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Articles For Knowledge Sharing » Society » Difference between an ordinary lease and an Islamic lease (ijarah)

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Difference between an ordinary lease and an Islamic lease (ijarah)

An ijarah lease, like a conventional lease, is an agreement to rent out property or services. In an ijarah lease the lessor (the person granting the lease) maintains ownership of the property or service while the lessee (the person to whom the lease is granted) gains use of the property and the resulting profit. In conventional financial leasing, the interest payments have to be made to the lessor whether the lessee gains benefit from the property or not. If the property is damaged through no fault of the lesseeandrsquo;s, the interest payments are still payable. So the ownership risk does not entirely rest in the ownerandrsquo;s hands. Ijarahs, on the other hand, clearly distinguish between ownership and usufruct, or the use and profit of a thing, and stipulate that rental rates, unlike interest rates, be known and agreed upon beforehand.

The central component of a valid ijarah agreement is the appropriation of risk, specifically the ownership of risk. In an Islamic lease, risk associated with the leased property or service remains with the lessor, the beneficiary of the rental payments.

Stocks are like gambling, but Islam permits stocks and forbids gambling.

The reason is this returns to the basic principle of asset and service backing. Stocks invest in real assets (a companyandrsquo;s property, plant and equipment) and actual services (a companyandrsquo;s management expertise). Gambling invests in nothing. Even if a lottery funds charities or finances public works, the money with which it does so is still haram. Stocks provide risk-based returns based on publicly available information. Gambling provides only uncertainty, and the distant prospect of huge gains based entirely on chance.

To the casual observer andldquo;buying low and selling highandrdquo; resembles gambling, but because there is no Islamic stipulation on the price at which something is sold and the duration for which it is held, the primary concern relates to what is actually bought and sold. Provided the main business of the company is permissible, the company owns some illiquid assets, and the investor removes the proportion of his profits that correspond to the companyandrsquo;s interest earnings, and then purchasing the stock is permissible.

Secondary market for Islamic instruments

A secondary market is a fancy name for any exchange where securities (like stocks) are bought and sold after their original issuance. Islamic leases, or ijarahs, are an example of a securitizable instrument.

Because lessors have the right to sell all or part of their leases to one or more third parties with- out affecting the continuity of the lease itself, ijarah certificates may be traded like securities under certain conditions. An ijarah certificate represents the third partyandrsquo;s new ownership in the lease as well as the proportionate share in claiming rent and suffering loss. Ownership, not the right to claim rent, represents the tradable portion of the certificate. Islam permits the trading of assets, not of money, for profit, and a rental claim is a receivable that represents money. So trading rental claims without first transfer- ring ownership is forbidden. But it is acceptable for buyers seeking ownership and sellers seeking profit to trade ijarah certificates like common securities in a capital market.

Islamic banks face an unusual set of competing demands today. This turns people to have Islamic finance certification. On the one hand, the Islamic banking sector is growing at about four times the rate of the industry as a whole. But on the other hand, Islamic banks are forced to conform to a regulatory environment that has traditionally catered to a well-entrenched interest banking system. As a result, Islamic banks now inherit a customer base so accustomed to dealing in interest that to suggest an alternative, particularly one with a well-laden andldquo;Islamicandrdquo; label attached, is to imagine the seemingly unimaginable. But in just the first few decades of consumer-level Islamic banking, a centuries-old conventional finance sector is beginning to acknowledge the importance of providing an Islamic alternative by providing knowledge of Islamic banking courses, evidenced most tellingly by the creation of Islamic subsidiaries within conventional Western banks. And because all banks, whether Islamic or not, are profit-motivated and demand-driven, it is important that the Islamic banking customer demands products that are compliant, for which the first step is self-education about what actually makes a financial product Islamic.

Article Source: Articles For Knowledge Sharing

About the Author

Become a Certified Islamic Finance Executive. The CIFE is the only accredited Islamic finance training certificate available 100% online. For more details on islamic finance training and islamic banking courses please visit our website ethicainstitute.com

by: rickymorcals

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