Practical Applications of Ijara - ijaraCDC

Practical Applications of Ijara

Islamic financial systems are almost as ancient as the religion itself. The basic principles of Islamic financial systems that are in vogue today date back to almost 1500 years ago. However, modern Islamic financing, as we know it to be, actually had its origins in the 1960s. Currently, according to the estimates by the International Monetary Fund, there are about 500 Islamic financial institutions successfully running operations in more than 100 countries, catering to millions of customers, not only Muslims but also people from other religious orders.

Built to Last

This so ancient a financial system could not only survive time but also flourish even in the midst of competition and tough economic periods, is ample testimony of the soundness and integrity of its basic operational principles. It is thus not surprising that the ijara financing system, one of the most popular amongst the various Islamic financing modes, would find almost countless practical applications. What is more, the practical applications of ijara are evident across all sectors of the economy.

The Practical Applications of Ijara

A study of the practical applications of ijara serves to highlight the numerous admirable features of this form of Islamic financing, rooted like the others, in the principles of the Sharia law.

One of the most prevalent practical applications of ijara can be seen in instances that involve financing of highly expensive and/or extremely sophisticated pieces of equipment or machinery, such as aircrafts, ships, and industrial and agricultural machinery. And it is easy to see why these are some of the most widely-occurring practical applications of ijara. This agreement allows the customer to enjoy the benefits from using an asset even if he does not buy it or cannot afford to. On the other hand, the bank or the financial institution gets to enjoy some return on investment on leasing the asset.

In recent times, the most notable practical applications of Ijara have been exhibited by the Emirates Airlines and HSBC. The Emirates Airlines regularly enters into ijara financing agreements to facilitate the expansion of its fleet. On the other hand, in 2003, HSBC in the United Kingdom introduced mortgages that were compliant with the rules of the Sharia. In doing so, it became the first clearing bank in the U.K. to offer Islamic mortgages. In this ijara agreement, the bank buys a residential property and then leases it to a customer for some definite period of time in return for some pre-specified amount of rent. At the end of the leasing period, the right of ownership of the property may be transferred to the customer. These practical applications of ijara only go on to reiterate the fact that the ijara financing system has benefits aplenty for both the financial institution and the customer.

Apart from the above-mentioned practical applications of ijara, there are also instances where the ijara financing mode has come into play to finance smaller and less expensive pieces of equipment, like medical and diagnostic equipment needed by private medical practitioners in their clinics. These practical applications of ijara prove particularly beneficial to individuals who have dreams of starting their own business or practice but do not have the funds required to buy the requisite infrastructural equipment. Ijara financing helps them benefit from the use of a particular piece of equipment even if they cannot afford to buy it. Furthermore, they may also choose to have the right of ownership of the equipment transferred to them at the end of the leasing period. Many individuals, who had been so long leasing a piece of equipment that they intend to continue using, avail of this opportunity.

Some Reasons Behind the Practical Applications of Ijara

The almost countless examples where practical applications of ijara may be witnessed undoubtedly stem from the myriad benefits that ijara financing provides to both the lessor and the lessee. For instance, ijara allows 100% financing. This allows the lessee to conserve his capital and channel it to other avenues that may generate additional revenue. Furthermore, the lessee has the right to enjoy the benefits from using an asset without having to borrow on interest.

The myriad practical applications of ijara only go on to prove that ijara financing is a sound, transparent, easy-to-execute financial agreement that is of benefit to both the parties who have entered into the contract. It is thus not surprising that there has been a manifold increase in the practical applications of ijara, like for instance, the burgeoning demand for Islamic mortgages in the U.K, USA and Canada.