Understanding Islamic Finance - Doha Academy of Tertiary Studies

298 Understanding Islamic Financeitems, provided that the asset and the rent both are clearly known to the parties at thetime of the contract.• The Ijarah rate can be fixed or floating, provided a clear formula is mutually agreedwith a floor and a cap. Rental has to be stipulated in clear terms for the first term oflease, and for future renewable terms it could be constant, increasing or decreasing bybenchmarking.• Holders of Ijarah Sukuk jointly acquire ownership in the asset, bear the price risks andthe ownership-related costs and share its rent by leasing it to any user(s).The flexibility described above can be used to develop different contracts and Sukuk thatmay suit different purposes of issuers and holders. Governments can use this concept asan alternative tool to interest-based borrowing, provided they have durable useable assets.Use of assets is necessary, while it does not matter whether these assets are commerciallyviable or not. Funds mobilized by issuance of Ijarah Sukuk may be used to purchase assetsfor leasing and the rentals received from the users distributed among the Sukuk holders.Ijarah Sukuk can be traded in the secondary market on market price; the purchasers replacethe sellers in the pro rata ownership of the relevant assets and all rights and obligations ofthe original subscribers pass on to them. Hence, they may help in solving the problems ofliquidity management faced by the Islamic banks and financial institutions.Hence, Ijarah has great potential for financing public sector projects without the involvementof interest. Ijarah Sukuk/certificates can be issued to raise funds from the primaryfinancial market for projects to be started afresh, or they can be issued against alreadyexisting projects. They can also be sold in the secondary market at a price to be determinedby the market.Suppose a government intends to build an airport but is short of funds. It may sign acontract with a contractor to build the airport, but at the same time, it may undertake tolease the airport and sell it to the public by issuance of Ijarah Sukuk. The value of the lease(equal to or greater than the cost of construction) will be divided over a large number ofIjarah Sukuk/certificates of different denominations and maturities. In other words, differentinvestors may participate in the lease contract for different periods. The government willpay the contractor from the proceeds of the Sukuk. The government is not obliged to payinvestors anything different from the actual income from the facility.11.6 SUMMARY OF GUIDELINES FOR ISLAMIC BANKERS ONIJARAH1. According to Islamic principles of finance, there is no difference between operating andfinance leases; if all of the four essential elements relating to contracting parties, subjectmatter, consideration and the period in Ijarah are taken care of, Ijarah can be used as themode of modern business by the financial institutions in the form of Ijarah Muntahia-bi-Tamleek. The deciding factor in this regard is the risk relating to ownership that mustremain with the lessor and sale should be separate from the lease.2. The lease of an identified asset cannot commence before the bank takes the possessionof the asset to be leased. If the time of possession of the asset to be leased is unknown,the whole arrangement will be provisional.3. Any arrangement of two contracts into one contract is not permissible in Sharī´ah. Therefore,IFIs cannot have the agreement of hire and purchase built into a single agreement.