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Concerns about popular sharia finance method

November 23, 2011

Weekly word:  Ijara

Ijara simply means “to give something for rent”.*  In practice, ijara financing often works as a lease-to-own agreement.

In real estate, ijara is frequently used as the basis for a mortgage with a premium rolled into the monthly rental/lease payment toward an eventual purchase of a house.  Ijara-based home loans can be distinguished from murabaha mortgages by the timing of the “sale.”  Murabaha may allow the sale and technical transfer of ownership once the borrower begins making payments, whereas under ijara the sale is made when the lessee makes final payment.

Ijara is widely accepted among Islamists because even they cannot deny the logic of paying on a lease to use an asset until the leesee is able to buy the asset outright.

Ijara critique

But if ijara is simply a lease, why bother having it at all?  In other words, Muslims could just take out a conventional lease, which is a popular method of financing car purchases in the U.S.  One senior member of a Pakistani web forum makes the following observation:

I am in possession of a Car Ijara Document from Meezan Bank which claims to have their Car lease interest free and Shariah Compliant certified by Maulana Taqqi Usmani. Some body [sic] please explain [to] me the difference between their Arabic sounding Ijarah and Car lease by other banks.

Meezan bank gives you [a] car for 20% security (another name for down payment) and gives you [a]  car on monthly rent almost comparable in amount to interest being charged by other banks (instead of instalments [sic] as rent is allowed in Islam). After 3-5 years, whenever the term completes, car is gifted to you while your security deposit is forfeited (or the car is sold to you at the security deposit price). Now someone please tell me, where do you pay rent and get guaranteed ownership of the property after a fixed tenure. There are few other obscure differences regarding ownership of car, status of monthly instalments [sic] etc etc but they are more of playing with words than having any real value.

This seems to me as a case of “Halala” of interest. Just play with words and use some arcane Arabic terminology like Mudaraba and Ijarah etc etc and viola, you are certified Shariah compliant. And you always get some maulvi to give a fatwa in your favour in exchange of some pay/ emolument. I wonder how much Maulana is being paid by the bank to be its Sharia advisor?

Money Jihad too wonders how much Taqi Usmani is being paid to bless off on sharia finance products.  In theory, one difference between ijara and a conventional lease is that ijara rents received by the bank aren’t invested in pork bellies or Anheuser-Busch stocks, and a portion of the bank revenues are diverted as zakat to be distributed as pro-sharia men Mr. Usmani see fit.

Investors start souring on ijara

Sukuk (Islamic bonds) are one of the largest asset classes among the sharia finance industry.  Sukuk can be structured using any of the methods that Money Jihad has defined over the last couple months—murabaha, mudarabah, musharaka, ijara, etc.—but ijara sukuk have become the most popular (partly because the aforementioned Mr. Usmani panned the alternatives).

Nevertheless, when Goldman Sachs recently announced its record and troubling $2 billion sukuk issue, it eschewed ijara for a murabaha—a structural choice that prompted surprise and speculation among Islamic finance analysts.  Goldman Sachs has committed a moral failure by endorsing such a massive foray into sharia finance, but their decision to base it on murabaha suggests that there are practical risks to ijara that have not yet been fully communicated to the public.

* Kettell, Brian B., Introduction to Islamic Banking and Finance (Chippenham:  John Wiley and Sons, 2011).

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One comment

  1. Parties enter into contracts that come into effect serially, to form a complete lease/ buyback transaction. The first contract is an Ijarah that outlines the terms for leasing or renting over a fixed period, and the second contract is a Bai that triggers a sale or purchase once the term of the Ijarah is complete. For example, in a car financing facility, a customer enters into the first contract and leases the car from the owner (bank) at an agreed amount over a specific period. When the lease period expires, the second contract comes into effect, which enables the customer to purchase the car at an agreed to price.



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