Ijara - Benefits to Industrial Sector - ijaraCDC

Ijara – Benefits to Industrial Sector

What are the Benefits of Ijara Loans for the Industrial Sector?

The Islamic banking industry has notched up phenomenal growth figures in the last decade or so. The industry has been growing at a steady rate of 10-15% in this period, which incidentally had seen a recession and some quite tumultuous economic times. According to market analysts, the growth rate is in no danger of decline in the coming years. According to the Standard & Poor’s rating services, Sharia-compliant mortgages like ijara were worth a whopping $400 billion all over the world in 2009. This figure has been rising since then—an ample testimony to the myriad benefits of ijara loans that accrue to all parties who have entered into the contract. A bulk of the volume of ijara loans tendered to all over the world is consumed by businesses operating in the industrial sector. This has quite naturally prompted Islamic scholars and financial analysts to probe into the benefits of ijara loans for the industrial sector.

The benefits of ijara loans for the industrial sector can be classified into two different categories—those stemming from the ethical needs of the parties who have entered into the contract and those that fulfill their business motives. An understanding of the benefits of ijara loans for the industrial sector from both these viewpoints is necessary to fully comprehend how ijara loans have benefitted the industrial sector even during challenging and uncertain economic times.

The Benefits of Ijara Loans for the Industrial Sector—Ethics into Play

To understand the benefits of ijara loans for the industrial sector from the point of view of ethics, it is crucial that some financial principles of the Sharia are discussed. Sharia is an Islamic body of law that dictates the codes of conduct of Muslims in both their personal and professional lives. The basic working principles of the various forms of ijara loans are rooted in the guidelines laid down by the Sharia.

The following are some fundamental principles of the Sharia, based on the principles of justice and partnership:

  • Wealth can only be created by engaging in strictly legal trade and asset-based investment.
  • Charging and receiving interest is strictly forbidden.
  • Risks arising out of any financial transaction should be shared by all the parties who have entered into the agreement.
  • Speculative trading activities or those business ventures that involve extreme degrees of risks are strictly prohibited.
  • There should be absolutely no ambiguity—with respect to the terms, conditions, rights, obligations, and promises binding on the parties involved—in the contract drawn up for a financial transaction.

The benefits of ijara loans for the industrial sector can be readily understood from an analysis of the afore-mentioned Sharia laws:

  • The existence of Sharia-compliant financing methods has enabled many an individual to fulfill their dream of setting up their own business without having to violate their religious beliefs by going in for conventional interest-based loans.
  • One of the most crucial benefits of ijara loans for the industrial sector is that the transparency in the contract has encouraged business owners to choose these loans even during times of recession which seems to be ongoing in America now. This has ensured that not only these businesses but also the industry they operate in, was able to counter the effects of recession to a large extent.

The Benefits of Ijara Loans for the Industrial Sector—Commercial Interests into Play

The benefits of ijara loans for the industrial sector from the point of view of commercial interests are aplenty and they arise due to the flexibility afforded by the various forms of these loans.

For instance, one of the most oft-cited benefits of ijara loans for the industrial sector and particularly for small businesses stems from the simple form of ijara with no sale of asset involved. This loan enables many cash-strapped business owners to enjoy the benefits of using an asset without needing to buy it. This form of ijara is also entered into by businesses who do not wish to purchase an asset that has poor resale value.

The benefits of ijara loans for the industrial sector have also been realized by large businesses, like those dealing in expensive machinery like aircrafts, ships, industrial, and agricultural equipment. The provision of ijara loans makes it possible for these businesses to lease these pieces of equipment and put them to productive use and earn profits. Furthermore, at the end of the leasing period, the businesses can exercise their right to buy the equipment if they intend to use it for longer periods.

A study of the benefits of ijara loans for the industrial sector thusreiterates that these Islamic financial products by benefitting businesses have significantly contributed to industrial growth of an economy.