Financial Resource

individual’s own subjective beliefs). Situations where the agent cannot (or does not) assign actual probabilities to alternative possible occurrences are said to involve uncertainty.

While it is not always true that a riskier asset will pay a higher average rate of return, it is usually return. Risk is an opportunity in financial markets and also a problem. Risk-averse investors require additional return to be at additional risk and, in effect, in a competitive market higher return is accompanied by higher risk. An investor evaluates an asset in terms of its marginal contribution to his/her portfolio.

The fundamental principal of valuation is that the value of any financial asset is the present value of the cash expected. The process requires two steps:

1. Estimating the cash flow, and;

2. Determining the appropriate interest rate that should be used to calculate the present value

The following are the SHARI’AH compliant risk mitigating features:

1. By prior arrangements in the instrument, the investing company, through its banker, would have a priori right in profit sharing up to an agreed upon ratio.

2. The profit will be paid on account on a monthly basis to the investing company as provided in the projected accounts.

3. The final accounting and settlement is accomplished at the end of the term of the instrument when the profit and loss accounts are finalized.

4. In order to mitigate the risk and as per the terms of the instrument, a TAKAFUL fund is established for the term of the instrument.

5. In this TAKAFUL fund where the invested company earmarks a part of their reserves for the TAKAFUL fund.

6. The investing company will contribute 1% of the invested amount.

7. This 1% contribution is made through an advance by the invested company on account of future profits.

8. In case of any loss during the tenancy of the instrument, it will be adjusted against the TAKAFUL fund.

9. The balance will be distributed between investor and at the end of the term of instrument.

10. Through a valuation, value of the investment would be established for the purpose of exercising the put option.

11. The investing company shall have the option to exercise its put option at the value price and the company shall buy this instrument. [4]

Islamic Leasing

But before describing leasing, as aforesaid, let me very briefly touch upon two of the basic or fundamental principles of Islamic finance in order to develop a premise for meaningful discussions on leasing.

1. It has to be asset-based financing:

The first fundamental principle of SHARI’AH is that as opposed to conventional monetary dealing, profit is generated when something having intrinsic utility is sold or offered for use. Money has no intrinsic value. As such dealing in money (same currency) cannot generate profit but a RIBA unless converted into real assets to deal with.

2. There has to be an element of risk:

The second basic element of SHARI’AH is that one cannot claim a profit or fee for a property/transaction, the risk of which was never borne by him.

Based on the above fundamental principles, the most ideal mode or instrument of financing in SHARI’AH are MUSHARAKA and MUDARABA followed by SALAM and ISTINSA.

MORABAHA and leasing are not originally modes of finance. However, to meet certain specific needs where ideal modes like MUSHARAKA or MUDARABA are not workable for whatever reasons, they have been reshaped and allowed in SHARI’AH subject to certain conditions.

1. Leasing described for leasing, IJARAH is an Arabic term with origins in Islamic FIQH, meaning to give something to rent. There are two types of IJAREH. One relates to employing or hiring the services of a person for wages whereas the second type relates to the hiring of any asset or property in order to reap its benefits without the transfer of ownership, or what is called in English “USUFRUKT”. The price or consideration of this is the rent.

It is the second type of IJAREH which is the subject matter of the discussion here because it is generally used as a form of investment and also as a means of finance.

As described earlier, in the light of the two basic cornerstones of SHARIA’H, leasing is a contract whereby usufruct rights to an asset are transferred by the owner, known as the lessor, to another person, known as the lessee, at an agreed-upon price called the rent, and for an agreed-upon period of time called the term of lease.

2. Lease as a mode of financing Strictly speaking leasing is not a means of finance as originally envisaged. It is simply a transaction much as a sale/purchase. As described above, the leasing transaction simply denotes the transfer of the usufruct of a property from one person to another for an agreed-upon price called rent without transferring the corpus i.e. ownership of that asset. Accordingly, the rules of “leasing” closely resemble the rules governing “sale” because in both cases something is transferred to second person for valuable consideration.

Leasing differs from sale only in-so-much-as not transferring the corpus or ownership of the property which remains with the transferor. As such in SHARIA’H, a lease transaction is governed by a separate set of rules, which we shall outline in the following paragraphs.

Although leasing, as originally conceived, is not a means of finance, the financial institutions and the corporate world have adopted it as such. Due to several factors (including tax concessions, etc.), instead of providing an interest-bearing loan, certain financial institutions in the West started to provide requisite equipment to their customers. To arrive at the rent, the total cost of the asset is calculated plus interest or mark-up to be recovered during the period of lease on a monthly or quarterly basis. This type of lease in the West is known as a finance lease, to be distinguished from an operating lease, wherein various basic features of the leasing transaction are ignored which is tantamount to RIBA.

Knowing that leasing is lawfully allowed under SHARIA’H, since it meets one of the basic criteria of asset-based finance, a number of Islamic financial institutions have adopted leasing on this model as carried out by conventional financial institutions without making the necessary modifications that really conform to the rules under SHARIA’H, particularly in regards to assuming the risk of ownership in the leased asset. Great care needs to be exercised to ensure various SHARIA’H requirements, as rendered below, based on the basic two principles of:

1. Asset based finance, and;

2. Assuming a risk element connected to the ownership of the asset.

3. Basic Rules of Leasing

The description or definition given above, under part A, contains the following essential ingredients for outlining the basic rules under SHARIA’H:

1. That it is a contractual obligation.

2. That there has to be a valuable use of the asset and transferability of that usufruct.

3. That the ownership of the asset is retained by the transferor or lessor throughout the lease period. Consumable articles cannot be leased.

4. That the risk and liabilities of ownership lie with the lessor. The leased asset shall remain the risk of the lessor throughout the lease period. Any loss or harm caused by factors beyond the control of the lessee shall be borne by the lessor. However, the lessee is liable to compensate the lessor for any harm to the leased asset caused by any misuse or negligence on the part of the lessee.

5. That the risk and liabilities associated with the use of the asset shall be borne by the lessee. For instance, taxes and other government levies, utilities, etc. However, the contract must specify these items for clarity’s sake.

6. That the term of the lease, period of the lease, its renewal or early termination must be stipulated.

7. Purpose of use. The lessee cannot use the leased assets other than for the purpose specified in the contract or agreed to by the lessor expressly.

8. Commencement of lease. The lease commences from the date of delivery of the asset to the lessee and not from the day of payment or lease agreement, with reference to the commencement of rentals.

9. Determination of rental. The rent for the entire period of the lease must be determined at the time of the contract. Different rates of rent for different phases during the lease period are permissible. This point will be elaborated in the following discussion of the issues.

4. Issues

While operating a leasing business, a number of practical issues have cropped up which warrant discussion and interpretation under SHARIA’H. An exhaustive and conclusive list of such issues is impossible to make. However, certain important and salient issues need to be taken up in these discussions as follows:

1. Joint ownership (Lessors)/Joint Lessees – (permissible)

2. Insurance – Islamic TAKAFUL – (by the owner)

3. Renewal of or variation in

Pages: 1 2 3 4 5

Tags: "td f 90-22.1" "mortgage account", academic sense, acquisition, amount, Arrangements, asset, Banking, bench, bequest joint account foreign, bounties, business venture, capital, close foreign bank account, conclusions, contract, control, declare bank accounts green, declare credit card on fbar, declare foreign account, declare overseas account by june, declaring foreign accounts, deposit in foreign bank irs, determination, discussion, economic justice, economic paradigm, economic system, exchange rate, finance, Financial, financial instruments, foreign gift in foreign bank account, foreign gift in foreign bank account transfer to us, free enterprise, government, hasana, how long it take to recover from debt settlement?, human beings, implications of filing tdf 9022, instance, inthe, ira foreign national to declare assets, irs foreign property canada, irs international bank transfer, irs nonresident alien joint foreign bank account, irs sample letter late foreign bank, Islam, Islamic, islamic banking, islamic environment, islamic finance, islamic way of life, koran, leasing, lessee, Lessees, lessor, Lessors, letter to client foreign bank account, microsoft pension investment jobs, moral implications, mortgage on foreign property and fbar, muslim attorney for fbar, Obligation, Premature, shell business principles, shell climate change united states, shell fuel price, shell future fuel, shell pension investment jobs, shell recruitment accounting or commercial or finance or hr or management or pension or investment or procurement or supply or support, social objectives, supplier, TAKAFUL, time, transaction, transferor, Used, Variation, way of life