One of the most interesting economic developments in the past two decades or so has been the rapid strides made by the Islamic financial services industry. According to market research carried out by Standard and Poor’s, the Islamic financial services industry possessed assets worth more than $500 billion in 2010. The sector itself has been growing at a steady rate of 10-15% since the last decade and as per the estimates of financial pundits and market analysts, this growth rate won’t slow down in the coming years. The various modes of Islamic financial agreements have found acceptance not only in Muslim countries but also in the United States, the United Kingdom, and many nations of the European mainland.
Of the many forms of Islamic financial agreements, ijara loans are probably the most popular. The various types of ijara loans have multitude of takers, both commercial entities wishing to further their business prospects and individuals who desire to possess some asset, like a house or a car. The myriad benefits of ijara loans for businesses lay bare the reasons for the popularity of these types of financial services.
The benefits of ijara loans for businesses, both large and small, span two diverse kinds—ethical and commercial. Understanding the benefits of ijara loans for businesses from both these perspectives will help you appreciate the characteristic features of these types of loans.
The Benefits of Ijara Loans for Businesses—From the Ethical Perspective
The benefits of ijara loans for businesses from the ethical perspective are not much different from those pertaining to the other types of Islamic financial agreements. This is because all Islamic financial products are rooted in the laws of the Sharia. Sharia is a body of law that dictates the codes of conduct in both personal and professional operating spheres for Moslems all over the world. An understanding of some of the rules of the Sharia that govern financial transactions is essential to fathom the benefits of ijara loans for businesses from the ethical standpoint.
As per the dictates of the Sharia, charging and receiving of interest is strictly prohibited in a financial transaction. This follows from the basic mottos of the Sharia, which are justice and partnership and the fundamental rule that money cannot be used to generate money. These rules of the Sharia make it impossible for practicing Muslims in charge of businesses to go in for conventional mortgage or loan settlements where interest is involved. The benefits of ijara loans for businesses can thus be readily gauged—they present an opportunity for business owners to enter into beneficial financial transactions with banks or other Islamic institutions without having to violate the rules of the Sharia.
The Benefits of Ijara Loans for Businesses—From the Commercial Perspective
The benefits of ijara loans for businesses, large, medium, and small stem from the flexibility of these types of loans. To be specific, ijara loans do not impose upon the lessee the condition to buy the asset being leased at the end of the leasing period. This is especially beneficial for business owners who do not want to own an asset, maybe because it has poor resale value, and yet want to reap the productive benefits from its use. What is more, the conditions of ijara make it binding on the lessor to bear all the risks associated with the ownership of the asset. So the lessee, that is the business owner, can enjoy the rights of use by only paying the rental amount at fixed intervals. This is one of the most lucrative benefits of ijara loans for businesses.
The benefits of ijara loans for businesses that are just starting out or are yet to establish a strong foothold in the competitive world, are immense. Small businesses or start-ups may not always be able to buy an asset to be used for productive purposes outright, mostly due to lack of funds. Ijara loans enable them to enjoy the benefits from using the asset right after they make the first rental payment. Furthermore, these loans have an option of transferring the right of ownership of the asset to the lessee at the end of the leasing period. So, the benefits of ijara loans for businesses, small or still in their nascent stages of development stem from dual fronts. They can not only enjoy the benefits of using the asset without having to buy it outright but also can also exercise their right to own the asset for long-term usage.
The afore-mentioned benefits of ijara loans for businesses are ample testimonies to the fact that these loans have made it possible for many a business to not only keep their heads above water but also prosper in tough economic times.