Ijara - Benefits to Individuals - ijaraCDC

Ijara – Benefits to Individuals

What are the Benefits of Ijara Loans for Individuals as Opposed to Businesses?

In recent times, the global economy has been witness to not only the amazing growth of the Islamic financial services industry but its resilience in the face of turbulent economic phases and recessionary trends. According to the Standard and Poor’s ratings, the Islamic financing industry has grown at a steady rate of 10-15% in the past decade and looks to not only maintain but also improve upon this performance in the years to come. And amongst the various modes of Islamic finance, ijara loans are probably the most widely preferred by individuals, business entities, banks, and other financial institutions.

The popularity of ijara loans has transcended borders of Muslim countries and reached the shores of the U.S.A., the U.K., and many European nations. So it is not surprising that scholars and financial analysts would be interested to know the peculiar benefits of ijara loans that prompt multitudes to enter into these contracts. Of particular interest to them are the benefits of ijara loans for individuals as opposed to businesses.

The benefits of ijara loans for individuals can be studied at two different levels. At the primary level, the benefits of ijara loans for individuals are derived from the ethical nature of these types of loans that enable Muslims to stay true to their religious beliefs. At the secondary level, the benefits of ijara loans for individuals encompass the material gains that are to be had from entering into such agreements.

The Benefits of Ijara Loans for Individuals: The Ethics

Before delving into the ethical benefits of ijara loans for individuals, it is important to note that this type of financing method is deeply rooted in the laws laid down by the Sharia. The Sharia is a body of law that governs the code of conduct, in both personal and professional spheres, of Muslims all around the world.

The guiding principles of Islamic financing methods are based in the motto’s of justice and partnership and as dictated by the Sharia, are the following:

  • Wealth can only be produced by engaging in legal trade and asset-based investment practices. So money cannot be used to produce money.
  • Interest (riba) cannot be charged or received as part of any financial arrangement.
  • All risks accruing from a financial arrangement must be shared by the parties who have entered into the contract.
  • A financial agreement cannot be speculative in nature or be composed of extreme risks.
  • There should not be any uncertainty in the contract regarding the terms, conditions, rights, duties, and obligations of all involved in a financial agreement.

Any practicing Muslim who abides by the rules of the Sharia in his personal and professional lives thus cannot consider conventional interest-based loans and/mortgage schemes, most of which violate one Islamic norm or the other, to finance his projects. The benefits of ijara loans for individuals stem from the failure of conventional financing methods in this aspect.

To be more specific, there are dual benefits of ijara loans for individuals on the ethical front. Firstly, ijara loans enable a Muslim to finance his cherished projects and secondly, he is able to do so by not violating the rules of the Sharia.

The Benefits of Ijara Loans for Individuals: The Material Gains

The material benefits of ijara loans for individuals are numerous. Individuals wishing to buy their dream house or an automobile most often enter into ijara loan contracts because this financial arrangement allows them to fund their buys even if they do not have the requisite capital at the outset. The benefits of ijara loans for individuals are realized when as per the ijara contract, a bank or any other Islamic financial institution acquires the asset for the individual and leases it out to him in return for a specific rental payment to be tendered at pre-determined intervals. The amount and the frequency of payment are explicitly mentioned in the contract, as per the rules of the Sharia. At the end of the leasing period, the individual can exercise his option to have the right of ownership of the asset transferred to him.

There are also benefits of ijara loans for individuals who want to start a business of their own. Ijara loans provide him the opportunity of enjoying the productive benefits from using a particular piece of equipment or machinery without having to buy it. What is more, he is also not obliged to buy the asset at the end of the leasing period. This provision in an ijara contract is especially beneficial in instances where the capital equipment does not possess any long-term usage value and business owners do not wish to actually own it.

The above discussion on the benefits of ijara loans for individuals makes clear why ijara loans are so sought-after by people.