Islamic leasing (Ijarah in Arabic) is perhaps the dark horse of the Islamic finance industry. It is often overlooked and overshadowed by other structures such as Sukuk- or Murabahah-linked products. To an extent, Islamic leasing is seen as the less glitzy structure for infrastructure and real assets (such as aircraft and vessels) financing or sidelined toward the retail sector to service products like mortgages and auto loans. However, structurally, leasing is a beautiful method of financing which in my opinion is not fully utilized to its absolute potential. In addition to this, Islamic leasing could potentially be considered as one of the purest forms of Islamic financing. This is largely due to the nature of the utilization of a lease which in essence serves a financing purpose and is based on a form of asset(s) which is an essential pillar of Islamic finance.

Review of 2021
The world is still reeling from the devastating effects of COVID-19 which has caused disruption across almost every walk of life. The effects were particularly evident in 2020 and the start of 2021 with many sectors such as aviation, infrastructure and construction industries at bare-bone operations.

As a result, governments halted infrastructure projects, airlines delayed aircraft acquisitions and potential homebuyers were forced to put their acquisition of their dream homes on hold. With successful vaccine drives across much of the world, we started to feel a somewhat normalcy with people starting to travel and homebuyers returning to the market.

However, infrastructure projects still lagged behind with governments trying to get economies back on track.

While 2021 has shown the resilience of the Islamic finance sector, not all areas of the industry are rampant. Naturally this is a result of COVID-19.

If we look at the context of Islamic leasing products and structures in 2021, it has largely been driven by the retail sector and in particular to service the pent-up demand for properties and car purchases.

Despite the sharp increase in property prices in 2021, Islamic leasing contracts (Ijarah structures in particular) have helped homebuyers purchase homes while financiers have been reliant on this structure to service the demand.

While homebuyers would argue property prices are soaring, financiers would repel with the argument of low interest rates. At the end of the day, both are winners. Homebuyers are able to utilize an Islamic leasing structure to purchase their property and financiers are able to book an asset, all thanks to the Islamic leasing Ijarah contract.

Preview of 2022
In 2021, we saw Islamic leasing largely being utilized by the retail sector but what about in 2022, what does the year ahead hold? Simply put, Islamic leasing outside of the retail sector has been a casualty of COVID-19!

But just as we witnessed a pent-up demand for homes and international travelers itching to get back onto a plane, we see an opportunity for large-scale projects and acquisitions to return in the marketplace.

This includes infrastructure projects returning to the fray to supplement the housing shortage and the return of airline companies starting to plan for aircraft acquisitions. The same can be said for the shipping industry with shipping companies struggling to keep up with the backlog of supplies which has gripped the world through the supply chain crisis.

As infrastructure returns and with aircraft and vessel acquisitions in the pipeline, Islamic leasing structures will be at the center of attention for financiers.

We are also seeing innovative Islamic leasing structures being used to provide financing through leasing funds. While this is not something new, the market is actively looking for ways to provide financing solutions to fuel this demand for financing products.

Islamic leasing funds are gaining momentum as they provide a medium to finance a project and also a gateway for investors seeking an asset-backed yielding investment. Islamic leasing assets produce predictable and largely stable cash flows which are ideal for many investors.

I would expect to see Islamic leasing funds play a large role in both financing projects and providing stable investment for investors.

The same can be said for the Sukuk industry which has been somewhat inconsistent particularly in 2020 with issuances coming infrequently but picking up pace in 2021 due to the low-rate environment.

Islamic leasing structures have played an important role in the development of the Sukuk universe and this will continue, particularly as Ijarah-based Sukuk provide a widely acceptable structure that appeal to all forms of investors.

Conclusion
Islamic leasing has been a mainstay of the Islamic market but is often overshadowed by other structures and contracts. However, with the world emerging in a post-COVID-19 era, we will see both the public and private sectors try to play catch-up to the pre-COVID-19 era. This will surely create asset growth which will be fueled by both debt and equity.

As a result, contracts such as Ijarah structures will be in demand from not only the retail sector but also the institutional and governmental sectors. I would expect infrastructure projects to resume and travel to return to 2019 levels which will result in large-scale projects and asset acquisitions.

All these factors will come together to create a robust demand for innovative and also traditional financing structures. I would fully expect Islamic leasing to be a core offering to service the increasing demand of financing.

Ishaq Dadabhoy is the head of an Islamic window of a reputable organization. He can be contacted at [email protected]