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Islamic Accounting and Reporting
Finance & Accounting
Pages 7 (1757 words)
In Arabic the term “Ijarah” means to give something on a rent and in conventional accounting this term is referred to leasing. Ijarah is a mode of leasing contract which involves a lessor known as mu’ajjir…
The time period is also referred to as Ijarah period (Siddiqui, n.d.). The Ijarah contract is based on Islamic principles and has emerged as a popular asset financing concept. This contract is also used for transactions related to employment and hire of services. This contract of Ijarah is a mode of financing which provides customers with short to medium term financing to lease items such as buildings, real estates, computers, equipments, machineries and other items which are not forbidden of haraam. The contract is almost similar to conventional leasing contract but not identical to it (Ibrahim, 2001). The Ijarah rental amount is paid in installments over the time to cover the costs or the value of the investment for the bank in addition to the fair return on the investment (Ghuddah, 2007). In Ijarah the ownership of the asset is not transferred to the lessee. Risk associated with the ownership of the assets should remain with the banks and the asset is supposed to be reverted to the bank at the end of Ijarah period. The cash flows of the asset are structured in such a way that they cover the price of the asset and provide a return on the same. Some of the important features of the Ijarah contract are as follows:
The asset which has been leased must have a valuable use that is compliant with the Shari’a laws.
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