Islamic Banking IV

Islamic banking posts continues.....

Hibah (Gift)
This is a token given voluntarily by a creditor to a debtor in return for a loan. Hibah usually arises in practice when Islamic banks involuntarily pay their customers interest on savings account balances

Ijarah means lease, rent or wage. Generally, Ijarah concept means selling benefit or use or service for a fixed price or wage. Under this concept, the Bank makes available to the customer the use of service of assets / equipments such as plant, office automation, motor vehicle for a fixed period and price.

Advantages of Ijarah:
The following are the advantage of Ijarah to lessee:

1- Ijarah conserves capital as it may provide 100% financing.

2- Ijarah enables the Lessee to have the use of the equipment on payment of the first rental. This is important since it is the use (and not ownership) of the equipment that generates income.
3- Ijarah arrangements are flexible because the terms and rental provision may be tailored to suit the needs of the Lessee. Therefore, it aids corporate planning and budgeting.

4- Ijarah is not borrowing and is therefore not required to be disclosed as a liability in the Balance Sheet of the Lessee. Being an "off-balance-sheet" financing, it is not included in the computation of gearing ratios imposed by bankers. The borrowing capacity of the Lessee is therefore not impaired when leasing is resorted to as a mean of financing.

5- All payments of rentals are treated as payment of operating expenses and are therefore, fully tax-deductible. Leasing therefore offers tax-advantages to profit making concerns.

6- There are many types of equipment, which become obsolete before the end of their actual economic life. This is particularly true in high technology equipment like computers. Thus the risk is passed onto the Lessor who will undoubtedly charge a premium into the lease rate to compensate for the risk. A Lessee may be willing to pay the said premium as an insurance against obsolescence.

7- If the equipment use is for a relatively short period of time, it may be more profitable to lease than to buy.

8- If the equipment is for short duration and the equipment has a very poor second hand value (resale value), leasing would be the best method for acquisition.

Ijarah-Wal-Iqtina (Lease To Own)
A contract under which an Islamic bank provides equipment, building, or other assets to the client against an agreed rental together with a unilateral undertaking by the bank or the client that at the end of the lease period, the ownership in the asset would be transferred to the lessee. The undertaking or the promise does not become an integral part of the lease contract to make it conditional. The rentals as well as the purchase price are fixed in such manner that the bank gets back its principal sum along with profit over the period of lease.

Musharakah (Joint Venture)
Musharakah is a relationship between two parties or more, of whom contribute capital to a business, and divide the net profit and loss pro rata. This is often used in investment projects, letters of credit, and the purchase or real estate or property. In the case of real estate or property, the bank assess an imputed rent and will share it as agreed in advance.All providers of capital are entitled to participate in management, but not necessarily required to do so. The profit is distributed among the partners in pre-agreed ratios, while the loss is borne by each partner strictly in proportion to respective capital contributions. This concept is distinct from fixed-income investing (i.e. issuance of loans).

Wait for chapter V.....

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