Can Ijarah Be Defined As An Islamic Variant Of Conventional Leasing?

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1.       Can Ijarah be deϐined as an Islamic variant of conventional leasing? LEASING By Youssef Aboul-Naja The answer to this question is both a ‘yes’ and ‘no’; it all depends on the lens used to analyze the question. If one backtracks to the essence of the Islamic ęnance discipline, one would notice that all of the Islamic compliant modes, and their corresponding contracts, adhere to Shariah law. What this essentially means is that the underlying transaction must involve Shariah compliant products and be devoid of interest (Riba). It is mentioned in the holy Quran (2:275) that: “Trading is only like Riba (usury), whereas Allah has permiĴed trading and forbidden Riba (usury).” As such, Shariah compliant modes are transactional-based in nature; they generally take on one of the following forms: sale, partnership or equity investment. It may be observed that Ijarah is nothing more than a normal business activity (much like a sale), the only diěerence being that only the usufruct (right to use the asset) is transferred to the lessee, while the corpus of the property remains in the ownership of the transferor. Within such a context, both Ijarah and conventional leasing are similar, if not identical, in the case of an operating lease. As such, one may argue that Ijarah is in fact an Islamic variant of conventional leasing. But what makes Ijarah Islamically compliant is its adherence to Shariah law. Perhaps the apparent Shariah stipulations (which are not necessitated under conventional leasing) are: ȣ The lessor must own the assets for the full lease period. ȣ If the lessee defaults on payments or delays payments, the lessor cannot charge a compound interest. ȣ The leased asset’s use is specięed in the contract. Such requirements make Ijarah more analogous to sale transactions, and less of a ęnancing mode. On the other hand, © conventional leasing’s modus operandi resembles a simple interest-bearing loan. According to Sheikh Muhammad Taqi Usmani: “While ęxing the rent of [the assets to be leased], [ęnancial institutions] calculate the total cost they have incurred in the purchase of these assets and add the stipulated interest they could have claimed on such an amount during the lease period. The aggregate amount so calculated is divided on the total months of the lease period, and the monthly rent is ęxed on that basis.” For conventional leasing to adhere to Shariah law provisions, it would necessitate its deviation from the simple interest-bearing loan structure. As such, within such a context, it may be argued that Ijarah is much more than simply an Islamic variant of conventional leasing. It is observed that in today’s Ijarah practices, the industry seems to be marketing itself as the Islamic-variant leasing option. Though this is partially true, it fails to highlight the full scope of the product’s features. This results in a potentially adverse niche-positioning strategy; the uniqueness is lost when Ijarah is equated with conventional leasing. What further exacerbates the issue is that senior managers of Ijarah companies tend to lack Ijarah experience and/or formal education pertaining to the ęeld. This further fuels the industry’s convergence toward conventional leasing. Considering that Ijarah is one of the easier Islamic modes to be adopted by countries lacking Shariah compliant laws, the industry must avidly highlight its unique aĴributes; essentially paving the path for other more complex modes. Any public opinion or media appearance is the author's independent personal opinion and should not be construed to represent any institution with whom the author is aĜliated. Youssef Aboul-Naja is an Ijarah specialist at a supranational banking institution. He can be contacted at yaboulnaja@gmail.com. 22 IFN Sector Correspondents CROSS-BORDER FINANCING Fara Mohammad, director of Islamic ęnance, Foot Anstey CAPITAL MARKETS: Suhail Ahmad, CEO, Hikmah Capital Corp DERIVATIVES Suhaimi Zainul - Abidin, treasurer for Gulf-Asia Shariah Compliant Investment Association and advisor to 5Pillars GLOBAL ECONOMIC OUTLOOK Tariq Alrifai, expert, Islamic investment products and market trends LAW (EUROPE): Ayhan Baltaci, aĴorney at law, Bereket & Baltaci Law Firm LAW (MIDDLE EAST) Bishr Shiblaq, head of Dubai oĜce, Arendt & Medernach LEASING: Youssef Aboul-Naja, Ijarah specialist, a supranational banking institution MERGERS & ACQUISITIONS: Tushar Garg, associate, bulge bracket investment bank MICROFINANCE (ASIA): Dr Mahmood Ahmed, executive vice-president and director training, Islami Bank Training and Research Academy MICROFINANCE (AFRICA): Mansour Ndiaye, director of microęnance, Assistance and Consulting for Development PRIVATE BANKING & WEALTH MANAGEMENT: Thomas Woods, product development, wealth management, The Islamic Bank of Asia PRIVATE EQUITY & VENTURE CAPITAL: Arshad Ahmed, partner, Elixir Capital PROJECT & INFRASTRUCTURE FINANCE Anthony Coleby, head of corporate commercial department, Said Al Shahry Law OĜce (SASLO) REAL ESTATE Philip Churchill, founder partner, 90 North Real Estate Partners REAL ESTATE (MIDDLE EAST): Yahya Abdulla, head of capital markets — Middle East, Cushman & Wakeęeld REGULATORY ISSUES (ASIA) Intan Syah Ichsan , chief operating oĜcer, Samuel Aset Manajemen REGULATORY ISSUES (MIDDLE EAST): Mohammad Abdullah Malik Dewaya, head of Shariah compliance and audit, Maisarah Islamic Banking Services RETAIL BANKING: Chowdhury Shahed Akbar, oĜcer, Southeast Bank, Bangladesh. RISK MANAGEMENT: Dr Ken Baldwin, CEO, Islamic Financial Analytics SECURITIES & SECURITIZATION: Nidhi Bothra, executive vice-president, Vinod Kothari Consultants STOCK BROKING & TRADING: Athif Shukri, research analyst, Adl Capital STRUCTURED FINANCE: John Dewar, partner and head of Islamic ęnance, Milbank, Tweed, Hadley & McCloy SUKUK Anthony Coleby, head of corporate commercial department, Said Al Shahry Law OĜce (SASLO) SYNDICATED FINANCE Damir Galiev, portfolio manager, AK BARS Bank TAKAFUL & RE-TAKAFUL: Dr Sutan Emir Hidayat, assistant professor and academic advisor for Islamic ęnance, University College of Bahrain TAKAFUL & RE-TAKAFUL (AFRICA): Uwaiz Jassat, acting head of Islamic banking, Absa Islamic Banking TAKAFUL & RE-TAKAFUL (EUROPE): Ezzedine Ghlamallah, director, Solutions Insurance and Islamic Finance in France (SAAFI) TRADE FINANCE Anthony Coleby, head of corporate commercial department, Said Al Shahry Law OĜce (SASLO) TREASURY PRODUCTS: Naęth ALHersh Nazzal, Islamic banking specialist, certięed ęnancial and investment advisor IFN Correspondents are experts in their respective ęelds and are selected by Islamic Finance news to contribute designated short sector reports. For more information about becoming an IFN Correspondent, please contact sasikala.thiagaraja@redmoneygroup.com ͹–Š …–‘„‡” ʹͲͳͷ