Learn About Ijara and Operating Lease Contracts

Comparisons Between Ijara and Conventional Operating Lease Contracts

With the burgeoning popularity of the  ijara mode of Islamic financing agreement, it is only natural that there would be analyses and research into its working principles and specific benefits for the parties who have entered into the contract. Scholars and economic analysts have also made comparisons between ijara and conventional operating lease contracts in order to better understand how ijara scores over its counterparts. But before delving into comparisons between ijara and conventional operating lease contracts, it is worthwhile to gain a fair idea about the two modes of financial arrangements.

What is Ijara?

Ijara is a mode of Islamic leasing contract, involving a lessor and a lessee, where the lessor transfers the right to use a specific asset to the lessee for a pre-determined length of time and in return for some periodic rental payment. The lessor, however, retains the right of ownership of the asset and is legally bound to bear the risks of the asset, which also includes obligations to repair any damage caused naturally or due to wear and tear. The lessee has to compensate any damage to the asset arising out of his negligence. These characteristic features of this mode of financing agreement forms the basis of all comparisons between ijara and conventional operating lease contracts.

What is a Conventional Operating Lease Contract?

A conventional leasing contract is a financial agreement that is no different from an ijara economically. But while making comparisons between ijara and conventional operating lease contracts, it is interesting to note that an operating lease contract differs on three counts: the cost of acquiring the asset is not amortized during the leasing period; the lessor is responsible for bearing the maintenance costs of the asset; and the asset is usually returned to the lessor at the end of the leasing period.

Comparisons Between Ijara and Conventional Operating Lease Contracts

Now that you have a fair idea about how ijara and conventional operational lease contracts work, it is time to embark on attempting comparisons between these two modes of financial arrangements. The comparisons between ijara and conventional operating lease contracts are based on the various facets of these contracts like ownership, identification of the risk-bearer, the nature of the asset under the contract, and the specifics of payment.The comparisons between ijara and conventional operating lease contracts throw up several points of similarities. With regard to ownership of the asset, the lessor retains the right to own in both ijara and conventional operating lease contracts. The lessor bears the risks and liabilities and the costs of maintenance of the asset in both forms of contracts. This responsibility also pertains to instances where the asset has been damaged due to factors that were beyond the control of the lessee.The comparisons between ijara and conventional operating lease contracts can also be made on fronts like the particulars of the rental arrangement. In both the forms of contract, the first rental payment is made when the lessee receives the asset, in a usable condition and able to fulfill the objectives of its hiring.The terms and conditions stated in the contract provide ample grounds for comparisons between ijara and conventional operating lease contracts. In the ijara mode of Islamic financing, the asset that will be hired must be a “non-fungible” one that is, one that it should not perish in usage. The conventional operating lease contract specifies that the leased asset must not been a “limited use” object.Comparisons between ijara and conventional operating lease contracts provide an interesting insight into the working principles of ijara in particular and reiterate the soundness of this mode of Islamic financial agreement arising out of its adherence to the basic tenets of Sharia. For instance, in a conventional operating lease contract, the lessor is entitled to penalize the lessee for delaying or defaulting on payments. The ijara contract also states the same but modifies it to include the condition that the lessor can use the amount received as penalty only for charitable causes, thereby avoiding Riba.Comparisons between ijara and conventional operating lease contracts bring out some interesting features of both the forms of arrangement. For instance, when comparisons between ijara and conventional operating lease contracts are made with regard to “sale and lease back” conditions, it is seen that in ijara, both these transactions are allowed but separately. But in a conventional operating lease, the contract covers the sale of the asset by one company to another that in turn lets out the asset for hire to the original seller.

Significant Preference

The above-mentioned comparisons between ijara and conventional operating lease contracts only go on to highlight the integrity of the ijara mode of financing and thus make clear the reasons behind the overwhelming preference for this mode of financing over others.