Halal Options for Investment

Halal Options for Investment

By Ayesha Ashraf Jangda – Section Head, Corporate Strategy and Business Planning at Bank Islami Pakistan Limited

Disclaimer: The writer is an Islamic banker by profession and, in this article, will be informing readers about the Shariah-compliant investment options available in Pakistan. It is advisable that readers review these options according to their own set of beliefs and unique financial situation.

According to Encyclopaedia Britannica, investment is “the process of exchanging income during one period of time for an asset that is expected to produce earning in future periods. Thus, consumption in current period is foregone, in order to obtain a greater return in future.”

An individual might have many goals, for which he/she makes investments that are short term (less than one year), medium term (more than one year but less than five years) or long term (more than five years). One of these goals can be to have regular income, especially if you are a retiree or a widow, for which the monthly profit schemes of banks and mutual funds would be more suitable. If you are young and can take risky investments, then you can invest inshares,which willprovide you with immediate capital gain and dividends. If you are middle aged and have a large sum of money at hand to buy property or real estate on installments, you can earn a hefty capital gain by selling it. If you are a businessman and hardly have money to spare, you can open a foreign currency savings’ account and earn from exchange gain. If you are a woman and are fond of wearing jewellery, then investment in gold jewellery or coins can be your option.

I will now talk about these investment avenues in detail. These are deemed by many to be the interim solutions until the world enforces an Islamic economic system, Insha’Allah.

Islamic Bank Accounts

There are many types of deposit accounts available in Islamic banks for investment purposes:

  • Current Account: It is a non-remunerative account, meaning it will not give you any profit but will only keep your money safe. You have the flexibility of withdrawing your money at any time you want through a cheque or an ATM card/transaction.
  • Saving Account: This account has the flexibility of withdrawals just like a current account but is a remunerative account. A nominal and varied profit is given by the Islamic bank at the end of each month.
  • Fixed or Term Account:The amount deposited in this account is invested for a particular period and cannot be withdrawn until the period ends. Pre-mature encashment or early redemption is allowed, but it reduces the profit rate of the period of investment. There are two types of such accounts:
    • Monthly Income Accounts – profit is given on monthly basis.
    • Maturity Profit Accounts – profit is given at the end of the period.

Saving and Fixed accounts taken by an Islamic bank are under the Mudarabatul Musharika basis, which means that the depositor becomes a partner of the bank by investing his/her money in the deposit pool of the Islamic bank. The deposit pool can either earn profit or face loss, which is shared among the participants of the deposit pool, according to their weightages.

Foreign Currency

Purchasing foreign currency in the form of US dollars, Euros or British pounds, is also an investment avenue. Islamic banks facilitate a foreign currency deposit account. To learn more about it, visit: http://www.forex.pk/open_market_rates.asp.

Islamic Mutual Funds

Another option for investing money is Islamic mutual funds. It is a joint pool where investors or certificate holders contribute their money for the purpose of investing in a profitable avenue. The profitable avenue can be Shariah-compliant shares, Sukuks (Islamic bonds), bank deposits or even real estate.

There are many types of mutual funds. The equity fund invests in Shariah-compliant shares listed in the stock market, while the growth fund invests in shares to earn capital gain. Income funds invest in shares of mature companies, in order to earn dividend or Sukuks, while the balanced fund invests in shares as well as Sukuks. For more details, you may visit: http://www.mufap.com.pk.

Gold Coins or Ornaments

Gold coins and jewellery have been considered to be sound avenues of investment since time immemorial. The best part is that you can wear them and still have an appreciated value over a period of one year.

Gold coins can be bought from brokerage houses that are registered by the National Mercantile Exchange (http://www.pmex.com.pk/products/gold.php) or any jeweller. The most important thing is to keep the purchasing slip, so that when you are selling it, you can calculate the capital appreciation that has occurred. Word of advice: keep all the gold ornaments in a locker in an Islamic bank or specialized safety lockers’ companies.

Shariah-compliant Shares

We do not live in a perfect, Riba-free, Islamic economy; therefore, scholars have devised certain conditions based on which investments in shares are considered Shariah-compliant. Some of these conditions are as follows:

  • The main business of the company does not violate the Shariah.
  • If the company deposits its surplus amount in an interest-bearing account, the income from that amount should be less than 5%.
  • If the company has interest-bearing investments, they should be less than 33%.
  • If the company has borrowed money on interest, the debt on total assets should be less than 40%.

For further details, visit: http://www.albalagh.net/Islamic_economics/finance.shtml and http://www.kse.com.pk/ => Market information => Market indices => KMI30.

Real Estate

Real estate remains one of the securest investment avenues that almost always provide a good return. Land, whether urban, agricultured, a house, an apartment or a shop, constitutes different types of property that can be invested in. Those who do not have a lump sum amount can buy it in installments from a reliable real estate developer, avail the house financing facility from an Islamic bank or buy with the help of a real estate agent. The investor can use the property for personal purposes, rent it or earn capital gain upon selling it.

To turn the wheels of an Islamic economy, one must neither hoard nor waste one’s wealth. It is most advisable to invest one’s surplus funds, not just for one’s own future prosperity but to uplift Shariah-compliant economies.

Reminder

We would like to inform the readers that many scholars have contradictory opinions on saving and term accounts of Islamic Banks. The Ulemas of Jamia Binoria, Jamia Farooqia, Jamia Ashrafia, Lahore etc do not approve of the products of Islamic banking. Their opinion has been published in book titled “Murwajah Islami Bankari” which can

be downloaded from

http://banuri.edu.pk/files/publications/MURRWAJAH%20ISLAMI%20BANKAARI.pdf

On the other hand, many scholars agree with the concept of Islamic banking in Pakistan and worldwide; they include Jamiatul Rasheed, Darul Uloom, Korangi and OIC Fiqh Academy, etc. A leading scholar in Pakistan on Islamic banking is Mufti Muhammad Taqi Usmani. He has written a comprehensive book that answers arguments against

interest-free banking and supports the practice of Islamic banking in Pakistan. This book is titled “Ghair Soodi Bankari” and can be downloaded from

http://www.4shared.com/get/ygsETJb4/Ghair_Soodi_Bankari_By_SHEIKH_.html

or purchased from Darul Ishat in Urdu Bazar.

Shaping up Your Finances. Go Budgeting!

Jul 10 - Shaping up your finances Go budgeting

Budgeting is a mechanism, which helps you to be financially in shape. Too often people make purchases without considering the financial consequences. Some people shop compulsively and then wonder why their wallet is empty. Living in moderation is the only way to earn financial security; it is a concept stated in a number of Quranic verses and Ahadeeth.

“And let not your hand be tied (like a miser) to your neck, nor stretch it forth to its utmost reach (like a spendthrift), so that you become blameworthy and in severe poverty.” (Al-Isra, 17:29)

“And the slaves of the Most Beneficent (Allah) are … those, who, when they spend, are neither extravagant nor niggardly, but hold a medium (way) between those (extremes). (Al-Furqan 25:63-67)

Budgeting is a comprehensive financial plan that helps you to:

  • live within your income,
  • spend your money wisely,
  • reach your financial goals,
  • prepare for financial emergencies,
  • develop wise financial management habits,
  • establish financial discipline,
  • feel financially secure about your present and future.

The budgeting process can be divided in four major phases.

The first step is to determine your current financial position regarding income, savings, expenses and debt obligations, if any. Estimate your sources of cash from the given time period, for which the budget is prepared. A common budgeting period is a month, since payments, such as school fees or utilities bills, are due monthly. In estimating available income, you should include only the money that you are 100% sure to receive. Bonuses, commissions, gifts or unexpected income should not be considered, until the amount is actually received.

Budgeting income may be difficult, if your earnings vary according to season or your income is irregular. In these situations, attempt to estimate your income conservatively based on past year and your current year expectations. Estimating your income on the low side would always help in avoiding situations that lead to overspending.

Budget allocations, with regards to expense categories, would depend on your life situation (whether you’re single, a parent with dependent children, or widowed with independent children, etc.).  Maintaining a detailed record of your spending for several months is a better source for understanding your spending habits and patterns.

Carefully analyze your expenses in your spending record. Review the records of your previous months’ expenditure. Using this as a starting point, write down your historical monthly expenses. Determine which ones of them are fixed and which are variable expenses. Fixed expenses are compulsory needs. Variable expenses are wants and desires and will fluctuate according to your household income, time of the year, health and a variety of other factors.

Through this you will be able to estimate your monthly expenses for the next month, which will help provide an adequate yardstick in gauging your future expense. Each expense category can be totaled and a percentage to total expenses can be calculated for it. If some categories appear too high, the decisions can be made to control spending in them.

Once you have estimated your monthly income and expense position, you have made a budget plan for the month. Now, you would need to record your actual monthly incomes and expenses in the budget sheet. The actual income and spending might not always be the same as planned; the difference between them will tell you whether your budget is on the track or going in a deficit. It may be necessary to review and revise your budget and financial goals on weekly basis.

The result of the budgeting exercise can be: 1) having extra cash in your hand at the end of the month or 2) falling behind in your saving plan by making extra expenses and so on.

On a quarterly and yearly basis, prepare a summary to compare your actual amounts with budgeted amounts and to determine if you are moving towards your targets. The summary would help you see where changes in your budget may be necessary. This review process is vital for successful money management and long term financial security.

Budget is a circular, on-going process. You, therefore, would need to revise it on a regular basis. You need to judge for yourself, whether you are making progress towards achieving your objectives. You need to evaluate, whether you have to change your financial goals due to changes in your personal or economic conditions.

What should be cut when a budget shortage occurs? The answer to this question is not easy and would depend on your individual household situations.

Having a budget would not eliminate your financial worries. A budget will work only if you are serious about following it. Changes in income, expenses and goals will require changes in your spending habits. Money management experts advise that a successful budget should be:

1. Well-planned

A good budget takes time and effort to prepare but is simple to manage. Planning the budget should involve everyone in the household who would be affected by it. Children should be involved, so that they learn the important money management lessons, while helping to develop and use the family budget. The estimates should be stated specifically and in measurable terms and have a definite time frame.

2. Realistic

If you have a moderate income, don’t expect to save enough money immediately for an expensive car or a lavish vacation. A budget is designed not to prevent you from enjoying finer things in life or to live miserly but to help you attain what you want most in life. An old saying goes: “If you don’t know, where you’re going, you might end up somewhere else and not even know it.”

3. Flexible

Unexpected expenses or emergencies will require an immediate revision of your budget. Hence, budget needs to be such that it can easily be revised. Special situations, such as illness, pregnancy and arrival of a baby or guests coming to stay, may increase certain types of expenses.

4. Clearly communicated

The budget plan will only be implemented if you and others contributing to the household budget is aware of it and can understand it.

5. Simple

The budget needs to be simple to manage; otherwise, it would be discarded in the litter. It should not be time consuming and painstakingly difficult to implement and follow.

In the end, creating a budget may not sound like the most exciting thing in the world, but it is vital in keeping your financial house in order. It is important to realize that, in order to be successful in making a budget, you have to decipher as much detailed information as possible. Ultimately, the end result will show you where your money is coming from, how much is there and where it is all going!

Budget worksheet samples are available at:

http://office.microsoft.com

http://www.vertex42.com

Pinching Paisas…

quart jar full of coins, pennies,nickels,dimes and quarters, with clipping path

Hiba continues its series on money management. In the second article of this series, Sumaira Dada, Noorjehan Arif and Aisha Ashraf Jangda talk to people and get tips on how to save money.

Whether you call it using resources responsibly, saving for future generations or just plain pinching Paisas, you know exactly what we are getting at. During the times of rising prices and falling incomes, we all need to look around for little tips on saving money. Here’s what we found.

First Step

The first step, in order to reduce the mountain of unpaid bills, is to start cutting off unnecessary expenses. Beena, a homemaker, cut down all the imported cosmetic items she used to buy. She started using local products instead. She also started making clothes for her children out of her old ones, all by herself! Monia, a Quran teacher, states that understanding the Quran helps in controlling her spending habit. On a witty note, she claims that wearing an Abaya helps reduce spending on clothes!

To cut the rising costs of electricity and fuel, you can control the excessive use of air conditioners during summer. Having mint-lemon drinks and wearing cotton and lawn clothes can do wonders in keeping you cooler! In winter, a better idea is to use warm clothes and blankets, which can help you, cut down on the fuel bill and also keep you warm.

Second Step

The second step is to be creative in fulfilling your needs. One enterprising grandmother used to make quilt blankets out of old cloth pieces! An aunt, who is known in the family for her taste in furniture, reused an antique sideboard from her mother, got it polished and painted so well that now she has placed it in her drawing room. A friend of my mother had a great idea of saving money on buying expensive paintings to put up around the house. She framed the 500-piece cardboard puzzles that her teenage children had discarded and hung them on the walls. Trust me; a framed puzzle usually catches any guest’s eye, just as it caught ours!

Third step

The third step is to start saving money with a group of like-minded people. Monia gives the idea of a Voluntary Committee (VC), a pool of funds, where every member puts in a certain amount of money on a monthly basis. At the end of the month, the entire amount accrues to a certain member. This helps to save a significant amount of money with little hassle. This discipline can be taught to teenagers as well, with an adult involved in safeguarding the money.

Quick Advice: Preparing an emergency fund is also very useful, as emergencies such as a job loss, illness, home or auto repairs, can be a significant drain on the finances. Most experts agree that you should keep between three and six months worth of your living expenses set aside in your emergency fund. Evaluation of your situation and the number of children in your family will determine what amount is best for you. Initially, you can begin with Rs.1000 a month and then increase the amount gradually. After a few months, you won’t even notice that Rs.1000 is missing, so you would be able to increase the amount you put aside. The best way to get started would probably be through your bank. Open up a new account in an Islamic Bank, if you currently don’t have one, and begin to save in it. The next step is to get into the habit of making regular deposits into this account. Once you make saving automatic, you won’t even have to think about it.

Working People

1) Saving Money at Lunchtime

We’ve all heard the advice to bring lunch from home to save money. But does it mean missing out on eating out with your co-workers?

  • Ask a few colleagues, if they’d like to join you in brown bagging lunch. Chances are they’d like to save money, too. You can set up a potluck in the break room or kitchen with everyone’s leftovers or favorite sandwiches. Not only you will get to know your colleagues better, but you will also be able to try a variety of foods. This may lead to recipe-swapping.
  • Avoid eating unnecessary and unhealthy snacks like chips, biscuits and ice-cream at work. They may be excellent munchies and you may want a crunch during that afternoon slump, but fresh fruits or vegetables brought along from home are more healthy and lighter on the stomach as well as your wallet.
  • Avoid eating out too often. Eating out is extremely expensive, and it leads to overeating, since the sizes of portions are larger than usual. If everyone at work decides to eat out, you could either eat your own food by staying back or simply order the cheapest option on the menu.

2) Saving Money on Commuting

Do you cringe at the price of filling up your gas tank? Consider cutting your fuel costs and saving wear and tear on your car by changing your commute. See if you can:

  • Search for an alternative route.
  • Avoid rush hours. Go to work half an hour earlier and leave an hour later.
  • Carpool with a co-worker or someone who works nearby.
  • Take a bus. You may enjoy the time usually used in driving to read or listen to translation of the Quran on your mobile.
  • Get your chores done along the way. Pick up grocery items or laundry, while you are coming back from work. This can save you time, money and fuel.

Save Money on Gifts

Have you ever had to give gifts to co-workers, because they’ve just got married or someone has just had a baby? Most organizations have a policy, where you can give a gift to colleagues or customers financed by the department budget. Find out if your organization has such a policy and utilize it, thereby saving your personal income.

Another way to save on gifts is to pass on gifts that you have received from others or be a little creative and design a card or clothes or even bake a cake. You can also pick a bunch of flowers from your garden. In fact, there are endless options of saving money on gifts – all it takes is some creativity and a willingness to pinch Paisas!

Significance of a Will

Vol 6 - Issue 3 Significance of will

What is a Will (Al-Wasiya)?

Fundamentally, your will is a record of your instructions on how you want your estate to be distributed after your death. It can also include some of your other wishes, for example, directions regarding your funeral rites.

Basic Features of a Will 

There is no specific wording for a will, but it should have the following elements:

  • It must be written in sound mental ability and health – it should not be verbal.
  • It should have the declaration of Faith (Shahadah).
  • It should command the survivors to do good and avoid sins.
  • It should declare all liabilities and assets, including names and contact information for payment of liabilities and ownership of the assets.
  • It should appoint executor(s) and arbitrator(s) of the will and guardian(s) of wealth and children.
  • It should specify the legal heirs and their correct shares.
  • It should bequeath part of the estate, i.e., naming beneficiaries and indicating the amount of estate to bequeath (up to one-third of the total).
  • It must be signed, dated, notarized and signed by two witnesses in a manner provided by law.
  • It is recommended to take the advice of a lawyer, tax consultant and Islamic scholar, while drafting the will.

The following points can also be added in your will:

  • how you would like your funeral to be conducted;
  • details of distribution of your personal items;
  • desire to forgive debts, which others owe to you at the time of your death;
  • details of distribution of one-third of your estate to whomever you wish to – this may include individuals not entitled to inherit under Islamic law.

Why a Will? 

Leaving a will is a responsible act, which will ensure estate distribution to the rightful beneficiaries of your choice, thus safeguarding their interest and financial welfare. Without a will, your family, relatives and friends could face severe difficulties, disputes and bitterness. And, although you may not like it, if you don’t make a will, the law will decide for you, which may not be what you would have wished. A will not drafted according to Shariah requirements is Haram and its punishment is described by the following Quranic verses: “These are the limits (set by) Allah (or ordainments as regards law of inheritance), and whoever obeys Allah and His Messenger will be admitted to Gardens under which river flows (in Paradise, to abide therein, and that will be the great success. And whoever disobeys Allah and His Messenger, and transgresses His limits, He will cast him into the Fire, to abide therein; and he shall have a disgraceful torment.” (An-Nisa 4:13-14)

Benefits of a Will

Protects the Rights: It ensures that our instructions regarding our family, children, wealth, property, assets, debts and our bodies are articulated and clearly understood. It helps in protecting the rights of our kids, our families and ourselves. We don’t want to die without giving someone their rights, nor do we want to die and not have our rights given to us.

Gives Peace of Mind: It ensures that your assets are distributed to your chosen beneficiaries in the manner you desire. Plus, it avoids unnecessary family disputes, which can occur if two people wish to receive the same personal items, investments or property. There are also situations in which the inheritance is not distributed properly among the rightful beneficiaries, causing distrust and discord. “Then whoever changes the bequest after hearing it, the sin shall be on those who make the change. Truly, Allah is All-Hearer, All-Knower.” (Al-Baqarah 2:181)

Ensures Security of Children: Children, by legal definition, are your biological children. According to the Islamic law, legally adopted and step children are not included in this definition. If you wish them to be provided for, they need to be mentioned separately in the will. A will ensures that the future of all your loved ones is secured. If you have minor children, and you and your spouse die together, then the courts or elders may take the decision as to who looks after them, which might not be the person of your choice. By appointing legal guardians in your will, you can ensure that this doesn’t happen.

Makes Financial Sense: Making a will is a relatively straightforward decision. However, in spite of this, many people die without making one. This often causes delays, hardship and worry – and costly legal bills can result, if there is confusion and disagreement among those left behind.

Helps Less Fortunate: By leaving a gift in your will to a charitable cause, you can help not only the beneficiaries but also yourself. Sadaqah-e-Jariya (ongoing charity) is an action that continues to be rewarded after death.

Evidence from the Quran and Sunnah

“It is prescribed for you, when death approaches any of you, if he leaves wealth, that he makes a bequest to parents and next of kin, according to reasonable manners. (This is) a duty upon Al-Muttaqoon (the pious).” (Al-Baqarah 2:180)

The Messenger of Allah (sa) said: “It is the duty of a Muslim, who has anything to bequeath, not to let two nights pass, without writing a will about it.” (Malik, Bukhari, Muslim and others)

“A man may do good deeds for seventy years, but if he acts unjustly when he leaves his last testament, the wickedness of his deed will be sealed upon him, and he will enter the Fire. If, on the other hand, a man acts wickedly for seventy years but is just in his last will and testament, the goodness of his deed will be sealed upon him, and he will enter the Garden.” (Ahmad and Ibn Majah)

Other Quranic verses that contain guidance regarding inheritance are: Al-Baqarah 2:240; An-Nisa 4:7-9, 11, 19, 33; Al-Maidah 5:106-108. 

When to Make a Will? 

It is important that you make a will preferably after attainting the age of eighteen. Making a will is particularly important, if you are anticipating marriage, having a child, getting divorced or getting remarried. Also, do make a will before starting a business, leaving for Hajj, buying property, acquiring assets or making investments. It is recommended that you review and update your will every five years. Changes that should trigger a review of your will include any changes in your financial, marital, health or emotional circumstances. If you draw up a new will, you will need to destroy the old one, so as to avoid confusion in the future.

Conclusion

In short, it is a duty of every Muslim to make a will, and it should not to be neglected because life and death has no guarantees. Life is short. Today, we are here. Tomorrow, we may be gone. Imagine the distress that is caused to the widow or children, or leaving a near and dear destitute by not clarifying your will and by not doing it according to Shariah requirements. It would spare your family from uncertainties, disputes, bitterness and family breakdowns afterwards, as is the case with so many families today.

Sukuk

Vol 2 -Issue 4 SukukWhat is Islamic Sukuk?

Bonds are fixed income securities that promise the holder a specified set of payments. A bond investor has lent money to the bond issuer. In return, the issuer of the bond promises to pay interest and repay the principal on maturity.

Islamic Sukuk is a form of debt financing structured under the rules of Shariah. Sukuk are term finance certificates (TFC) of equal value representing undivided shares in ownership of assets of a particular project or special investment activity.

Difference between Sukuk and Conventional Bonds

The basic difference between conventional bonds and Sukuk lies in the way they are structured and floated. In the conventional system of bond issue and trading, the element of ‘interest’ is at the centre of all transactions. Sukuk, on the other hand, are structured in such a way that the issue is asset backed and is based on “an exchange of approved asset for some financial consideration” that allows the investors to earn lawful profits from transactions. The underlying asset, contract, and payment mechanism of the Sukuk while being commercially viable, has to be aligned with the requirements of the Shariah.

Types of Sukuk

Thus, the issuance of Sukuk requires an exchange of a Shariah compliant underlying asset for a financial consideration through the application of various Islamic commercial contracts, such as the Mudarabah, Musharakah, Ijarah, Istisna’, Salam, and Murabahah. The equity-based nature of Mudarabah and Musharakah Sukuk exposes investors to the risks connected with the performance of the project for which the financing is raised. In contrast, issuance of Sukuk on principles of Ijarah and Murabahah yields deterministic receivable and hence result in predictable and somewhat fixed returns for the prospective investors.

Mechanism of Ijarah Sukuk

The Ijarah Sukuk  is one of the most popular concepts among issuers of global Islamic Sukuk. The structure of Ijarah Sukuk can be understood from this example. If a corporation requires, for example, USD50 million for the purchase of land, real asset, equipment, aircraft, etc., it can issue Ijarah Sukuk equalling that amount in small denominations, say USD10,000 each. The firm then either purchases the asset on behalf of the Sukuk holders (investors or certificate holders) or transfers the ownership of the already acquired asset to Sukuk holders by establishing a Special Purpose Vehicle (SPV), which owns the underlying assets. The investors or Sukuk holders, own the shares of this SPV. The asset is then leased back to the firm and the lease proceeds from the asset are distributed to the Sukuk holders as dividend. The returns on the Sukuk certificates, or shares of the SPV, could be either fixed or floating. The expected returns (pre-determined rental payments) are fixed and can be treated as predictable like the coupon payments of a conventional bond.

Ijarah Sukuk can be issued through a financial intermediary, a bank, a brokerage house or directly by the users of the lease asset. A third party can also guarantee rental payments, and since the yield is predetermined and the underlying assets are not liquid but tangible and secured, the Ijarah certificate can be freely traded in the secondary markets at par, premium or discount.

Note: The prevalent system of Islamic banking the world over is truly not the ultimate and ideal solution. It is only a step towards creating an interest free environment to provide Muslims with an option. Much needs to be achieved keeping in view the injunctions of Quran and Sunnah.

Ijarah – Islamic Leasing

Vol 2 Issue2 IjaraahWhat is Ijarah?

Ijarah means: ‘to transfer the usage of a non-consumable asset by the owner (the lessor) to another person (the lessee) for an agreed period, at an agreed price (rent).’

Basic Rules of Ijarah

  • Transferring the usufruct, not the ownership, for an agreed period, at an agreed price.
  • The non-consumable asset should have identifiable value and quantity.
  • The lessor bears all liabilities of ownership, while the lessee is responsible for those of the use of property. (Example: The property tax should be paid by the lessor, while the water and electricity bills referable to the use of the house should be borne by the lessee.)
  • Throughout the leasing period, the lessee bears the risk of ownership, i.e., the reduction in the value of the real estate or any harm caused by the factors beyond the control of the lessee. However, the lessee is liable to compensate the lessor for any loss due to his/her negligence. After the lease period completes, the remaining asset should be given back to the owner (the lessor).

Additional Rules

  • The asset can be insured, preferably through a Takaful (Islamic insurance) company, at the expense of the lessor, not the lessee.
  • Ideally, the rent charged for the leased asset and its periodical increase should be benchmarked to the current prevailing market rates of the pool of similar assets classes. However, in practice, banks usually use interest rates as benchmarks. Although not preferable, these bank benchmarks can be used, until a suitable Islamic based benchmark becomes available.

Differences between Ijarah and Conventional Leasing

Leasing such as, Murabaha, is not originally an Islamic mode of financing. However, Islamic financial institutions adopted it by making some relevant modifications in the structure of the leasing contract (i.e., its terms and conditions), in order to conform it to the rules of Islamic Shariah.

In conventional leasing, instead of offering an interest-bearing loan, banks and leasing companies provide to the lessee an asset along with the risk of ownership. Many basic features of the conventional lease are Islamic, except these two:

1. In Ijarah, the lessee’s liability for the rent starts, when the lessee takes delivery of the asset and not from the day the price has been paid, either directly or through the lessee.

2. In Ijarah, there is no hire purchase arrangement at the start of the leasing contract. After the leasing period has ended, the lessor can, under a separate contract, sell the previously leased asset to the lessee or any other person. Unlike conventional leasing agreements, the Ijarah contract itself should not contain the ‘express clause,’ a pre-condition of gift or sale at the end of the lease period.

How Ijarah is practiced

An asset, usually a car, machine, equipment or household durables, is leased to the lessee on an agreed fixed rental payments for a maximum of 5 years. After the end of the leasing period, through another contract the asset is usually sold to the lessee at the book value of the asset.

In Pakistan, Ijarah form of financing is provided by Islamic Banks, Islamic windows of Commercial Banks and Modarabas. The Ijarah structuring is the most common method used for Islamic Sukuks (bonds).

Note: The prevalent system of Islamic banking the world over is least permissible and truly not the ultimate and ideal solution. It is only a step towards creating an interest free environment to provide Muslims with an option. Much needs to be achieved keeping in view the injunctions of Quran.