Things You Need To Know About Islamic And Conventional Leasing

The most important financial difference between Islamic leasing and conventional leasing is that, with Islamic leasing, the leasing agency must own the leased object for the duration of the lease. In many cases, the car dealership may in fact use a bank or other financial intermediary to provide a loan for the present value of lease payments and charge the customer interest on this loan. This would constitute the forbidden riba. Therefore, although leasing a car from a car manufacturer or car dealership may in principle be permissible for Muslims (if the contract satisfies the other conditions), Muslims should investigate further.

Scrupulous Islamic financial institutions ensure that the contract abides by all the restrictions set out in the Shariah (e. g., subleasing requires the permission of the lessor; careful calculation on late payment penalties to avoid riba, etc.).
We describe the differences between conventional and Islamic financing schemes in the sections below.

How Do Islamic and Conventional Leasing Work?

The conventional financing schemes provide financing for purchasing a car; that is, in essence, the financier is giving a loan and charging interest.

The Islamic car financing – Ijara – is based on a lease contract. It is not a financing scheme; rather it is a lease contract. As mentioned earlier, 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 the lease.

Importance of Sequence

Islam considers the procedure in which any transaction takes place as a significant factor in all modes of financing. The underlying difference between the Islamic and conventional modes of financing is that of the process. To Muslims, not only the end result but also the means to it are important.
If the result is correct and the steps are wrong, or vice versa, the entire process can be invalid, from the Islamic perspective. According to Shariah principles, lawful steps to lawful results are very important. Ownership of the asset is the prerequisite for leasing out its usufruct. As mentioned, Islam places great emphasis on sequencing.

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