The financial world is beginning to witness an amazing development. The Middle East has begun to realize that oil revenues are not a forever thing, and diversification is going to be extremely important. This is very true in the world of banking. Islam is the religion and has been the culture of the region for centuries. Islamic banking, which will fund construction and other economic diversification, is an essential way of conducting finance. It is necessary to understand its practices, which includes Ijarah Islamic finance.
What Defines Ijarah in Islamic Banking?
This is a bit different than the commonly accepted practices of Western banking. Ijarah is in essence an exchange transaction. Assets are made available without being transferred in ownership. Payments are made as a form of rent. The assets can be in the form of equipment, automobiles, and buildings, among other possibilities. The payments are done over a period of time, and after it has expired a contract known as a Bai is entered into. This is the purchase price of the asset. The idea of interest on a loan is not present in any of this.
The Rationale for Ijarah Islamic Finance
The starting point for this type of banking rests with the Sharia of Islam. The holy law does not allow for any type of interest payment or fees for money loans. In other words, usury is not something that is acceptable. These practices of Islamic banking were used for centuries and were abandoned for period of time for Western banking practices. As the Middle East returned more towards the Islamic roots, banking that was consistent with Sharia became more in demand. Practices such as Ijarah now have become extremely common and literally billions of dollars are transacted under its guiding rules. Moreover, you may learn more about Murabaha in Islamic banking on our site.
Benefits of Ijarah Islamic Banking
The whole principle may seem a bit strange to Western eyes, but there is a benefit to Ijarah. It permits any company to be able to get a hold of equipment or other assets by means of the lease. It means that upfront capital expenditures are avoided. The terms of the Ijarah ordinary last just a few years, and the leasee has the right to purchase the asset at the end of the period (the price of the asset is determined beforehand). A business owner benefits from not having to put up a sizable amount of capital in the beginning. It can allow that company to consider other transactions while keeping to the terms of the Ijarah lease.
This lease agreement as part of Islamic banking is widespread. There are many companies in Islamic world that are more open to this type of arrangement. Western banks have traditionally followed certain procedures and the Ijarah is not something that is very familiar. However, being able to make use of this is a way of getting business in the Middle East. The traditional loan officer is not somebody who’s going to be very noticeable in Damascus or Ankara. Taking a serious look at Ijarah and other Islamic banking practices can open up opportunities. This is more than just a local custom; it is a financial way of life in the Islamic world. Its use by Western banks can bring in additional business.