Case Study 1.doc - Case Study 1 Ijara Contract 1.1 LEARNING...

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Case Study 1: Ijara Contract 1.1 LEARNING OUTCOMES After working through Case Study 1 you should be able to do the following: 1. _ Define the Ijara contract. 2. _ Define the Ijara wa Iqtina contract. 3. _ Distinguish a conventional loan from Ijara . 4. _ Describe the elements of an Ijara transaction. 5. _ Contrast Ijara with the other modes of Islamic finance. 6. _ Identify the reasoning behind the Sharia’a rulings on Ijara . 7. _ Describe the different forms of Ijara . 8. _ Explain the practicalities of implementing Ijara . 9. _ Identify the Arabic terminology used in Ijara . 10. _ Describe the Sharia’a rulings on Ijara . 11. _ Contrast conventional leasing with Islamic leasing. 12. _ Explain the role that interest can play within an Ijara transaction. 13. _ Identify problems associated with applying Ijara . 14. _ Explain the importance of deferred sales within Islamic finance. 15. _ Contrast the role of penalty defaults within conventional and Islamic finance. 16. _ Explain how Ijara can be used for home finance. 17. _ Define LIBOR and explain its application with an Ijara contract. 18. _ Identify the deferred sale versus profit and loss share contracts. 19. _ Test that you have fully understood the principles that underlie the Ijara contract. 1.2 ROLE OF IJARA IN ISLAMIC FINANCE Those who take riba (usury or interest) will not stand but as stands the one whom the demon has driven crazy by his touch. Qur’an Sura 2: 275–280 Case Abstract Ijara is an Arabic term, with origins in Islamic Fiqh , meaning to give something to rent. Leasing is a contract whereby usufruct rights to an asset are transferred by the owner, known as the lessor, to another person, known as the lessee, at an agreed-upon price, called the rent, and for an agreed-upon period of time, called the term of the lease. This case study describes the rationale and application of the Ijara financing technique. The example provided is that of car finance but it could have equally will have been applied to any physical capital asset used in business.
1.3 THE IJARA CONTRACT AS A MODE OF ISLAMIC FINANCE 1.3.1 What is The Ijara Contract? Ijara is an Islamic mode of finance adopted by Islamic banks. Ijara (leasing) is a medium to long-term method of financing capital equipment or property. Under this contract, the customer selects the capital equipment or property (assets) to be financed by the bank and the bank then purchases these assets from the manufacturer or supplier and then leases them to the customer for an agreed period. In conformity with the Sharia’a , the owner of the assets (in this case the bank) must be paid rent (fixed or variable, as agreed by the lessor and lessee) and must exercise all the rights and obligations that are incidental to ownership such as maintaining, insuring and repairing the assets. The lessee, on the other hand, obtains the use of the asset for the period of the lease subject to paying the rent. The lessee may assume the obligations, such as maintaining, insuring and repairing the asset, in return for a reduced rent.

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