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    Ijarah

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    sultanatkhan
    Ijarah refers to an Islamic financing structure where a bank leases equipment or assets to customers for a fixed rental payment over a set period of time. At the end of the lease period, the customer has the option to purchase the asset. This structure provides advantages to customers such as allowing up to 100% financing while keeping leasing payments off their balance sheet. A similar structure called Ijarah Thumma Al-Bai' combines two contracts - the first is a lease and the second automatically triggers purchase of the asset once the lease term ends. Ijarah-wal-Iqtina is also used where rental payments are fixed to cover the bank's principal plus profit over the lease period and ownership transfers to the

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    Ijarah

    Uploaded by

    sultanatkhan
    135 views3 pages
    Ijarah refers to an Islamic financing structure where a bank leases equipment or assets to customers for a fixed rental payment over a set period of time. At the end of the lease period, the customer has the option to purchase the asset. This structure provides advantages to customers such as allowing up to 100% financing while keeping leasing payments off their balance sheet. A similar structure called Ijarah Thumma Al-Bai' combines two contracts - the first is a lease and the second automatically triggers purchase of the asset once the lease term ends. Ijarah-wal-Iqtina is also used where rental payments are fixed to cover the bank's principal plus profit over the lease period and ownership transfers to the

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    Ijarah refers to an Islamic financing structure where a bank leases equipment or assets to customers for a fixed rental payment over a set period of time. At the end of the lease period, the customer has the option to purchase the asset. This structure provides advantages to customers such as allowing up to 100% financing while keeping leasing payments off their balance sheet. A similar structure called Ijarah Thumma Al-Bai' combines two contracts - the first is a lease and the second automatically triggers purchase of the asset once the lease term ends. Ijarah-wal-Iqtina is also used where rental payments are fixed to cover the bank's principal plus profit over the lease period and ownership transfers to the

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as DOC, PDF, TXT or read online from Scribd
    Download as doc, pdf, or txt
    135 views3 pages

    Ijarah

    Uploaded by

    sultanatkhan
    Ijarah refers to an Islamic financing structure where a bank leases equipment or assets to customers for a fixed rental payment over a set period of time. At the end of the lease period, the customer has the option to purchase the asset. This structure provides advantages to customers such as allowing up to 100% financing while keeping leasing payments off their balance sheet. A similar structure called Ijarah Thumma Al-Bai' combines two contracts - the first is a lease and the second automatically triggers purchase of the asset once the lease term ends. Ijarah-wal-Iqtina is also used where rental payments are fixed to cover the bank's principal plus profit over the lease period and ownership transfers to the

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as DOC, PDF, TXT or read online from Scribd
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    Ijarah

    Ijarah means lease, rent or wage. Generally, Ijarah concept means


    selling the benefit of use or service for a fixed price or wage. Under
    this concept, the Bank makes available to the customer the use of
    service of assets / equipments such as plant, office automation, motor
    vehicle for a fixed period and price.

    Advantages of Ijarah

    Ijarah provides the following advantages to the Lessee:

    Ijarah conserves the Lessee' capital since it allows up to


    100% financing.

    Ijarah gives the Lessee the right to access the equipment


    on payment of the first installment. This is important as it
    is the access and use (and not ownership) of equipment
    that generates income.

    Ijarah arrangements aid corporate planning and budgeting


    by allowing the negotiation of flexible terms

    Ijarah is not considered Debt Financing so it does not


    appear on the Lessee' Balance Sheet as a Liability. This
    method of "off-balance-sheet" financing means that it is
    not included in the Debt Ratios used by bankers to
    determine financing limits. This allows the Lessee to enter
    into other lease financing arrangements without impacting
    his overall debt rating.

    All payments towards Ijarah contracts are treated as


    operating expenses and are therefore fully tax-deductible.
    Leasing thus offers tax-advantages to for-profit operations.

    Many types of equipment (i.e computers) become obsolete


    before the end of their actual economic life. Ijarah
    contracts allow the transfer of risk from the Lesse to the
    Lessor in exchange for a higher lease rate. This higher rate
    can be viewed as insurance against obsolescence.

    If the equipment is used for a relatively short period of


    time, it may be more profitable to lease than to buy.
    If the equipment is used for a long period but has a very
    poor resale value, leasing avoids having to account for and
    depreciate the equipment under normal accounting
    principles.

    Ijarah thumma al bai' (hire purchase)

    Parties enter into contracts that come into effect serially, to form a
    complete lease/ buyback transaction. The first contract is an Ijarah that
    outlines the terms for leasing or renting over a fixed period, and the
    second contract is a Bai that triggers a sale or purchase once the term
    of the Ijarah is complete. For example, in a car financing facility, a
    customer enters into the first contract and leases the car from the
    owner (bank) at an agreed amount over a specific period. When the
    lease period expires, the second contract comes into effect, which
    enables the customer to purchase the car at an agreed to price.
    The bank generates a profit by determining in advance the cost of the
    item, its residual value at the end of the term and the time value or
    profit margin for the money being invested in purchasing the product
    to be leased for the intended term. The combining of these three
    figures becomes the basis for the contract between the Bank and the
    client for the initial lease contract.
    This type of transaction is similar to the contractum trinius, a legal
    maneuver used by European bankers and merchants during the Middle
    Ages to sidestep the Church's prohibition on interest bearing loans. In
    a contractum, two parties would enter into three concurrent and
    interrelated legal contracts, the net effect being the paying of a fee for
    the use of money for the term of the loan. The use of concurrent
    interrelated contracts is also prohibited under Shariah Law.

    Ijarah-wal-iqtina

    A contract under which an Islamic bank provides equipment, building,


    or other assets to the client against an agreed rental together with a
    unilateral undertaking by the bank or the client that at the end of the
    lease period, the ownership in the asset would be transferred to the
    lessee. The undertaking or the promise does not become an integral
    part of the lease contract to make it conditional. The rentals as well as
    the purchase price are fixed in such manner that the bank gets back its
    principal sum along with profit over the period of lease.

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