I am sure the customers who have utilized Ijarah financing from Islamic banks must have had a field day after going through my last week’s article on the treatment of a partial or total loss of the leased asset, particularly the aspect that the rent ceases to exist upon the occurrence of a total loss of the Ijarah asset.
At the same time, it must have been an eye-opener for the customers who have taken conventional mortgages or financial leases from the interest-based lending institutions (banks and leasing companies).
A question arises as to whether the parameters described by me last week are from the real world or simply a theoretical phenomenon. It is all good to have such principles embedded in the books on Islamic finance with glossy covers widely available in neatly stocked bookshops.
But as they say, the proof of the pudding is in the eating; as such, where is the evidence that Islamic leasing principles were ever applied genuinely in such circumstances, thus providing unheard-of benefits to clients of the banking industry in a jurisdiction?
Well, I am the witness to some of the real-life examples in my Islamic banking career. One such incident happened in 2012 when a 34-storey residential tower at Dubai’s busiest Sheikh Zayed Road was badly gutted. The fire started from a lower apartment and spread all the way up due to strong winds that night. Thank God that the ever-vigilant Dubai Civil Defense quickly evacuated all the occupants safely.
I remember the residents were a mix of borrowers from conventional banks and customers of Islamic home finance under Ijarah from local banks and financial institutions.
Acting on the instructions of their respective Shariah boards, the Islamic financial institutions took the following steps:
a. Stopped applying the lease rent instantly under Ijarah financing to all those affected customers, and
b. Arranged immediate free hotel accommodation for the families for a number of days followed by providing alternative residential units for a year at the institutions’ expense.
While the first act carried out by the Islamic financial institutions fulfilled the Shariah requirement explained by me in last week’s article, the second one was purely a humanitarian gesture.
Comparatively, the residents who took conventional mortgages from interest-based banks and financial institutions were the worst off. Not only did the lenders continued to recover the mortgage installments during the restoration period of four years, they also applied a penalty interest in case of delays in payment.
I have pulled the following quote from one of the residents who utilized a conventional mortgage so that readers can judge for themselves as to the justice and fairness of the Islamic financial system compared to its conventional counterpart: “Despite the fire, I had to continue to pay my mortgage to the bank on the flat I owned even as I had to rent another place to stay. So financially, it was a huge impact for the last four years.”
I have explained in detail in the earlier articles that an Islamic bank manages depositors’ funds for and on their behalf. As such, the profit or loss is owned by the depositors since they invest equity and do not lend money to the bank, as conventional bank depositors do.
If that is true, are there any Shariah permissible techniques to eliminate such risks where the Islamic bank (and hence the Islamic depositors) can seek protection from losses?
When it comes to transactional risks, Shariah principles do not allow the elimination of them altogether and the reasons for this aspect have been discussed in detail in this space. However, it will be in order if these risks are mitigated in a Shariah permissible manner. So, how can it be done?
Let us first take the instance where the leased property suffers a partial loss. The Islamic financial institution is encouraged by the scholars to seek Takaful cover (Islamic insurance) for any asset financed by it. As such, if the leased asset gets partially destroyed due to no fault of the lessee, the Islamic financial institution will rely on claiming the amount spent on restoration from the Takaful cover provider. This will protect the Islamic depositors from getting hit for the cost of repairs.
As for the loss of rent during the restoration period, this is something that the Islamic bank (and hence the Islamic depositors) will have to put up with since a reduction or cessation of rent during the repair period must be borne by the lessor. Hence, the Islamic bank (and the Islamic depositors) shall incur a loss in profit while their equity shall remain intact.
If the partial loss to the leased asset is incurred due to the lessee’s negligence, it will have to be borne by the lessee whereby the lessee will bear the repair expenses besides continuing to pay the lease rent unabated.
The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions of the Dubai Islamic Economy Development Centre, nor the official policy or position of the government of the UAE or any of its entities. The purpose of this article is not to hurt any religious sentiments either consciously or even unwittingly.
Sohail Zubairi is the senior advisor with the Dubai Islamic Economy Development Centre. He can be contacted at [email protected]
Next week: The discussion on mitigating the Ijarah risks to an Islamic bank shall continue next week.