Application of Ijarah Al Ashkhaas in Personal Banking – A Missing Opportunity by Islamic Banks of Pakistan

Abstract

Islamic banking is expanding and same is the case with Islamic financial products. The banks are using different modes of Shariah based finance for the variety of their products and services. Ijarah is one of the most commonly used form of finance for the wide range of Islamic consumer and corporate products. There are two broad categories of Ijarah, namely Ijarah al Ayaan and Ijarahal Ashkhaas. Ijarah al Ayyan is the hiring of the usufruct of a fixed asset for example; car finance, house finance, plant and machinery finance etc. Second type of Ijarah is Ijarah al Ashkhaas (commonly known as service Ijarah) which is the hiring of usufruct of intangible goods or services. Islamic banks opt it for financing personal banking products like education, medical, or travelling, etc. in several Islamic countries including Malaysia, Indonesia, UAE and Bangladesh. Contrary to this, Pakistan has twenty two Islamic banking institutions including five full fledge Islamic banks but there is not a single product based on service Ijarah facility. Therefore, the main objective of this study is to explore the need to develop service Ijarah based personal finance by Islamic banks of Pakistan. This paper also discusses the concept and application of Ijarah al Ashkhaas, the model and process of service Ijarah financing by banks globally and possible adoption of service Ijarah facility by Islamic banks in Pakistan.