Monzer Kahf Assets Ijarah Bonds

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Islamic Economic Studies Vol. 4, No. 2, May 1997

THE USE OF ASSETS IJARA BONDS FOR BRIDGING THE BUDGET GAP
MONZER KAHF*

A shari‘ah compatible fixed-return financial instrument is needed in an Islamic economy. This paper explores the potential of ijara (renting)-based financial instruments to meet this need. The paper proposes ijara-bonds as marketable Islamic financial instruments for resource mobilization in the public sector as well as an instrument for monetary policy. Private companies can equally use the ijarabonds for resource mobilization. This paper aims at presenting the idea of assets ijara bonds (AIBs)1 and how such bonds can be used by governments as an alternative means of borrowing funds from the public. The paper consists of four sections. Section one deals with the assumptions under which the AIBs shall be discussed. Section two will analyze the ijara contract and discuss the shari‘ah foundation of the AIBs. The third section defines AIBs and studies their different forms. Finally, section four will discuss the characteristics and economics of AIBs and compare them with other securities. 1. ASSUMPTIONS In order to restrict the discussion in this paper to the limits that serve the stated objectives, we have to make a few necessary assumptions: 1. We assume existence of a deficit in the budget, but without discussing its causes or nature. A deficit may be attributed to shortage of financial Research Economist, Islamic Research and Training Institute, Islamic Development Bank, Jeddah, Kingdom of Saudi Arabia. 1 Assets Ijara Bonds can be differentiated from Services Ijara Bonds. Since the ijara contract in shari‘ah is essentially the same for physical durable assets and for human labor, both kinds of ijara contracts can be securitized respectively, in the form of Assets Ijara Bonds and Service Ijara Bonds (such as Certificates of Education). In fact, a third form of ijara bonds can also be devised based on an ijara contract that involves services of assets along with their operators. In this form of AIBs, the lessee gets services such as telephone for the production of which machines, equipments and man-hours are needed. *

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Kahf : Use of Assets Ijara Bonds

resources or high public expenditure or both. This paper does not attempt to study budget deficit itself. 2. The government has many durable assets that are used in the process of performing governmental functions, performed either under current or capital account of the budget. In other words, the government already owns buildings, bridges, airports, seaports etc., that are actually used by the government in the process of providing its services to the community. Furthermore, the government continues the process of construction and/or acquisition of durable fixed assets, including infrastructure, for the purpose of improving its services to the community and fulfilling the social, political and economic aims of the society and its government. This means that there are a number of fixed durable assets presently owned by the government that can be sold and leased back. Additionally, there are also many projects for constructing or acquiring new durable assets which can be purchased by investors and then leased to the government. Furthermore, for the purpose of this paper, it does not matter whether such durable assets are used for the production of marketable goods and services or simply for the non-income generating governmental activities. In other words, it does not matter whether durable assets are income generating or not. 3. To supplement the second assumption, it shall also be assumed that most of the major projects for infrastructure and public services such as roads, bridges, airports, communication installations, electricity, water sewerage etc. are undertaken by the government, and their expenses are charged in the budget. 4. There are sufficient savings available within the society that can finance the budget deficit. These...
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