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BNFN 3307 – Islamic Banking and Finance 1 |P a g e Case Assignment Date: 9/11/2020 Course Code and Title: BNFN 3307 - Islamic Banking and FinanceCourse Instructor: Khaled Ibrahim Semester: Fall 2020-2021 Grade: 10 points ROLE OF IJARA IN ISLAMIC FINANCE LEARNING OUTCOMES After working through this Case Study you should be able to do the following: •Define the Ijara contract. •Distinguish a conventional loan from Ijara. •Distinguish conventional leasing from Islamic leasing •Describe the elements of an Ijara transaction. •Describe the Sharia’a rulings on Ijara. •Explain how Ijara can be used for Car finance. Case Abstract Ijara or leasing is an Islamic 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 a Car finance through Ijara. 1. THE IJARA CONTRACT AS A MODE OF ISLAMIC FINANCE 1.1 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
BNFN 3307 – Islamic Banking and Finance 2 |P a g e 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 a rent (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. 1.2 What is Car Ijara? As mentioned above, Ijara is basically the transfer of usufruct of a fixed asset to another person for an agreed period, for an agreed consideration. Under a Car Ijara agreement the car will be rented to the customer for the period agreed upon at the time of contract. Upon completion of the lease period, the customer, in this example, gets ownership of the car against his initial security deposit. Car Ijara is a Sharia’a-compliant car-leasing scheme. It is based on the principles of Ijara and is completely free from the element of interest. This product is designed for interest averse individuals, looking for a car-financing scheme that helps in avoiding interest-based transactions.