Ijarah for vehicle financing in Islamic financial institutions in Sri Lanka: the Shari'ah and legal assessment [EMBARGOED]

Abstract

Ijarah ending with ownership is one of the latest innovative products used by Islamic financial institutions for financing consumer goods, equipment, and vehicles. Contemporary Shari’ah scholars have designed and developed its structure carefully to be in line with Shari’ah principles in order to meet the current demand of customers. In Sri Lanka, it is predominantly used for vehicle financing. Although the Islamic leasing industry has existed in Sri Lanka for 25 years, it is still largely nascent and not mature enough to reach its full potential. Its application under the Finance Leasing Act, No. 56 of 2000, has been questioned, and there are ongoing deliberations as to whether the current practices of Ijarah for vehicle financing comply with Shari’ah principles. Furthermore, Ijarah is perceived by the public as relatively analogous to conventional leasing in most aspects. This misconception is an impediment to industry growth. Therefore, this study examines the practice of Ijarah for vehicle financing in Islamic financial institutions in Sri Lanka from Shari’ah and legal perspectives. In addition, this study intends to identify the gap between the Shari’ah, legal requirements, and the current practice of Ijarah to provide recommendations to enhance the practice. The Finance Leasing Act 2000, the main law governing Ijarah transactions, is also analyzed, identifying its strengths and weaknesses. To illuminate the understanding of the operation of Ijarah vehicle financing, the study adopts a qualitative research method. A total of 13 in-depth interviews have been conducted with Islamic bankers, Shari’ah advisors, Shari’ah scholars, legal experts, and academicians. At present, about 13 Islamic financial institutions offer Ijarah for vehicle financing. These Islamic financial institutions are split into three categories; fully-fledged Islamic banks, Islamic banking windows, and Islamic leasing companies. From each category, one institution has been selected for the study. Accordingly, Amana Bank, An-Noor Islamic Window, and Al-Falaah leasing company were selected for the case study. The rationale for choosing one institution from each category is accessibility and adequacy due to similarity in practice. The findings of this study reveal that the Islamic leasing industry in Sri Lanka is fairly stable but undeveloped. The current practices of Ijarah vehicle financing are analogous in most aspects among the selected institutions and are in line with Shari’ah requirements in most aspects of their practices. As well as the practice of Ijarah vehicle financing can be based upon the Finance Leasing Act 2000 since it has been shown that its provisions are not impediments but rather in line with Shari’ah requirements. There is a great need to harmonize Shari’ah requirements with the existing law instead of making amendments to the Finance Leasing Act 2000. Such things are nearly impossible for Muslims in Sri Lanka as a minority, and they are not in a position to do them.

Ij?rah ending with ownership is one of the latest innovative products used by Islamic financial institutions for financing consumer goods, equipment, and vehicles. Contemporary Shar? ?ah scholars have designed and developed its structure carefully to be in line with Shar? ?ah principles in order to meet the current demand of customers. In Sri Lanka, it is predominantly used for vehicle financing. Although the Islamic leasing industry has existed in Sri Lanka for 25 years, it is still largely nascent and not mature enough to reach its full potential. Its application under the Finance Leasing Act, No. 56 of 2000, has been questioned, and there are ongoing deliberations as to whether the current practices of Ij?rah for vehicle financing comply with Shar? ?ah principles. Furthermore, Ij?rah is perceived by the public as relatively analogous to conventional leasing in most aspects. This misconception is an impediment to industry growth. Therefore, this study examines the practice of Ij?rah for vehicle financing in Islamic financial institutions in Sri Lanka from Shar? ?ah and legal perspectives. In addition, this study intends to identify the gap between the Shar? ?ah, legal requirements, and the current practice of Ij?rah to provide recommendations to enhance the practice. The Finance Leasing Act 2000, the main law governing Ij?rah transactions, is also analyzed, identifying its strengths and weaknesses. To illuminate the understanding of the operation of Ij?rah vehicle financing, the study adopts a qualitative research method. A total of 13 in-depth interviews have been conducted with Islamic bankers, Shar? ?ah advisors, Shar? ?ah scholars, legal experts, and academicians. At present, about 13 Islamic financial institutions offer Ij?rah for vehicle financing. These Islamic financial institutions are split into three categories; fully-fledged Islamic banks, Islamic banking windows, and Islamic leasing companies. From each category, one institution has been selected for the study. Accordingly, Amana Bank, An-Noor Islamic Window, and Al-Falaah leasing company were selected for the case study. The rationale for choosing one institution from each category is accessibility and adequacy due to similarity in practice. The findings of this study reveal that the Islamic leasing industry in Sri Lanka is fairly stable but undeveloped. The current practices of Ij?rah vehicle financing are analogous in most aspects among the selected institutions and are in line with Shar? ?ah-requirements in most aspects of their practices. As well as the practice of Ij?rah vehicle financing can be based upon the Finance Leasing Act 2000 since it has been shown that its provisions are not impediments but rather in line with Shar? ?ah requirements. There is a great need to harmonize Shar? ?ah requirements with the existing law instead of making amendments to the Finance Leasing Act 2000. Such things are nearly impossible for Muslims in Sri Lanka as a minority, and they are not in a position to do them.