So, in other words, I will chose to call "Interest", "Profit" and that makes it "Islamic"?? Wah, Saeb - islam for idiots ?
In fact what is being claimed as Islamic in the case of Islamic banking is a brand new formulation of Islamists - The three montheistic religions have strong admonistions and sanctions against USURY and not interest, but our Marxist inspiried ideologues of Islam-ism wish to market this rubbish as if it were Islam they were marketing .
I think this will give us more insight in the issue:
gulfnews : Search Results
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We will discuss the first of various Islamic products, which have been modified for use as financing vehicles. It is Ijara or leasing.
What do I mean when I say modified? For example, if Ahmed employs Badar for his services and pays him a wage, Ahmed will be called Mustajir or employer and Badar Aajir or employee whereas the transaction will be termed Ijara or hiring and the wage Ujrah.
Apply these terms to an asset, for example a car. In this case, Aajir will be the owner of the car, Mustajir who is currently using it, the amount paid by Mustajir will be Ujrah and the whole transaction will be called Ijara.
To understand it more clearly, note that in the above transaction while the basic concept is similar to a sale whereby an asset is transferred to another party for a monetary consideration, it is important to note that the Ijara merely allows transfer of the right of use to Mustajir (lessee) whereas the corpus of the asset continues to remain with Aajir (lessor).
As such, it is often said that Ijara is originally not a mode of financing but an ordinary business activity improvised to serve as a financing tool.
Following are the 10 main principles of Ijara:
1. An Ijara transaction takes place when the owner of an asset transfers its right of use to another person or entity for a specified period and at an agreed monetary consideration.
2. The asset transferred under Ijara must have some purposeful use. Therefore, things having no such use (e.g. gold and jewellery) cannot be considered under Ijara.
3. It is necessary for a valid Ijara contract that the corpus of the leased asset remains in the ownership of the Aajir or lessor.
4. Anything fully consumable by its use cannot be leased. Examples are grain and other eatables, fuel, money, etc. As such a leased asset must have a value upon completion of the agreed lease period.
5. Any liability emerging from the ownership of the asset such as property tax will be the responsibility of lessor. Similarly, the liabilities related to the use of the property such as utility charges etc shall be borne by the lessee.
6. Lessee is restricted from using the leased asset other than for the purpose clearly spelt in the lease agreement.
7. Lessee is liable to compensate the lessor for any damage caused to the leased asset by virtue of his negligence or misuse.
8. However, lessee will not be responsible for any damage caused to the asset without his negligence such as destruction of the property due to an earthquake or flooding. In this case, the lease will cease to exist and any prepaid lease rent will be refundable by the lessor.
9. A joint owner of an asset can lease his share in the asset only to his partner(s). However, all the owners can jointly lease the asset to a third party.
10. Fixation of various lease amounts for different periods is allowable under Ijara provided it is pre-agreed. For example a stepping-up rent in a shopping mall for premises on a long-term lease.
Islamic banks quite commonly use Ijara as a means of financing the real estate, vehicles, vessels and plant and machinery, etc. However, it will be in the fitness of things to clarify certain misgivings on the lease rent (profit) levied by the Islamic banks by benchmarking it on the fluctuating interest rate models such as Libor/Eibor.
First of all, there are two main reasons for doing that:
A) Absence of an internationally acceptable Islamic benchmark for profit such as Libor in the conventional banking.
B) Reluctance on the part of a lessee to enter into an Ijara agreement where he could end up paying an amount higher than the interest, if he was dealing with a conventional bank.
As there are few Islamic banks in the UAE or GCC compared with a large number of conventional banks, it becomes essential on the part of Islamic banks to remain competitive and as such adjust their profit earnings close to the market. By not doing so, they may not be able to achieve the purpose of adding value to the trusted investments of their shareholders and depositors.
Therefore, the Ijara agreements adopted by the Islamic banks provide that for the sake of clarity, the rental will be equal to a benchmark interest rate at the start of an Ijara period (such as 3-month Libor/Eibor) plus a constant spread called margin. The rent is readjusted for each Ijara period on the same basis for the Islamic banks to remain in line with the market.
The objection raised against this practice is that, by subjecting the rental payments equal to a rate of interest, the transaction is rendered akin to an interest-based financing.
The reply to this argument is that so long as all other Sharia parameters are fulfilled, the Ijara agreement may use any benchmark for determining the amount of periodical rental.
Remember that the core difference between conventional financial leasing and Ijara is that in Ijara lessor assumes full risk of the corpus of the leased asset. If the asset is destroyed during the lease period without lessee's negligence, the lessor will bear the full loss besides also losing the right to continue to earn rent. In addition, the lessor will be required to refund any prepaid rent to lessee.
It is thus clear that the use of the rate of interest merely as a benchmark does not render the contract invalid and parallel to an interest-based transaction.
Another objection raised by certain quarters to this arrangement is that future variation in Libor/Eibor rate being unknown, the rental thus tied up with it will tantamount to Gharar (uncertainty) and Jahala (ignorance) which is forbidden in Sharia since it is a primary condition that all considerations in a contract must be clearly known and understood to the parties entering into it.
My research says that the element of Gharar and Jahala in a financial transaction was prohibited to avoid dispute. This aspect is absent in Ijara due to written agreement from both parties upon a well-defined benchmark that will serve as a criterion for determining the rent. Needless to say that whatever amount is arrived at, based on this benchmark, will be acceptable to both parties.
Another reason attributing interest benchmarking to Gharar and Jahala is that the lessee could incur sizable loss in case of sudden jump in interest rates. On the other hand, it is equally possible that the interest rates take a plunge, thereby causing loss to the lessor. An easy solution to such unexpected developments could be to set the top and bottom caps on the rate of rent to avoid it from taking a wild swing.
gulfnews : Islamic Finance: Factors that make Ijara stand out in the mart
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