What is Ijarah?
Ijarah (Islamic Leasing) is the most common financing instrument used by Islamic banks all over the world. IBA is currently offering Plant, Machinery and vehicle financing on the basis of Ijarah. Ijarah is a contract whereby Bank transfers right to use of Ijarah Asset to the customer for agreed period with agreed rentals. All the assets will be financed on Ijarah basis which are Shari’ah Compliant. Following are the common assets for Ijarah financing;
How does it work?
Ijarah is a rent agreement whereby the bank purchases and provides right to use assets needed by the client for an agreed fee. Ijarah is used for the financing of assets like vehicle, plant and machinery.
How will it benefit you?
The Ijarah financing mode will benefit you in the following ways:
- Ijarah allows you to acquire assets without injecting your upfront capital and use it to generate revenues for your business.
- A simple transaction process: Within Ijarah, you will enjoy the right to use the asset mentioned in the agreement and avail its benefits right after making the first rental payment.
To whom it is offered?
Within Ijarah, the Islamic bank of Afghanistan offer services in four areas:
Ijarah Muntahia Bittamleek (Finance Lease)
In this lease option, the Islamic bank of Afghanistan will purchase and lease out assets needed by the client against an agreed upon price. However, it is different from Operating Ijarah as it offers an option for the client to purchase the asset after the termination of the lease period.
In the Ijarah and Ijarah Muntahia Bittamleek sharia banking arrangements, the bank may also conduct a leaseback or sale accord with the client while the bank will buy the equipment from the client and leaseback.
Sale Lease Back (SLB Ijarah)
Under SLB Ijarah, the Islamic Bank of Afghanistan holds the asset that is owned by the client and leases it to them at an agreed rental amount and term. The benefit of SLB Ijarah is allowing the client funds to use for other purposes like buying another property or asset.
Ijarah (Operating Lease)
In the operational lease, IBA keeps a range of different assets to fulfill the demands of various clients. These assets normally entail a high extent of market potential. The Islamic bank of Afghanistan will allow these assets to any interested candidate to use for an agreed period of time. Following an end of the lease term the assets are returned to the bank to find a new lessee.
One of the most significant features of this Islamic banking and finance feature is that the assets remain in the possession of the bank to get it leased again after the end of the lease term so that it cannot be used for an extensive period of time.
Within operational lease of Ijarah, IBA will confront the risk of diminishing demand of the assets as well as economic recession.
Ijarah Wa Iqtin'a (Hire Purchase)
Ijarah Wa Iqtin’a extends the concept of Ijarah financing into a hire and purchase contract. In this lease agreement, there is an option for the customer to acquire the leased asset by the end of the lease term. Within Ijarah Wa Iqtin’a, Islamic Bank of Afghanistan provides finances for machinery or vehicles for the client against an agreed rental.