Ijarah Contracts Used By Islamic Financial Institutions Essay

Ijarah Contracts Used By Islamic Financial Institutions - Essay Example It assists in strengthening the financial system of the country. The stronger the economy the stronger the country is. There are two kinds of banking systems and they are Islamic banking and the Conventional banking. Islamic banking is significantly different from conventional banking, and some of the differences are discussed in this essay. This report talks about an important feature in banking system i.e. lease. In conventional banks, it is referred to as conventional lease; and in Islamic bank, the lease is known as Ijarah. â€Å"Ijarah derives from the root word ajar a – to recompense, compensate or give a consideration and return. Ajr refers to a worker’s wage, and ujra h to rental payment.† (Kamali n.d.). Ijarah is a Shariah compliant alternative to Conventional lease. Through these two kinds of lease, bank performs as a Lessor and the individual to whom the asset is leased acts as a Lessee. The bank insists the lessee to pay an amount monthly for the use of the asset. The rights of the asset remains with the bank, and only the privileges of use are transferred to the lessee. 2. Types of Ijarah Contracts Used By Islamic Financial Institutions: 2.1 Simple Ijarah (similar to an Operating Lease) In a business world marred by financial uncertainties and increasing costs of operations, Ijarah loans are broadly considered as the safest, easiest, and the most efficient means to finance production procedures. Like all the other forms of Islamic financing, Ijarah too is rooted in the sound economic main attitude laid down by the Sharia. There are different types of Ijarah, each matched to the specific needs of the parties involved in the agreement. â€Å"The two most popular forms of Ijarah loans are the Simple Ijarah or Ijarah as an operating lease and Ijarah thumma al-bai or Ijarah as a financial lease. The distinguishing feature of Ijarah as an operating lease is that the lease contract is not associated with a purchase agreement.† (All About Ijara as an Operating Lease 2005). The following are some of the features of Ijarah as an operating lease: The whole price of the asset, or the part of property specified in the contract is not amortized through the main leasing tenure. The lessee can get out of the contract, that is, stop the Ijarah as an operating lease agreement anytime the lessee wishes to. On the other hand, the lessee should provide a notice prior to doing so. The real ownership of the piece of property or assets mentioned in the agreement is retained by the lessor. This agreement is executed irrespective of the quantity of payment the lessee has tendered, and that identifies the lessor’s insistence to bear every responsibility and risk connected with the ownership. In Ijarah as an operating lease, permits a part of the property to be returned to the lessor at the end of the leasing tenure. The lessor, which can be a bank or any other financial organization, can again lease the property, if i t is a functioning unit, to a different person or business unit. 2.2 Ijarah Muntahia Bittamleek (similar to a Financing Lease) Ijarah Muntahia Bittamleek is an Ijarah dealing, in which the possession of the subject asset can be relocated to the lessee after the lease term. Ijarah and Ijarah Muntahia Bittamleek are by nature mere leasing contracts, in which the subject issue is the usufruct of the property; and not the quantity of cash, as in the case of a finance lease. In other words, it is not a financing deal, and instead, it is an alternative to financing