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Copy of Islamic Finance Ijarah

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ash pitrola

on 4 March 2014

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Transcript of Copy of Islamic Finance Ijarah

Our Team Members:
Ash (12796187), Callum (11726676), Hassan (11711581), Zahid (11716805) and Zeshan (11715299)

Islamic Finance:

Ijarah (Leasing) in
Pakistan vs Malaysia

1. Islamic Finance & Leasing (Ijarah)

2. Ijarah vs Conventional Leasing

3. Ijarah in Pakistan vs Ijarah in Malaysia

4. Conlusion
Islamic Finance
Leasing (Ijarah)
Ijarah:Operating / Forward Contract (Albaraka, 2011)
Operating contract:

Ijarah: Leasing Ending
(Ijarah muntahia bittamleek)
Comparison of Ijarah vs Conventional Leasing (Jamaldeen, F 2014)
Islamic Finance In Pakistan (Haniff, 2011) (State Bank, 2009)
Car Ijarah In Pakistan (Meezan Bank, 2006)
Ijarah In Pakistan (Meezan Bank, 2006)
Islamic finance In Malaysia (ISRA, 2011)
Car Ijarah (AITAB)
Problems with Ijarah
(Rahman, 2010)
Islamic Finance was a concept until 1963.

Average growth rate 76% since 2003 - 2010.

First banking license was given to Meezan Bank in 2002
lessor should pay for all expense as they receive 'rent'

Meezan Bank says the lesse should bare the running costs

Seven day grace period before a penalty charge is given.

Charges are not a income but credited to a charity fund (scholarships & natural disasters)

If the car is lost or stolen and is not because of the negligence of the lesse the bank will void the contract.

Scholars ( Usmani, 2002) say its is not a form of Ijara but a sale purchase agreement

Lessee is given an option whether to buy or not. This is a separate contract from the Ijara
Islamic finance industry has had successful and solid background for over 30 years.
Islamic banking system started in 2002.
Average growth rate of 18-20% annually with a 12% market share.
Involves two contracts and concludes with purchase of the assets
The owner must remain liable for basic maintenance.
The Hannafi (2010) school of thought believes buyers should have warranty against latent defects.
Bank bears the risk in the event of loss or damages through unavoidable circumstances.
Mixed reactions from scholars with penalties for late payments (Sanusi, M, 2012)
Responsibility of maintenance
Penalty charges
Bank bares the risk
Purchase of asset
Grace period
Based on the principles of Islamic law(Sharia) and guided by Islamic economics (The Quran & Sunnah)

Started in Malaysia/Indonesia in the early 1960’s, currently operating in 70 countries (TradeArabiaNews, 2012)

Valued at $1 trillion in assets and is expected to expand to $5 trillion in 2016 (TradeArabiaNews, 2012).

The bank will buy and lease product to customer for an agreed rental fee.

The agreement does not state that the ownership of the product will be transferred over to lessee.
Ijarah contracts have 3 main elements:
- Offer and acceptance (Sighah)

- Two parties: the bank as lessor (Mu'ajjir) and the client as lessee (Musta'ajjer (Albaraka, 2011)

- The Ijarah contract includes the rental amount and the service.

Forward contract (Ijarah mawsoofa bil thimma):
Financier undertakes payment during construction, whilst customer's payments will start after delivery.

Obligation to buy or sell in the future at a specific date at the spot rate agreed
The lessee can agree to buy the asset at the end of the lease period in which the lease takes on the nature of a hire purchase known.

This form of ijarah states that at the end of the agreement the ownership can be transferred to the lesse. (Jamaldeen, F 2014)
• Ownership: in conventional lease, ownership can be transferred anytime, while in ijarah ownership remains with the lessor.

• Rental outset: in conventional lease, rental begins upon transfer of funds, while in ijarah it begins when the lessee starts using the object of ijarah.

• Penalty interest in case of default: conventional lease usually provides for interest on late payment of rent, whereas ijarah doesn’t permit this.

Accounting Treatment

Binding Process

Possibility of Corruption?

Not Compliant with Shariah (maintenance, penalty)
We believe that Ijarah should be more coherent with Shariah laws. This can be done by:

Giving evidence of where the Charity fund its allocated.

Lessee should bare all costs, related to risks and rewards to ownership.

The lessee should be responsibly for direct costs(fuel, tickets etc).

The lessee should be able to exercise the right to choose to buy the car or not
A Critical Review of Car Ijarah in Pakistan
Primary & Secondary data (research papers, books, internet sources interviews) Meezan Bank.
Critical Evaluation on Al-Ijarah Thummalbai
(Research papers, regulatory frameworks, questionaries and proposed models)

Abdul Rahman, A. R. (2010). An Introduction to Islamic Accounting: Theory and Practice. Kuala Lumpur: CERT Publications.

AL Baraka. (2011). Ijarah and Ijarah Muntahia Bittamleek. Available: http://www.albaraka.com/default.asp?action=article&id=302. Last accessed 24th Feb 2014.

ISRA. (2011). Islamic Financial System: Principles and Operations. (W. A. Dusuki, Ed.) Kuala Lumpur, Malaysia: ISRA.

Jamaldeen, F. (2011). Leasing or Renting (Ijara) in Islamic Finance. Available: http://www.dummies.com/how-to/content/leasing-or-renting-ijara-in-islamic-finance.html. Last accessed 24th Feb 2014.

Mohammed Sanusi, M. (2012). Islamic Banking and Finance Shariah and Legal: Issues and Challenges. Kuala Lumpur: Aslita Sdn Bhd.

Rizwanullah, Mr. and Ullah, Inayat and Khan, Madiha and Ali, Arshad and Shah, Fayaz Ali, A Critical Review of Car Ijarah in Pakistan: A Case Study of Car Ijarah Offered by Meezan Bank Limited Pakistan (November 11, 2012). Available at SSRN: http://ssrn.com/abstract=2173876 or http://dx.doi.org/10.2139/ssrn.2173876

TradeArabiaNews. (2012). Islamic finance industry to hit $5 trillion by 2016. Available: http://www.propelconsult.com/islamic-finance-industry-to-hit-5-trillion-by-2016/. Last accessed 24th Feb 2014.

Usmani, M. T. (2007). An Introduction to Islamic Finance. Karachi: Maktaba Ma'arifatul Qur'an.
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