Use of ijarah sukuk by Islamic banks Essay Example | Topics and Well Written Essays - 3000 words

Use of ijarah sukuk by Islamic banks - Essay Example The intention of this study is Ijarah Sukuk as a type of sukuk based on leased assets, involves securities of the same value of every issue, and stands for long lasting physical assets. These assets are attached to an ijarah contract that is based on Shari’a. On that note, there are several reasons why Ijarah Sukuk is considered a contentious financial instrument. For example, Ijarah Sukuk permits corporate customers access to other methods of Islamic refinancing. In addition it grants Islamic organizations a way of handling their liquidity. In contrast, lack of global standards on the acceptable commodities facilitates the establishment of an appropriate global interbanking market. Furthermore, there is always the problem of over taxation because Ijarah Sukuk holders possess assets that they fund such as capital gains tax, value added tax and double stamp duty land tax. This affects its growth as the minimum revenue accrued is diminished during over taxation. Similarly, Ijara h sukuk is viewed as a contentious financial instrument because it only offers securitization. Ijarah sukuk and not any other lease bond securitize this means that the revenue produced. There is also the issue of principal-agent challenges. This entails lack of financial capability by Islamic banks to manage its principal-agent challenges. Therefore, this affects long-term funding due to insufficient credit in the market. In this case, a bank may decide to use readily accessible conventional lease bonds because ijarah sukuk is not applicable for long financial projects (Ayub, 2009, p.65). Alternatively, there is the unavailability of ijarah sukuk investments in the market especially to low-earning businesspersons. It is only available to wealthy men hence it widens the space between the rich and poor. On that note, we can say that ijarah sukuk needs organizations with many assets and these assets must not be impeded by other factors. Furthermore, deals involving ijarah sukuk are oft en deficient of legal infrastructure within upcoming markets especially in relation to trusts or property. On the other perspective, less designed variants of sukuk gets disheartened by the economic likeness of ijarah sukuk and fixed-income goods of conventional lease bonds because of the ideologies of profits and loss sharing. There is also the investment law that governs ijarah sukuk whereby limitations of foreign ownership transfer taxes with large ownership may deter the genuine sales of an asset. Another contention with ijarah sukuk is its complex structure when granted in a non-Islamic nation may result to attempts to counter the problem of designing a tax proficient structure that complies with Shari’a (Lewis & Hassan 2007, p.54). Additionally, ijarah sukuk as a financial tool requires care in terms of bank considerations. This is because of the tendency of sukuk transaction to establish a shared interest of beneficial possession for the sukuk proprietor. 2. Difference s and similarities between Ijarah Sukuk and the conventional lease bond There are various similarities and disparity between Ijarah Sukuk and the conventional lease bond. In our case, we will begin with the differences. For instance, the role of sukuk in the Islamic finance perspective is sharing. Therefore, those