Monzer Kahf Assets Ijarah Bonds
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
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
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