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Article
Publication date: 17 August 2015

Namrata Gupta

This paper aims to discuss the accounting treatment of one of the most popular instruments of financing in Islamic banks, which is Islamic leasing or Ijarah. This research…

Abstract

Purpose

This paper aims to discuss the accounting treatment of one of the most popular instruments of financing in Islamic banks, which is Islamic leasing or Ijarah. This research undertakes an empirical investigation of the accounting practices of Ijarah followed by UAE’s Islamic banks. The main objective of this paper is to compare the accounting practices followed by UAE Islamic banks and accounting practices recommended by Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) for the accounting treatment of Ijarah.

Design/methodology/approach

This study also aims to examine the justification and explanation behind this practice and clarify the accounting treatment of Ijarah as defined in the regulatory framework and standards.

Findings

The author has found that the accounting treatment of Ijarah practiced by four UAE Islamic banks, it is clear that all of them are following IAS-17 and not FAS-8 of AAOIFI. The main difference is: FAS-8 issued by AAOIFI suggests that the accounting treatment for both Ijarah and Ijarah Muntahia Bittamleek be similar to operating lease transactions with certain exceptions. On the other hand, these Islamic banks are accounting for Ijarah as a financing transaction, just like finance lease – in accordance with IAS-17.

Research limitations/implications

Taking out the right information from banks officials regarding Ijarah was a big hassle.

Practical implications

After considering the above-mentioned points, according to the researcher, Western accounting standards are not appropriate to be applied in Islamic financial institution because of their different nature and treatment of financial instruments. Therefore, Islamic banks and other Islamic finance professionals should consider making the standards of AAOIFI mandatory, and they should stick to these standards for information disclosure, building investors’ confidence, monitoring and surveillance. These standards would also ensure the integration of Islamic financial markets with international markets.

Social implications

This study also aims to examine the justification and explanation behind this practice of bankers when the researcher approached these four banks, their officials mentioned that Ijarah contracts are similar to conventional form of financing, and it does not involve the central tenet of Islamic capitalism, i.e. to share risk and profit; therefore, they are justified and convinced to adopt IAS-17 in accounting for Ijarah transactions.

Originality/value

It is an original case study based on secondary research data.

Details

International Journal of Islamic and Middle Eastern Finance and Management, vol. 8 no. 3
Type: Research Article
ISSN: 1753-8394

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Article
Publication date: 2 January 2018

Asim Ehsan Wahla, Hamid Hasan and M. Ishaq Bhatti

The main aim of this paper is to measure customers’ perception of car Ijarah financing transactions services provided by the Islamic banks and financial institutions in Pakistan.

Abstract

Purpose

The main aim of this paper is to measure customers’ perception of car Ijarah financing transactions services provided by the Islamic banks and financial institutions in Pakistan.

Design/methodology/approach

The paper uses two research methodologies: Kruskal–Wallis and Mann–Whitney test (non-parametric) and logit regression model (parametric). Both methods are then applied to a real data set of 300 respondents from various cities of Pakistan in the car Ijarah financing industry. The demographic effects are also investigated to see the perception about the degree of Shari’ah compliance and the quality of service of transaction offered by banks.

Findings

Main finds of the paper reveal that the customers who used the car Ijarah facility from Islamic banks have positive attitude toward this sort of transaction. In addition, gender, income, marital status affect the perception about the quality of Shari’ah compliance, and the quality of service of transaction issues are very important to selected clients in the industry.

Research limitations/implications

These findings are limited to the car Ijarah financing industry and may not be applicable in other banking products in Pakistan and elsewhere.

Practical implications

Based on the results of this study, potential Islamic bank customers may find it helpful choose products or make product decisions conveniently. The findings of the paper also support Islamic banks in improving the Ijarah facility to increase their customer base in the geo-political locality with similar characteristics as Pakistan.

Social implications

Shari’ah compliance in the Islamic finance industry is a sensitive issue in Pakistan, and hence, car Ijarah’s Shari’ah compliance can affect banks’ reputation and sensitivity.

Originality/value

The work reported in this paper is original, unpublished and the paper is not submitted elsewhere for publication.

Details

Journal of Islamic Accounting and Business Research, vol. 9 no. 1
Type: Research Article
ISSN: 1759-0817

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Article
Publication date: 4 September 2017

Abdul Rafay, Ramla Sadiq and Mobeen Ajmal

This paper aims to discuss the urgent need to develop a sound and robust universal framework that would prove helpful in creating uniform acceptability of Islamic…

Abstract

Purpose

This paper aims to discuss the urgent need to develop a sound and robust universal framework that would prove helpful in creating uniform acceptability of Islamic financial instruments. Among many problems, a particular problem in developing a uniform global framework for Islamic financial instruments is the existence of different madhahib within Islamic Fiqh. The leading and the most prominent Sunni madhahib that have survived till today are four, the Hanbali, Shafi, Maliki and Hanafi, while the most prominent Shia madhab is the Jafari madhab.

Design/methodology/approach

The research approach was descriptive and exploratory in nature. Secondary resources were used except for a semi-structured interview with a Shariah scholar with the justification that his knowledge and experience regarding the subject matter may prove helpful. The methodology included a systematic review of already issued Sukuk by various madhahib. Compared to a simple narrative review of a few case studies regarding Sukuk, this methodology has a benefit to provide the reader the power to assess the review and even replicate it. The results of this systematic review are summarized in the form of tables.

Findings

Ingredients were determined that would help make a truly global Sukuk security, a model acceptable to all madhahib of Islamic Fiqh. These ingredients include rentals, relationship between special purpose vehicle (SPV) and originator, transference to SPV, Sukuk structure, guarantee, liquidity, listing and tradability, convertibility, subordination and post-Ijarah price. Moreover, specific steps were also analyzed that must be taken to issue such type of Sukuk al-Ijarah.

Research limitations/implications

This study is focused only on a type of Islamic financial instrument, i.e. Sukuk whose underlying was Ijarah-based contracts. This is due to lesser global acceptability for other Islamic financial instruments including other forms of Sukuk. Based on the nature of study, purposive/judgmental sampling was done. The sample population was 40 Sukuk (nine each from Hanafi, Shafi and Maliki madhahib, five each from Hanbali and Jafari madhahib and three from non-Muslim zones). Some Sukuk were dropped due to non-availability of enough data and to keep some semblance between the impact of the madhab on financial world and the data.

Practical implications

For practitioners and regulators, on the basis of the given recommendations, it would be possible to create a standardized product, acceptable for all madhahib of Islamic Fiqh. This standardization will lead to a unified platform that can attract a larger investor pool as well as better integration. For practical purposes, the proposed model of Sukuk al-Ijarah can be replicated for other Islamic financial instruments for global acceptability.

Social implications

For an Islamic society, the expansion of Islamic economic system depends principally on unity. So integration is critical and also essential for the success of any Islamic financial instrument. When the society will move away from Riba and its associated evil, the society will move in a positive direction, while still making profits. The proposed model may also be utilized for socially responsible initiatives like protection of natural resources, advancement of renewable energy, economic development and rehabilitation to name a few.

Originality/value

Previous studies were silent on the development of comprehensive frameworks acceptable to all madhahib of Islamic Fiqh. This research study is the first study of its kind and is the first step toward integration, as it would try to suggest a global framework for Sukuk al-Ijarah that can be acceptable by the followers of any madhab of Islamic Fiqh.

Details

Journal of Islamic Accounting and Business Research, vol. 8 no. 4
Type: Research Article
ISSN: 1759-0817

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Article
Publication date: 28 May 2019

Iman Adeinat, Naseem Al Rahahleh and M. Ishaq Bhatti

The purpose of this study is to assess customers’ perceptions of Islamic banks (IBs) of customers who have used or intend to use Ijarah service to purchase a car. The…

Abstract

Purpose

The purpose of this study is to assess customers’ perceptions of Islamic banks (IBs) of customers who have used or intend to use Ijarah service to purchase a car. The study further examines the mediating role of clarity and accuracy (CAA) of service offered between customer perceptions and customer satisfaction. This paper focuses on connecting in quantitative terms customers’ perceptions of IB services to customer satisfaction by providing the first evidence of this relationship in the context of car Ijarah financing.

Design/methodology/approach

In this paper, a model is proposed to assess customers’ perceptions of the Ijarah service used by IBs to finance car purchases. The model connects customers’ perceptions to customer satisfaction with this Shariah-compliant service. The data are drawn from 300 randomly selected customers living in five major cities in Pakistan, and factor analysis and structural equation modeling are used to understand the patterns of correlation/covariance among a set of variables and to evaluate customers’ perceptions of Ijarah financing for car purchases.

Findings

The results of the study show a significant positive relationship between customers’ perceptions and customer satisfaction. In particular, the CAA of the services provided is a significant predictor of customer satisfaction. This paper finds that CAA is a partial mediator between customers’ perceptions and customer satisfaction.

Research limitations/implications

As this study is based on only one country and one simple car Ijarah financing product, the results cannot be generalized to the entire industry. Therefore, deeper research is needed in which data from other countries are used and a range of models and approaches are applied to secure knowledge about the multinational and multifactor variations of Ijarah financing.

Practical implications

In terms of their implications for IBs, the study results provide a basis for the banks to more effectively cater to their customers by improving the services offered in line with customers’ expectations and thereby increasing profitability. This investigation is much needed in academia and industry because the market share for Ijarah financing is growing and competition between IB products and conventional banking products is increasing.

Originality/value

This study presents the first endeavor to use exploratory factor analysis, confirmatory factor analysis and structural equation modeling to assess customer satisfaction in Ijarah financing using Pakistani banking clients’ data. This approach is also applicable to various IB financial products and Shariah contracts.

Details

Qualitative Research in Financial Markets, vol. 11 no. 2
Type: Research Article
ISSN: 1755-4179

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Article
Publication date: 13 April 2012

Fahad Zafar

This purpose of this paper is to highlight the weakness in vehicle Ijarah contract.

Abstract

Purpose

This purpose of this paper is to highlight the weakness in vehicle Ijarah contract.

Design/methodology/approach

A real life example of a vehicle Ijarah contract was studied in which a customer gets a car from an Islamic bank and then misuses the system.

Findings

The case study provides a path for more research on Ijarah contract for vehicle leasing. Islamic bankers should take into account the amount of down payment requested besides the fulfilment of other criteria. Vehicle Ijarah contract is only appropriate when the amount of deposit or down payment requested is below 40 per cent threshold, otherwise a diminishing Musharakah contract should be preferred.

Research limitations/implications

The research is only on one case reported in one of the Islamic banks in Pakistan. The solution is also by only one Shariah scholar. The future research should be on similar contract at entire Islamic Banking Industry. Views of all top Shariah scholars should be taken to mitigate such kind of risks for Islamic banks.

Practical implications

This paper would trigger management of all Islamic banks to alter the structure of their vehicle Ijarah contracts.

Social implications

Islamic bankers would be warned against making a vehicle Ijarah contract with individuals wanting to contribute more than a down payment, just for the sake of cheating the system.

Originality/value

This paper is of great importance to the management of Islamic banks as this would raise flag against any future losses due to loopholes in the structuring of contracts.

Details

Journal of Islamic Accounting and Business Research, vol. 3 no. 1
Type: Research Article
ISSN: 1759-0817

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Article
Publication date: 7 October 2019

Hanudin Amin

This study aims to examine the factors that determine consumer behaviour of ijarah home financing using the Islamic theory of consumer behaviour (ITCB). In particular, the…

Abstract

Purpose

This study aims to examine the factors that determine consumer behaviour of ijarah home financing using the Islamic theory of consumer behaviour (ITCB). In particular, the specific contract used is al-ijarah muntahia biltamleek. Subsequently, the term al-ijarah muntahia biltamleek home financing is used throughout the paper.

Design/methodology/approach

Drawing upon the ITCB, the present study examines patronage factors for al-ijarah muntahia biltamleek home financing. This study’s data were drawn from valid 409 usable questionnaires.

Findings

Partial least square results suggest that the role of iman, Islamic mortgage support and maqasid consumer index are significantly related to consumer behaviour. In turn, consumer behaviour is instrumental in determining religious satisfaction.

Research limitations/implications

Two limitations were observed that provide direction for future studies. Firstly, the current study is only tested in one particular Islamic home financing product that may explain why the generalisation is an issue. Secondly, the theory is still in its infancy stage, which, of course leads to some criticisms pertinent to its parsimony and applicability to other settings. Despite these limitations, however, this study aims to suggest a so-called Islamic model of factors that can explain consumer behaviour of a particular Islamic home financing product. In particular, scrutinising the product acceptance from the context of the ITCB can open a new debate in this area.

Practical implications

This study indeed reduces the theory–practice gap by suggesting new indicators that are workable to improve consumers’ positive perception of Islamic home financing. Given the results obtained, the ITCB provides a better prediction for consumer behaviour of al-ijarah muntahia biltamleek home financing.

Originality/value

This study expands the applicability of the ITCB to include al-ijarah muntahia biltamleek home financing.

Details

Journal of Asia Business Studies, vol. 13 no. 4
Type: Research Article
ISSN: 1558-7894

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Article
Publication date: 3 August 2012

Mariam Jamilah Abdul Jalil and Zuriah Abdul Rahman

The purpose of this paper is to determine whether the amount of profits gained from musharakah mutanaqisah model using coupon rate of 4.5 per cent, price at par and tenure…

Abstract

Purpose

The purpose of this paper is to determine whether the amount of profits gained from musharakah mutanaqisah model using coupon rate of 4.5 per cent, price at par and tenure of five years was greater than using ijarah principle where the price is at a discount. Also to compute and compare the profits obtained from sukuk investment in ijarah and musharakah mutanaqisah for 3.5 per cent coupon rate and price at par for a sukuk with tenure of 12.5, 15, 17.5 and 19 years.

Design/methodology/approach

In total, two models were used to calculate profit. These models are based on ijarah and musharakah mutanaqisah principles. Formulas are derived from ijarah and musharakah and mutanaqisah principles used in sukuk.

Findings

Sukuk investment using ijarah principle is found to be a better investment alternative than musharakah mutanaqisah principle, regardless of the number of years of the sukuk, as long as it is a long‐term tenure. However, for short‐term tenure, the latter is preferred based on the amount of profits generated.

Research limitations/implications

The formulas and results shown in this research are just one of the mathematical approaches that can be used for decision making in sukuk investment. There are other approaches which may deemed to be more effective in decision making. This research was applied only to ijarah and musharakah mutanaqisah types of investment.

Practical implications

The results in the research will assist in making a quick decision on what type of sukuk investment for the investors and issuers and which will be suitable given the amount of financial resources and duration of the investment period.

Originality/value

Many researchers have attempted to study the implications of using mathematical formulas to guide decision making on the choice of sukuk investment and this research has, to a certain extent, concurred with and complemented the works of past researchers. Additionally it will create awareness and provide more information to potential investors on better sukuk investment alternative principles from a mathematical point of view.

Details

Qualitative Research in Financial Markets, vol. 4 no. 2/3
Type: Research Article
ISSN: 1755-4179

Keywords

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Book part
Publication date: 19 June 2019

Datien Eriska Utami, Irwan Trinugroho and Bruno S. Sergi

We empirically investigate the determinants of sukuk issuance type in Indonesia to issue either ijarah sukuk or mudharabah sukuk. We include sukuk characteristics…

Abstract

We empirically investigate the determinants of sukuk issuance type in Indonesia to issue either ijarah sukuk or mudharabah sukuk. We include sukuk characteristics, sharia-related factors, and firm characteristics, provide empirical evidence on the determinants of sukuk issuance type by incorporating sukuk-specific factors, firm-specific factors, and sharia compliance variables, and address the role of Sharia Supervisory Board, as the sharia representative of firm compliance for sharia products, in the issuer’s choice of sukuk type. By studying 88 sukuk issuance in Indonesia from 2009 to 2017, we find that firm profitability and the sharia compliance level have a significant effect on the probability of issuing mudharabah sukuk. Some other factors’ characteristics including sukuk yield, firm age, and inflation rate are also found to have a significant effect.

Details

Asia-Pacific Contemporary Finance and Development
Type: Book
ISBN: 978-1-78973-273-3

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Book part
Publication date: 20 May 2019

H. Kiaee and M. Soleimani

In literature, a vast number of researches have tried to analyse the interaction between different financing methods and corporate governance. Some believe that good…

Abstract

In literature, a vast number of researches have tried to analyse the interaction between different financing methods and corporate governance. Some believe that good corporate governance companies are more successful in equity financing whereas others believe in positive relationship between corporate governance and debt finance. In this chapter, the authors analyse the interaction between sukuk financing and corporate governance. The authors first tried to differentiate between the financer and company's point of view in the financing decisions of different corporate governance quality companies, and then showed that, theoretically, there should be a positive relationship between murabahah sukuk and ijarah sukuk issuance and the corporate governance quality of companies in both types of views. The corporate governance characteristics of sukuk issuing companies in Iran are also analysed. The results from model estimation confirmed theoretical conclusion and corporate governance variables had positive and significant effects on the Sukuk issuance among Iranian Sukuk issuer companies.

Details

Research in Corporate and Shari’ah Governance in the Muslim World: Theory and Practice
Type: Book
ISBN: 978-1-78973-007-4

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Article
Publication date: 16 October 2017

Nik Abdul Rahim Nik Abdul Ghani

The purpose of this paper is to critically study the application of beneficial ownership in sukuk ijarah by analysing the fiqh interpretation on the concept of beneficial…

Abstract

Purpose

The purpose of this paper is to critically study the application of beneficial ownership in sukuk ijarah by analysing the fiqh interpretation on the concept of beneficial ownership.

Design/methodology/approach

This is a theoretical paper using content analysis approach that delves into the works of Islamic scholars on the concept of ownership and evaluates the concept of beneficial ownership in sukuk ijarah from the Islamic perspective.

Findings

The paper concludes that the beneficial ownership should be considered as true ownership because Shari’ah has allowed the transfer of ownership by a sole basis of contract (offer and acceptance). Although the sukuk holders are not registered as the legal owners in the Land Office, the documentations and agreements have clearly specified the owners and their liabilities.

Research limitations/implications

Empirical investigations into how sukuk holders are responsible for the underlying assets in sukuk ijarah.

Practical implications

It is therefore important to develop parameters for beneficial ownership to govern the use of the concept in Islamic finance.

Originality/value

The paper shows the fiqh interpretation on the beneficial ownership in sukuk ijarah while considering all the constraints and challenges in the implementation of sukuk.

Details

International Journal of Islamic and Middle Eastern Finance and Management, vol. 11 no. 1
Type: Research Article
ISSN: 1753-8394

Keywords

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