Guide to ijarah contract perfected in 7th century AD but extensively used in present age...

In-Depth Analysis

Unlike conventional banking and finance where one size does not fit all, Islamic banking and financial institutions leverage the variety of underlying Shariah structures to match a given customer requirement with an appropriate contract. It took 63 articles to reach the stage where the series now discusses the fourth sales contract in Shariah — Ijarah or leasing. The underlying principles and mechanism of each contract have withstood the test of time several times over during the last 14 centuries, the latest being during the global financial crisis of 2008/09. The importance of a leasing contract in the present day and age compared to the olden days when the world's population was small and the availability of land was vast is significant. In such a scenario, who would like to rent a house, farm, or a shop when it was cheaper to build one's own such premises at any place deemed appropriate? History tells us that land registration actually started precisely 1% centuries ago when in 1882 the first such office started functioning in London. At the time, it was felt there was a need to introduce a system by which matters concerning the ownership, possession, or inheritance rights in land and property could be recorded with the government in order to protect the owners, facilitate sales and purchase transactions and avert unauthorized disposal. The UK refined the system through the Land Registration Act 1925 which is more or less still intact, albeit with minor changes to catch up with technology. As the British Empire expanded far and wide, the other jurisdictions under its control were also brought in line with the land registry regulations. The benefits emanating from such controls, including the revenue from the registration fee, convinced the other non-British governments to also adopt the system. The other responsibilities added to the land department were registration of mortgages and leases (tenancy contracts). In this backdrop, the completeness of Islamic finance is evidenced from the fact that whereas the trading of goods, commodities and assets, which were the need of the hour in 7th century AD, was perfected by way of Murabahah, Salam and Istisna, at the same time the do's and don'ts on Ijarah or leasing were also finalized, albeit there was hardly any need for it at that time. Islamic banks utilize the Ijarah contract to develop an array of products for their depositors and shareholders. For the function of home financing, a retail customer submits an application to buy a certain property which may be readily available or under construction. In the case where the property is readily available, the Islamic bank shall purchase the property in its own name, of course pursuant to the bank's satisfactory due diligence on the customer. Once the property is purchased, the Islamic bank shall lease it to the customer on the financial lease basis. This is in contrast to a conventional bank's system which does not purchase the property in its own name but simply extends an interest-bearing loan to the customer who utilizes the loan proceeds to purchase the property in the customer's name and mortgages it to the bank as security.