP debts sold to Cagamas.

Eligibility Criteria of Islamic Hire Purchase Debts

To be eligible for sale to Cagamas, the Islamic Hire Purchase debts must:

• be related to IHP of equipment under the Islamic principle of AITAB;
  
• be fully disbursed and amortising;
  
• not be more than 3 months in arrears at the time of sale;
  
• have a remaining life expiring on or after the Review Date;
  
• have a book balance, less unearned profit, if any, not exceeding RM2 million per debt;
  
• have an effective rate greater than the Cagamas required rate of return; and
  
• comply with other criteria specified in the Cagamas IHP Debts Guide.