The Application of Service Ijarah in Islamic Finance

Abstract

This research aims to explore the current application of Service Ijarah in Islamic Finance across three major sectors of Islamic commercial finance: Islamic banking, Islamic Insurance, and Islamic capital market. Furthermore, this study identifies potential challenges and risks associated with the use of Service Ijarah by comparing it with alternative Shariah contracts. This research employs a qualitative desk review research method to delineate the practical application of the Service Ijarah. The data was primarily collected from the official websites, product disclosure sheets, and annual reports of Islamic finance and banking institutions in different jurisdictions. Additionally, other secondary sources were used, including Shariah Standards, policy documents, journal articles, and other forms of reports. At least 15 Islamic banks globally have used the contract for financing services such as education, marriage, travel, home renovation, green technology, professional services, and Hajj & Umrah in countries including Oman, UAE, Malaysia, Maldives, Bangladesh, Bahrain, Tanzania, and Nigeria. The contract has yet to be practically applied within the Islamic capital market and Islamic insurance (Takaful). However, there is potential for the structuring of service-based Ijarah Sukuk and the development of Takaful products to cover service-ijarah-based financings. The absence of guidelines on Service Ijarah and the difficulty of finding reliable service providers for custom jobs may present challenges for the banks. This research is expected to be beneficial for industry practitioners seeking to explore a contract that remains relatively underutilised in the Islamic finance field and Shariah and regulatory authorities. It also examines the potential for service-based Ijarah Sukuk and AAOIFI's role in facilitating the development of Service Ijarah-based products.