Ijarah

Table of Contents
CHAPTER # 1 ABSTRACT...............................................................................................................................................3
IJARAH..........................................................................................................................................................5 TYPES OF IJARAH............................................................................................................................................5 IJARAH IN QURAN AND SUNNAH........................................................................................................................6 IJARAH UNDER FOUR SCHOOLS.........................................................................................................................7

CHAPTER # 2 IJARAH AS A MODE OF FINANCING................................................................................................8

IJARAH FOR ISLAMIC FINANCE SOLUTION...........................................................................................................9 PROCESS OF IJARAH........................................................................................................................................9 FINANCING MIX OF ISLAMIC BANKS.................................................................................................................10

CHAPTER # 3 IJARAH AS A MODE OF FINANCING...............................................................................................11

BONDS..........................................................................................................................................12 IJARAH SUKUK..........................................................................................................................................12 IJARAH SUKUK STRRUCTURE................................................................................................................12 SECURITIZATION OF IJARAH.................................................................................................................13
IJARAH

CHAPTER # 4 DISCUSSION AND ANALYSIS............................................................................................................15

SALE AND LEASE BACK....................................................................................................................................16 LIABILITY FOR LOSS.........................................................................................................................................16 RULES OF IJARAH..............................................................................................................................................17 REVOCATION OF IJARAH................................................................................................................................18 IJARAH FINANCING CALCULATION............................................................................................................19

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CHAPTER # 5 CONCLUSION & RECOMMENDATION...........................................................................................20

ECONOMIC BENEFITS OF ISLAMIC LEASING...........................................................................................21 CONCLUSION.......................................................................................................................................................22 RECOMMENDATION..........................................................................................................................................22

REFERENCES........................................................................................................................................23

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ABSTRACT

This report is presented in two parts and several sections. The first part provides a fairly detailed examination of the fiqh rules pertaining to the contract of Ijarah. It begins with the definition of Ijarah and reviews the leading schools of Islamic law on the basic conditions and requirements of this contract. This is followed by a review of the two varieties of Ijarah known to the market, namely operational lease, and financial lease. The discussion proceeds with a review of contractual options (khiyarat) and their relevance to Ijarah, liability for loss and insertion of penalty clauses in the Ijarah, and then the fiqh rules pertaining to the termination of this contract. The second part deals with the sukuk (bonds) in general and the Islamic bonds in particular. It also discusses potential benefits of Islamic bonds and their effects on economic development and examines experts' opinions on issues of concern to Islamic bonds that have drawn the attention of commentators. A brief review of some recent issuances of Islamic bonds is followed by a discussion of hybrid assets in the sukuk.

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CHAPTER # 1 INTRODUCTION TO THE TOPIC

Learning Objectives: 1. What is Ijarah? 2. Types of Ijarah 3. Concept of Ijarah in Quran & Sunnah
4. Ijarah under four Schools

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IJARAH Ijarah derives from the root word ajara to recompense, compensate or give consideration and return. Ajr refers to a workers wage, and ujrah to rental payment. In its juristic usage, Ijarah primarily refers to both a rental as well as a hire contract that engages the services of persons. In its current usage Ijarah also occurs in two types, namely operational lease and financial lease, the latter is known as Ijarah wa iqtina. The word Ijarah refers to a transaction that involves giving something on a rental basis. It can denote the paying of wages to employees (Ijarah Amal) as well as the renting of an asset (Ijarah Ain). In the Ijarah Aina contract, there is no option for the lessee to acquire the asset at the end of the lease. However, there is another type of Ijarah contract, referred to as Al-Ijarah Thumma Al-Bai (AITAB), wherein the lessee can acquire the asset at the end of the lease. In Ijarah Aina (hereafter, Ijarah), the lessor rents the assets to benefit from their use without having ownership transferred to the lessor. The legal term for this arrangement in English is usufruct and the price for this use is referred to as rent. There is no element of interest in the transaction, since ownership of the asset always remains with the lessor, and there is no option for the lessee to gain title to the asset. Since title (ownership) to the asset is not being transferred, there is no sale of a tangible asset, only the sale of an intangible asset, namely the right to its use for a specific period of time. This right to use or usufruct is known as manfaa in Arabic. Unlike the conventional lease, an Ijarah is a contract whereby a financial institution, using Islamic principles, purchases and then leases the asset required by the client in exchange for a rental fee that is not related to interest. Under the contract, the lessor owns the property and may have the right to renegotiate the lease payments at various intervals agreed to in advance in the contract with the lessee, thereby ensuring that the rental payments are equal to the residual balance value of the asset as well as the opportunity cost of the lessor, that is, his forgoing the use of the assets. The risks of ownership of the asset stay with the lessor. In this structure, Ijarahs legal characteristics are similar to those of a sale-and-purchase transaction, with the exception that the physical asset is not transferred and there is a specific time limit on the use of the asset. It should be noted that the source of funds used Essentials of Islamic Finance
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by the financial institution to finance Ijarah transactions must be halal. Ijarah can be contracted on an asset that is yet to be constructed or manufactured, as long as it is fully described in the contract, provided that the lessor should normally be able to acquire, construct, manufacture, or buy the asset being leased by the time set for its delivery to the lessee. TYPES OF IJARAH Islamic financial institutions use the lease for the usufruct as an instrument of financing. They purchase the assets and rent them out to customers in return for rental. They use two models, namely 1. 2. Finance lease Operating lease

A finance lease is mostly used to raise long term capital to pay for assets. It enables the lessor to earn reasonable profit along with full recovery of the cost of the asset. The corporations uses this mode of Ijarah to acquire high cost assets such as heavy machinery, production plants etc without investing large amount of funds. The ownership of the asset is retain with the lessor but hand over the rewards and benefits associated with the asset to the lessee on certain consideration. Finance lease basically allows business to used as asset over a fixed time period on regular installments i.e. rent, The bank purchases the asset on behalf of customer, and after all the payments have been made the ownership of asset is transfer to the lessee. The rent is fixed and it is not dependant on the benefits and performance of the asset. The lessor usually does not provide any service relating to the usage of the asset but responsible for insurance, registration etc. The finance lease is non cancelable and the lessee cannot return the asset to the bank in normal circumstance. On the other hand, operational lease is similar to financial lease but its short term thats the reason, it is also called as a non-full payout leases, because the amount of the rental does not cover the lessor full cost of asset and the period of lease is always less than the useful life of the asset. The rate of return in operating lease is dependent on the asset performance and benefits associated with it so it is not confirmed and there is probability and uncertainty in it. The lessor may also provide the services related to asset maintenance or operations. During the whole useful life of asset, it remains in the ownership of the lessor who can re-lease it every time after the lease period end. The lessor also carries the risk of, recession, obsolescence or diminishing demand. So the main difference in between the finance lease and the operational lease is that in operational lease the lessee does not have the option to purchase the asset. IJARAH IN QURAN AND SUNNAH Essentials of Islamic Finance
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Ijarah is validated by the Quran, Sunnah, and general consensus (ijmaa). Several verses are found in the Quran (al-Kahf,77:al-Qasas, 26: al-Talaq, 65-6) on the workers entitlement to a wage where references are also made to the practices of previous Prophets on Ijarah, thus indicating that Ijarah represents an instance of continuity in the Quran of the laws of previous nations. References also occur in hadith to Ijarah and the employer-employee relations, including, for example, the instruction, in symbolic terms, to the employer to pay the employee his wages before the sweat of his brow dries up. Whereas the Quran and Sunnah only refer to Ijarah as an employment contract, the companions of the Prophet practiced Ijarah, in the sense of employment as well as rental of real property. The validity of Ijarah is thus upheld by conclusive ijmaa of the companions, as well as general custom (urf) among Muslims that prevails to this day. IJARAH UNDER THE FOUR SCHOOLS Ijarah comes from the root word ajr, which means compensation and, at the same time, means the sale of usufruct. Hanafi School: Ijarah is defined as a contract that enables possession of a particular intended usufruct of the leased asset (ayn) for a consideration. Some jurists have stipulated that the usufruct from the leased asset should be intended, while others explained that what is meant by it are considered intentions in light of Shariah and reasoning, and not merely intentions. Maliki School: The Maliki School of fiqh defines Ijarah as a contract that relates to permissible usufructs for a particular period and a particular consideration not arising from usufruct. Shafie School: The Shafie School of fiqh defines Ijarah as a contract for a defined intended usufruct liable to utilization and accessibility for a particular recompense. Hanbali School: The Hanbali School of fiqh defines Ijarah as a contract for a particular permissible usufruct that is taken gradually for a particular period and a particular consideration. Although there are various definitions of Ijarah given by the scholars of Islamic jurisprudence via their various schools of thought, it is agreed among them that Ijarah is a contract on the use of benefits or services in return for compensation. The definition of Ijarah according to AAOIFI is the ownership of the right to the benefit of using an asset in return for consideration. While in Financial Reporting Standard 117 (FRS 117), a lease is an agreement whereby the lessor conveys to the lessee in return for a payment or series of payments the right to use an asset for an agreed period of time. In summarizing all the definitions, Ijarah may be regarded as a leasing of property pursuant to a contract under which a specified permissible benefit in the form of a usufruct is obtained for a specified period in return for a specified permissible consideration.

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CHAPTER # 2 IJARAH AS A MODE OF FINANCING

Learning Objectives 1. Ijarah for Islamic Finance Solution

2. What is the process of Ijarah?

3. Financing mix of Islamic banks

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IJARAH FOR ISLAMIC FINANCE SOLUTION The arrangement of finance to purchase asset is the major issue for businesses. Leasing allows businesses to acquire asset without investing the total cost in onetime payment and spread the cost of asset over the time period and it also helps the business to meet its current finance requirements. Leasing allows a logical way to separate ownership and the use of asset. It means to acquire the use of asset over a fixed period on rent. The amount of the rent can be re-bargain after some interval between the bank and client. In Islamic finance Ijarah is a very popular shariah way to asset finance without involving interest. It enables the customer to use durable inconsumable goods, equipment and heavy machinery e.g. Aircrafts, ships, heavy machinery and production plants without directly purchasing them. The bank itself is not interested in the asset so if option is added in the Ijarah contract then the lessee correspondingly gets the ownership of the asset at the end of the period which makes simple Ijarah to Ijarah wa iqtina. Ijarah is also favored because of its tax advantage as the amount of rental is offset against firm tax rate by the lessee. As the client renting the equipment is not the owner so its also not included in Zakat. The decision of Islamic banks to provide Ijarah financing depends upon the amount of cash flows from the leased asset and the financial position of the customer but without interest. The bank can directly purchase the asset itself or may appoint client as agent to purchase the asset on behalf of bank. As long as the client is agent all the risk associated with the asset is of bank thats the difference between Ijarah and conventional lease. As soon the agent gets the delivery of the asset, he becomes lessee. The rental is due from the time of delivery of the asset in full working condition whether the lessee start using it or not. The amount of rent can be re-priced by the Islamic banks to ensure that return on Ijarah financing is profitable and competitive to the prevailing market. PROCESS OF IJARAH

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The client Lessee contact the bank Lessor with the request for Ijarah leasing and enters into a promise for lease contract. It includes the offer and acceptance by the client. The bank buys the asset required for Ijarah and gets title of ownership from the manufacturer. The bank makes payment to the manufacturer.

The Bank leases the asset to the customer after execution of lease agreement. The customer makes periodic payments as per the contract. At the end of the tenure customer can purchase the asset from the bank with the help of separate Sale agreement. FINANCING MIX OF ISLAMIC BANKS Islamic principles stipulate certain conditions that need to be adhered to while developing Islamic banking products. Having left with no choice due to the absence of attractive investment avenues, Islamic banking products mainly rely on asset based financing to generate returns for their depositors. Although no less Shariahcompliant, these fixed rate trade based products draw criticism from certain quarters of the economy due to their apparent resemblance with conventional, interest bearing counterparts, usually in terms of returns only.

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CHAPTER # 3 IJARAH BONDS

Learning Objectives What are Ijarah bonds? What is Ijarah Sukuk? How to securitize bonds?

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IJARAH BONDS Ijarah sukuk or bonds are the securities that shows the ownership of clearly specified existed and known asset that is link up to a lease contract, rent of which is the return that is distributed among sukuk holders. Ijarah bonds depict the leased asset without actually relating the bond holders with the corporation. For example, an air craft on Ijarah leased can be delineated in bonds and these bonds are owned by thousands of people as bond holder, reach of them is individual and is not associated with each other. In simple words they all are the owner of the air craft and they are entitled to receive regular income which does not have any risk like in common stocks, because the rent is fixed and predetermined. However Ijarah bonds are exposed to the risk from the general market conditions, real sate rates, ability of the lessee to pay rentals, insurance cost etc. This means that the expected returns on some form of Ijarah bonds are not able pay pre determined & fixed rentals but most of the time the rentals are predetermined and is fixed or floating depending upon the contract of Ijarah. Ijarah Sukuk is completely transferable and can be traded in the secondary markets like common stocks and conventional bonds. IJARAH SUKUK Ijarah sukuk are the securities representing ownership of well defined existing and known assets tied up to a lease contract, rental of which is the return payable to sukuk holders. Payment of Ijarah rentals can be unrelated to the period of taking usufruct by the lessee. It can be made before beginning of the lease period, during the period or after the period as the parties may mutually decide. This flexibility can be used to evolve different forms of contract and sukuk that may serve different purposes of issuers and the holders. IJARAH SUKUK STRUCTURE

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1. The borrower buys the asset from the seller and sells it to the special purpose vehicle (SPV). Alternatively, SPV buys the asset directly from the seller according to the needs of the borrower. 2. To pay for the acquisition, the SPV issues sukuk to sukuk holders. 3. a. Sukuk holders pay sukuk proceeds to the SPV. b. The SPV distributes the proceeds received from sukuk holders to the borrower to pay for the asset acquisition. If the SPV buys the asset from the seller, the proceeds are used to pay the purchase payment to the asset seller. 4. The SPV leases back the asset to the borrower (the lessee). 5. a. As return on the lease transaction, the lessee pays regular lease payments to the SPV. b. The SPV distributes the lease payment to sukuk holders as the periodic distribution amount; this amount is equal to the lease payment received from the borrower or the lessee. 6. At the maturity of the sukuk, the borrower repurchases the asset from the SPV. 7. a. The borrower pays the repurchase price to the SPV. b. The SPV distributes the repurchase price received from the borrower to sukuk holders as a dissolution distribution amount. SECURITIZATION OF BONDS The arrangement of Ijarah has a good potential of securitization which may help create a secondary market for the financiers on the basis of Ijarah. Since the lessor in Ijarah owns the leased assets, he can sell the asset, in whole or in part, to a third party who may purchase it and may replace the seller in the rights and obligations of the lessor with regard to the purchased part of the asset. Therefore, if the lessor, after entering into Ijarah, wishes to recover his cost of purchase of the asset with a profit thereon, he can sell the leased asset wholly or partly either to one party or to a number of individuals. In the latter case, the purchase of a proportion of the asset by each individual may be evidenced by a certificate which may be called 'Ijarah certificate'. This certificate will represent the holder's proportionate ownership in the leased asset and he will assume the rights and obligations of the owner/lessor to that extent. Since the asset is already leased to the lessee, lease will continue with the new owners, each one of the holders of this certificate will have the right to enjoy a part of the rent according to his proportion of ownership in the asset. Similarly he will also assume the obligations of the lessor to the extent of his ownership. Therefore, in the case of total destruction of the asset, he will suffer the loss to the extent of his ownership. These certificates, being an evidence of proportionate ownership in a tangible asset, can be negotiated and traded in freely in the market and can serve as an instrument easily convertible into cash. Thus they may help in solving the problems of liquidity management faced by the Islamic banks and financial institutions. Essentials of Islamic Finance
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It should be remembered, however, that the certificate must represent ownership of an undivided part of the asset with all its rights and obligations. Misunderstanding this basic concept, some quarters tried to issue Ijarah certificates representing the holder's right to claim certain amount of the rental only without assigning to him any kind of ownership in the asset. It means that the holder of such a certificate has no relation with the leased asset at all. His only right is to share the rentals received from the lessee. This type of securitization is not allowed in Shariah. As explained earlier in this chapter, the rent after being due is a debt payable by the lessee. The debt or any security representing debt only is not a negotiable instrument in Shariah, because trading in such an instrument amounts to trade in money or in monetary obligation which is not allowed, except on the basis of equality, and if the equality of value is observed while trading in such instruments, the very purpose of securitization is defeated. Therefore, this type of Ijarah certificates cannot serve the purpose of creating a secondary market. It is, therefore, necessary that the Ijarah certificates are designed to represent real ownership of the leased assets, and not only a right to receive rent.

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CHAPTER # 4 DISCUSSION AND ANALYSIS

Learning Objectives Sales and lease back Liability for Loss Rules of Ijarah Revocation of Ijarah Ijarah financing calculation

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SALE AND LEASE BACK When the client sells the asset to the bank the entire risk and rewards are transferred to the bank who is then is responsible for the ownership related expenses. In this case the bank is allowed to lease the asset to the client but there are conditions which have to be followed to make the entire transaction Shariah compliant. There should be at least one year lease period There should be separate contracts for sale and lease The agreement to sell at the end of the lease must be separate The intention of the client is to avoid interest related transactions

LIABILITY FOR LOSS Since the lessor, in a financial lease, bears ownership responsibilities, in the event the asset is destroyed during the lease period, he alone stands to suffer the loss. Similarly if the leased asset loses its utility and function without the lessees fault or negligence, the lessor's entitlement to rent discontinues. This may also be said to be one of the differences between Ijarah and conventional leasing, as the latter entitles the lessor to receive rent even if the lessee could not obtain any benefit from the leased asset. Long term leases with fixed rent may be liable to market fluctuations of rent and inflation which may present loss-incurring factors for the lessor. To prevent excessive uncertainty in this regard, the lessor may insert a condition in the lease that the rent may be reviewed or made renewable on new terms at specified intervals. This would be tantamount to what is now known as floating Ijarah, as opposed to fixed rate Ijarah. If the lessee contravenes any of the terms of the agreement, he may be held liable for compensation of the loss caused, but he cannot be compelled to pay the rent of the remaining period. The lease asset normally reverts to the lessor when the lease is terminated. Should there be no contravention on the part of the lessee, the lease cannot be terminated without mutual consent. Hence any stipulation which gives the lessor unrestricted power to terminate the lease would be contrary to Shariah. Similarly, any clause which obligates the lessee to payment of rent for the remaining of the lease period would be ultra vires the Shariah. If the leased asset has totally lost its utility and function, accidentally destroyed, or its usufruct value substantially reduced and no restoration or repair is feasible, the lease terminates as of the day of the loss of its utility. However, in modern practice, the leased assets are usually insured against such contingencies, in which case, it may be unnecessary to insert additional stipulations in the lease contract. The lessee's control over the leased article is in the nature of a trust (amanah) which means he is not liable for loss and damage that occurs through normal use of the leased object. But he is liable to pay compensation when he violates the terms of the trust and uses the Essentials of Islamic Finance
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leased article contrary to what is normal and customary, or when proved deliberately negligent and abusive. Financial lease agreements often stipulate a penalty if the lessee defaults on payment. Uthmani observed that a penalty of this kind is not valid in an Islamic lease. The reason given is that the rent after it becomes due is a debt payable by the lessee and a monetary charge on it is tantamount to riba. A stipulation may, however, be inserted in the Ijarah agreement making late payment by the lessee over a period of time liable to a certain amount of charity. This may provide a deterrent to late payment even though it does not compensate the lessor for his opportunity cost over the period of default. RULES OF IJARAH Ijarah/Leasing is a contract whereby the owner of something transfers its usufruct to another person for an agreed period, at an agreed consideration. 1. The subject of Ijarah must have a valuable use. Therefore, things having no usufruct at all cannot be given on Ijarah. 2. It is necessary for a valid contract of Ijarah that the corpus of the Ijarah property remains in the ownership of the seller, and only its usufruct is transferred to the lessee. Thus, anything which cannot be used without consuming cannot be given on Ijarah basis. Therefore, the Ijarah facility cannot be affected in respect of money, eatables, fuel and ammunition etc. because their use is not possible unless they are consumed. If anything of this nature is given on Ijarah basis, it will be deemed to be a loan and all the rules concerning the transaction of loan shall accordingly apply. Any rent charged on this invalid Ijarah transaction shall be an interest charged on a loan. 3. As the corpus of the Ijarah Assets remains in the ownership of the lessor, all the liabilities emerging from the ownership shall be borne by the lessor, but the liabilities referable to the use of the property shall be borne by the lessee. 4. The period of Ijarah must be determined in clear terms. 5. Lessees cannot use the Ijarah asset for any purpose other than the purpose specified in the Ijarah agreement. If no such purpose is specified in the agreement, the lessee can use it for whatever purpose it is used in the normal course. However if he wishes to use it for an abnormal purpose, he cannot do so unless the lessor allows him in express terms. 6. The lessee is liable to compensate the lessor for every harm to the Ijarah asset caused by any misuse or negligence on the part of the lessee. 7. The Ijarah asset shall remain in the risk of the lessor throughout the Ijarah period in the sense that any harm or loss caused by the factors beyond the control of the lessee shall be borne by the lessor.

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8. A property jointly owned by two or more persons can be given on Ijarah basis, and the rental shall be distributed between all the joint owners according to the proportion of their respective shares in the property. 9. A joint owner of an Asset can given on Ijarah basis his proportionate share to his cosharer only, and not to any other person. 10. It is necessary for a valid Ijarah that the Ijarah asset is fully identified by the parties. REVOCATION OF IJARAH Since the principal purpose of Ijarah is to enable the lessee to enjoy the usufruct of the leased object, the majority of schools, excepting the Hanafis, allow revocation (faskh) of Ijarah in basically one situation only, which is when the leased article loses its utility and benefit. The majority consequently do not allow revocation of Ijarah on grounds of any personal disability that befalls the lessor or the lessee. Hence a lease contract may not be revoked on any other ground. The Hanafis also permit revocation of Ijarah on ground of disabilities affecting the parties even when the leased item remains intact. Revocation is thus allowed of the lease, for example, of a shop if prior to taking occupancy, the lessee loses all his merchandise. Similarly, when someone hires a chef for an event which is, however, unexpectedly postponed or cancelled, the hire contract may be revoked. Disagreement among the schools has also arisen over the dissolution of Ijarah in the event of death of one of the contracting parties. The majority of schools maintain that Ijarah remains intact even after the death of one of the contracting parties and hold that their legal heirs would inherit the contract. The latter would consequently step into the shoes of their deceased relative and would consequently be bound to honor the contract. The Hanafis maintain, on the other hand, that the contract is dissolved upon the death of one of the contracting parties. This is because usufruct according to the Hanafis is a manfaa (benefit) which is not mal and therefore not inheritable. Transfer of ownership by way of sale, gift and inheritance also does not vitiate the Ijarah, which according to the majority including the Hanafis survives the transfer and the new owner must observe it until the end of its period. Ijarah basically expires when its period of validity comes to an end unless it is for a reason that necessitates its extension beyond the due date. Thus when the hire period of an animal or a vehicle comes to end during the continuation of a journey they have been hired for, the Ijarah continues until the time the carrier reaches destination.

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EXAMPLE OF IJARAH FINANCING CALCULATIONS Generally, the financial institutions calculate the rental amounts as follows: Assumptions: 1. The financial institution determines that it wants to have a profit rate (PR) of 10 percent. 2. The purchase price (PP), including all costs, is $1,000,000 (cost borne by the financial institution). 3. The term (T) of the lease is 5 years. Calculations: 1. Profit (P) = Purchase price x profit rate x period of financing $1,000,000 x 0.10 x 5 = $500,000 2. Total lease rental = Purchase price plus the profit $1,000,000 + $500,000 = $1,500,000 3. Monthly rental = Total lease rental divided by the term (in months) $1,500,000/ (5 x 12 months) = $25,000 per month

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CHAPTER # 5 CONCLUSION & RECOMMENDATION

Learning Objectives Economic benefits of Islamic leasing Conclusion Recommendation

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ECONOMIC BENEFITS OF ISLAMIC LEASING Let us proceed to discuss the economic benefits of Islamic leasing. Five distinct benefits of Islamic leasing can be mentioned: 1. Islamic leasing necessarily involves real assets. This ensures and strengthens the linkage between the financial sector of the economy and the real sector contributing to economic stability. In this way lease finance relates to a distinctive feature of Islamic finance, a feature missing in the conventional system. Proliferation of financial assets without any counterpart in the real sector of the economy makes the financial markets vulnerable to speculative games threatening to turn these markets into a casino. It also engages a large number of highly skilled people into maneuvers that have nothing to do with production of goods and services. Incomes generated by these activities have contributed to the increase in the inequality in the distribution of income and wealth in the society. 2. Islamic leasing creates a great potential for securitization. Sukuk based on Ijarah can be traded in the market, affording a convenient instrument for investing savings to the people of small incomes who constitute the overwhelming majority in the developing countries in general and in the Muslim countries in particular. 3. Islamic leasing is especially suitable for some sectors of the economy for which sharingbased modes proved to be rather difficult to practice, e.g. the consumers sector and the public sector. It can take care of the public sector projects related to infrastructure building, e.g., roads and bridges, airports, irrigation systems, hospitals, schools, etc. As a matter of fact most of the leasing based sukuk issued recently belong to this category. 4. Lease finance is easier to practice as it involves less documentation and takes less time to conclude a deal. Unlike lending, it does not need collateral and no thorough enquiries into the creditworthiness of the lessee are called for. The physical presence of a tangible asset, the subject of the lease, whose ownership may remain with the lessor, makes these formalities unnecessary. This may make it especially suitable for the rural sector, where formalities may hamper operations. 5. Lease finance has some of the good features of debt finance and, at the same time, is free of some of the weaknesses of sharing-based modes of finance. There is less possibility of moral hazard/adverse selection than the sharing modes. There is no agency relationship between the lessor and the lessee, as is in the case of mudarabah (profit sharing), for example. The payment obligation of the lessee, the rent, is fixed, as in case of debt. It is not a case for adverse selection as no part of unforeseen losses/costs can be passed over to the lessor.

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CONCLUSION The basic advantages of Ijarah and how it can be used to avoid some of the controversial features of bay al-inah and bay al-dayn have generated much interest in Ijarah-based financing and sukuk in recent years. Ijarah can also be used as an incentive to economic development as it is usually long term and offers potential for stimulating productive industries. The fact that Ijarah is not dependent on collaterals also means that it has greater in-built stability to contain inflationary pressures in the economy. RECOMMENDATION Our analysis of the Shariah related issues pertaining to Ijarah based financing also suggests that there are basically no major departures from Shariah principles in the contemporary applications of this contract. Some of the issues to which attention has been drawn in this essay have featured in the existing literature on Ijarah and the quest continues for better solutions. With regard to financial leasing, the main critique is that the Ijarah certificates should represent a portion of the bearer's ownership in the leased assets and not a mere sale of the right to charge rent. This is not also an insurmountable issue. Another issue raised is over the obligatory manner of committing the lessee to acquire ownership of the leased asset at the end of the contract period. This practice is inconsistent, as explained earlier, with the requirements of Islamic law. For stipulation of such terms in the original lease not only amounts to combining two contracts in one, but can also lead to injustice. There is no objection to drawing a basic memorandum of understanding, or exchange of promises, between the parties that would help secure the desired purposes of the parties, provided it does not bind the lessee to acquire ownership. The lessor may also make a unilateral commitment to offer the lessee an option to buy the leased assets at the end. For those who accept the legality of traded options from the Islamic perspective, one may suggest perhaps that the lessor may offer a put option to the lessee to sell the leased assets to the latter at the end of the contract period. The option so provided would only commit the lessor but would not bind the lessee to exercise the option.

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REFERENCES Mohammad, H., (2005). A Shariah Analysis of Issues in Islamic Leasing. Retrieved from http://islamiccenter.kau.edu.sa/arabic/Magallah/Pdf/20_1/20-1_Kamali_05.pdf Dr. Abdul, S., (n.d.). Ijarah (lease). Department of Research and Development. Retrieved from http://www.albaraka.com/media/pdf/Research-Studies/RSIJ-200706201-EN.pdf Dinna, R., (2008). Design of Ijarah Sukuk. Retrieved from http://www.philadelphia.edu.jo/courses/Markets/Files/Markets/c44.pdf Maulana, T., (n.d.). Ijarah. Retrieved from http://www.accountancy.com.pk/docs/islam_ijarah.pdf Umer, A., (2010). Challenges Facing Islamic Banking Industry. Retrieved from http://www.meezanbank.com/docs/brecorder.pdf Dr. Muhammad, I., (n.d.). Meezan Banks Guide to Islamic Banking. Retrieved from http://www.meezanbank.com/docs/s7c28.pdf n.a., (n.d.). Focused Toolkit Islamic Leasing (Ijarah). Retrieved from http://leasingtoolkit.org/files/Islamic%20Leasing%20(Ijarah).pdf Ahmad, A., (n.d.). Islamic financial Accounting Standard -2 Ijarah. Retrieved from http://www.scribd.com/doc/18644133/Islamic-Financial-Accounting-IJARAH-byMEZAAN-BANK

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