LEASING

 IJARAH LEASING
INTRODUCTION
Today, starting a business is not an easy task as there exists stiff competition in all the sectors of the economy. Moreover, the start-up capital requirement for any business is very high.Further, with the expansion of international trade, global economy and the development in the technology has further made it essential for the corporate houses to assess the alternative financial institutions so as to fulfil their financial requirements. Ijarah (leasing) can be considered one of the alternative approaches that companies can work upon in order to meet their requirements. Instead of buying an asset, this method provides an opportunity for the companies to use the asset to meet their goals. This method is best suited for those assets which become outdated very frequent such as technology, which changes every now and then (Shubber, 2011).

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The benefit of using this approach is that, the company doesn’t have to worry about the investment made on the technology as they do not have to incur costs on them. But, this Ijarah (leasing) is bit contradict to international regulations and Islamic principles. This report will discuss the similarity between Ijarah contract and conventional leasing. Further, it will also describe the range of Ijarah-based contracts used by Islamic Financial Institutions. Further, it will also highlight the financial and operating lease by focusing on differences and similarities between leasing and Ijarah. Moreover, it will also discuss the different accounting treatments used by it. The final section of the paper will describe the different accounting standards recommended by the International Financial Reporting Standards (IFRS) and Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI). At the end of this work, some suggestions will be made which will help in squaring up the differences in interpretation between these approaches (Ahmad and Luo, 2010).

Ijarah contract is a form of Islamic leasing contract which involves two parties. First is the lessor and the second party is the lessee. Under such contracts the lessor transfers the right of using specific assets for pre decided period of time by both the parties and gets specific amount of rental in against of the use of the asset at a predetermined price. Under this contract, the ownership of the assets remains with the lessor and legally the lessor is responsible for any kind of risk associated with the assets such as maintenance cost, natural wear and tear, costs associated with repairing of the assets, etc. But, if the damages are aroused due to mal handling and negligence of the lesser, in that case the lesser will have to bear the compensation (Taap and et. al., 2011). Apart from this, the term Ijarah is sometimes interchanged with Ijarah Amal. Ijarah Amal means to employ an individual in order to accomplish work on one’s behalf. The best example is the salaries given by the company to its employees. Although, in Ijarah leasing contract, the ownership is not legally transferred to the lessee, but recently a new type of Ijarah contract has been developed and named as Ijarah Muntahia Bittamleek. Under such type of contract, at the end of the contract the ownership of the asset is transferred to the lessee or it can be said that the lease contract ends with the sales of the asset (Shubber, 2010).

On the other hand conventional leasing contract can be defined as a contract in which the lessor gives the right of using the asset to the lessee for a specific period of time and rent determined at the time when both the companies entered into the contract. In such contracts, ownership of the asset is not transferred to the lessee and all it is the liability of the lessor to bore all the expenses associated with the assets if they are aroused due to situations which are not in control of the lessee. At the end of the contract, the asset is transferred back to the lessor (Shubber, 2008).

The range of ijarah based contract used by Islamic Financial Institutions is very wide. Some of the different types of Ijarah contracts are discussed below:

Simple Ijarah: This type of contract is quite similar to that of conventional operating lease contract. Most of the time this Ijarah contract is made for those assets which are costly and the individual or the company has to invest huge capital. Further, it is also made for those assets which are highly profitable in the market. In operating lease contract, the lessor has the ownership of the assets and all the expenses such as maintenance and depreciation of assets, etc. are to be bear by the lessor. Under Ijarah leasing, the lease period if generally short and the lessee do not require to pay the full amount of the asset during the leasing period. Further, the lessee has right to terminate the contract by