Ijara – Benefits to Financial Institutions

What are the Benefits of Ijara Loans for Financial Institutions?

A certain level of curiosity had always been there but recent economic developments and certain research findings have heightened the interest pertaining to the benefits of ijara loans for financial institutions.

According to Standard and Poor’s, the last decade, including the years of recession, has seen Islamic banking products growing at a steady rate of 10 to 15% and the total worth of these products standing at a princely $500 billion in 2009. These figures are projected to improve in the coming years. The prediction is not surprising considering that Islamic banking products have already spread to the United States, the UK, and the countries of the European mainland. Various such products like the Musharaka, the Murabahasukuk, and ijara loans have not only found acceptance but have also gained popularity amongst non-Muslims in these regions of the world. Amongst all the various forms of Islamic financing methods, ijara loans are one of the most widely sought-after.

The benefits of ijara loans for financial institutions may not be as well-documented as those for other industries and individuals. The interest has been whetted in recent years particularly after witnessing banks and other Islamic financial institutions dabbling in these and benefitting even in times of recession. So, what are the benefits of ijara loans for financial institutions that have prompted global banking leaders like HSBC to not only open branches in the Middle East but also offer these products in their overseas branches?

The benefits of ijara loans for financial institutions must be studied from two varying perspectives—the ethical angle that harps on the Sharia roots of these Islamic financial products and the commercial angle that harps on the ease-of-use and administration of these loans.

The Benefits of Ijara Loans for Financial Institutions: The Ethical Perspective

The benefits of ijara loans for financial institutions from the ethical perspective stem from the fact that the working principles of these loans are deeply ingrained in the guidelines laid down by the Sharia. Sharia is an Islamic body of law containing rules and regulations that govern the private and professional lives of Muslims all around the world. This brings on dual benefits of ijara loans for financial institutions.

One of the most integral benefits of ijara loans for financial institutions can be understood after analyzing the Sharia laws that govern financial transactions. Here are the principal rules:

  • Financial institutions are barred from charging and receiving interest.
  • Financial institutions cannot engage in any speculative or risky behavior.
  • Banks and other Islamic financial institutions that offer ijara loans must draw up transparent and detailed contracts that explicitly mention the terms, conditions, rights, duties, obligations, and/or promises binding on each party that has entered into the contract.

Compliance to these rules of the Sharia imparts a considerable degree of transparency, integrity, and consistency to ijara loans, thereby making them lucrative even in times of recession. Thus by offering ijara loans, many financial institutions have been able to do business even when people around the world turned away from conventional loan agendas. One of the crucial and most noticeable benefits of ijara loans for financial institutions is that by dint of these loans, many financial institutions have been saved from downing their shutters during those turbulent financial times.

Secondly, many Islamic financial institutions are able to reap the afore-mentioned benefits of ijara loans for financial institutions without having to violate their religious affinities.

The Benefits of Ijara Loans for Financial Institutions: The Commercial Perspective

There are dual benefits of ijara loans for financial institutions from the commercial viewpoint. Firstly, the ease-of-comprehension and execution of these types of loans make them far more time-saving and cost-efficient than conventional types of loans. The efforts thus spared on the resources fronts translate into greater revenues for banks and other Islamic financial institutions that offer ijara loans.

Secondly, some forms of ijara loans incorporate a provision whereby the lessee can exercise his right to purchase the leased asset at the end of the rental period or after making all the payments. Many a lessee, whether an individual who dreams of owning his own house or a business entity that wants to buy an asset for long-term use, make use of this right. The benefits of ijara loans for financial institutions arise from the fact that financial institutions are not only saddled with the responsibility of owning an asset for which they have no use in many instances, but they are also able to accumulate some profits by leasing out the asset.

The benefits of ijara loans for financial institutions that have been highlighted above are only some in a list of many. But they suffice to prove the role these loans have played in furthering the interests of Islamic financial institutions.