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IJARAH LEASING

Leasing is, in essence, an agreement between two parties for the rental of property (land or asset). It allows one party, the Lessee, to use
an asset or property owned by another party, the Lessor. In this regard, leasing is equivalent to an Ijara, an Islamic mode of acquiring
property. The lessee makes the economic use of the lessor’s assets and pays in the form of a rental for this privilege.

Companies can obtain financing for various assets from SCM through leasing. We lease vehicles for commercial and non-commercial
use, generators, computer equipment, plant and machinery with repayment structure designed to suit individual company needs.

Benefits of Leasing

Leasing offers many substantial benefits both for the lessee and the lessor. The following are some of the benefits that a lessee can
derive from a lease:

1. Leasing is acceptable within the Islamic modes of finance as rental payments are made and interest is not involved.

2. Large lease payments are fully tax deductible at the time of payment. Therefore, an incentive may exist to load payments into a particular
     tax year.

3. Lower present value of after-tax leasing costs compared to purchase costs.

4. Leasing assures maximum conservation of capital as it makes large investments in fixed assets unnecessary. The lessee can use this
    for other purposes such as working capital, trade debts, and seasonal expenditures.

5. Leasing permits conservation of existing lines of credit that can be used for other purposes.

6. Leasing guards against technological obsolescence.

7. The terms and conditions are flexible and can be customized for the lessee.

8. Lease rentals can be structured in accordance with the Lessee’s cash flow requirements.

9. Leasing being long-term provides a hedge against inflation.

10. Facilitates capital budgeting as rental payments are fixed.

11. Off balance sheet financing may enhance ability to borrow by improving apparent liquidity and enhancing return on investment.

 
Lease vs. Buy
The primary difference between Leasing and Buying is the ownership of the asset. A straight purchase gives a person an immediate
ownership of the asset. However, in a lease, the ownership of the asset vests with lessor. The lessee benefits from the economic use
of an asset that does not belong to him. A closer look reveals that it is the usage of the asset that is important rather than its ownership.
The economic benefit of the asset lies with a person whether he leases or buys the asset. For personal usage, it is the pleasure of say,
driving a new car. For business purposes, it’s the usage that translates into profits. Another difference is the initial cash outlay
requirement. When buying, a person pays the cost of the asset as a lump-sum amount at the onset. However, leasing enables a person
to pay only a part of the cost (down payment) and begin utilization of the asset before repaying the full amount. The remaining amount is
repaid with fixed payments over a period of time.
 
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