Global growth in Ijarah and lease financing

• ICD is the key contender in Islamic leasing market 
• Etihad taps Ijarah financing for its sustainability programme
• Aviation and ESG-related projects becoming prime clients

The global market for Ijarah financing saw a significant increase, growing from $1.35 trillion in 2021 to $1.53 trillion in 2022, with a yearly compound growth rate of 12.9%. 

ICD is the key contender in the Islamic leasing market 

The Islamic Corporation for the Development of the Private Sector (ICD) under the Islamic Development Bank is one of the leading participants in the Islamic leasing industry. The ICD holds a 20% to 100% share in 13 leasing companies in various countries including Malaysia, Saudi Arabia, Tunisia, Turkey and Egypt. In 2022, the ICD launched a project with Uzbek Leasing International to expand its products  under the Ijarah financing model to attract more clients. 

Countries such as Brunei, Bahrain, Turkey, and Indonesia are frequent issuers of Sukuk Ijarah; Sukuk is a type of agreement similar to a lease where the assets covered by Ijarah financing can be used for various purposes such as vehicles, houses, buildings, industrial plants or equipment. Over the past year, a number of corporate organisations have used Sukuk Ijarah for financing. 

Etihad taps Islamic financing for its sustainability programme 

Etihad Airways recently raised $1.2 billion in the first sustainability-linked loan in the aviation industry tied to its environmental, social, and governance (ESG) initiatives. This trend is starting to impact operating leases, including Ijarah. 

One prominent aircraft lessor has arranged a sustainability-linked operating lease with a global airline, tied to the airline’s ESG rating that is periodically reviewed and validated. Based on the rating, the operating lease includes a two-way step-up and step-down rent mechanism that incentivises improvements in the airline’s ESG performance and commitment to sustainability. This marks an important milestone for the leasing sector in rewarding good environmental stewardship, and is something that Ijarah contracts should start to encourage. 

While sustainability-linked Ijarah agreements have great potential, the wider Islamic finance community will need to become familiar with the benefits and mechanics of such innovative, performance-based instruments.

From a Shariah perspective, a ‘floating’ rent that is not fixed for the duration of the Ijarah is considered potentially void due to uncertainty (Gharar), according to some scholars who view it as being similar to interest-based financing. However, other scholars argue that using benchmarks to generate non-uniform rental payments is acceptable if they are mutually agreed-upon benchmarks that do not change the fundamental nature of the payments or structure of the Ijarah, in which the lessor continues to retain ownership risk throughout the contract.

Aviation industry and ESG-related projects becoming prime clients

The views on Ijarah structures can vary considerably among different Shariah boards in different countries. If Shariah-compliant aircraft leasing and financing transactions can adopt innovative financing techniques and structures used in more mature markets, the aspirations of leading Islamic finance centres can be achieved more quickly. The Qatar Financial Centre, for example, aims to become a regional aircraft leasing and ESG investing hub.

The global aviation sector has the potential to contribute to 15 of the United Nations’ 17 Sustainable Development Goals to varying degrees. Islamic finance can support the growth of Shariah-compliant aircraft leasing with innovations in Ijarah contracts.

The global finance lease market size was valued at $210.99 billion in 2021 and is projected to expand at a compound annual growth rate of 5.1% from 2022 to 2030. This will be driven by the rising demand for heavy machinery, equipment, and other assets in sectors such as healthcare, construction, information technology and telecommunications. 

The shift from an agricultural-based to a manufacturing-based economy in developing nations, and an increase in demand for automobiles and consumer durables worldwide is also expected to contribute to market growth.

The global Ijarah market is growing due to increasing credit accessibility, making it more convenient for customers to purchase expensive items like cars and homes through financing. This form of financing offers consumers advantages such as low monthly payments, long-term flexibility, optimal tax benefits, and hassle-free lease maintenance. These factors contribute to a positive outlook for the industry.

Concerns over fluctuating interest rates, profit rates and increasing inflation may pose some obstacles to growth, but the Ijarah industry is nevertheless expected to continue on its trajectory.

Md. Touhidul Alam Khan is the chief risk officer of Standard Bank Limited of Bangladesh, a shariah-based private commercial bank in Bangladesh.

Views and opinions expressed in this opinion-editorial belong strictly to the author’s/contributor’s and do not reflect that of The Asian Banker.