An update on the international Islamic leasing market

An update on the international Islamic leasing market

Prof. Dr. Shahinaz Rashad, Senior Finance Advisor, ELA

THE ISLAMIC LEASING SECTOR represents a significant opportunity for the Islamic finance sector to grow, since it has gained wide acceptance among Shariah scholars globally. Proponents argue that Islamic leasing is often simple to operate in any jurisdiction, given its asset-backed nature, compared to other Islamic banking products.

Islamic leasing is likely to be most popular in those countries comprising the highest concentration of Muslims as well as in other non-Muslim countries which attract Shariah compliant investors.

In addition, Islamic leasing has wide applications among most global Islamic markets. In this context, Islamic leasing could take various forms such as Ijarah products offered by Islamic banks, Islamic leasing companies, Islamic microfinance institutions and Sukuk Ijarah issuers.

Islamic banking and Islamic leasing. In general, it is estimated that the total Islamic finance industry has grown over the past 12 months and now exceeds US$2.7 trillion. The biggest share of the Islamic finance market is represented by the Islamic banking industry (80%) with a total size US$1.85 trillion in over 100 countries.

Ijarah represents almost 26% of the Islamic finance product mix, which shows its significance as an Islamic product in the Islamic banking industry and the Islamic non-banking industry represented by Islamic leasing financial institutions.

However, the expansion of the Islamic leasing sector is often challenged by the conventional leasing limitations especially in Muslim-majority countries.

For example, some countries, such as Egypt, supported the Islamic leasing or Ijarah sector by introducing regulatory reforms such as a new leasing law and new mortgage regulations to include Ijarah-based home financing – also known as Ijarah MuntahiaBitamleek.

Multinational banks and multilateral organisations such as the Islamic Development Bank obtained licenses for Islamic leasing Ijarah to meet the growing demand from that segment. Islamic banks and leasing companies that offer Islamic banking products and services are establishing Shari’ah advisory committees to advise them and to ensure that the operations and activities of the bank comply with Shari’ah principles.

In addition, the recent leasing and microfinance law reforms allows for opportunities for Islamic microleasing to grow on a level playing field with conventional leasing.

In general, Islamic finance and  Islamic leasing are growing in South Asia, Central Asia and MENA. Major markets in the past 12 months on a country level include Egypt, Malaysia, Saudi Arabia, the UAE, Qatar, Pakistan, Iran, Indonesia and South Russia and other non-Muslim countries including the UK, France and South Africa.

Sukuk Ijarah. It is estimated that the share of the Sukuk market in the Islamic finance industry is 14%. Meanwhile, Sukuk Ijarah represent one of the most common types of Sukuk (approximately 70%).

Currently, the total outstanding Sukuk volume exceeds US$350bn. Sukuk Ijarah in major markets include the GCC and Asia; namely the UAE, Bahrain, Qatar, Malaysia, and Indonesia.

Islamic micro leasing (Ijarah). It is estimated that the share of  Islamic microfinance in the Islamic finance industry is 1% with a total size of US$1.5bn and exceeding 500 Islamic microfinance banks/institutions in around 46 countries.

Major markets for Islamic microfinance products include Pakistan, Bangladesh, Afghanistan, Yemen, Sudan, Nigeria, Iraq and Egypt.

Outlook. The Islamic finance industry is expected to grow exponentially. By the end of 2023, the total volume of the Islamic finance industry is expected to exceed US$3 trillion. The share of Islamic leasing as a product mix is expected to grow with regulatory reforms that addresses the limitations and  challenges of conventional leasing with the support of multilateral organisations, such the Islamic Development Bank and the World Bank and IFC.

It is expected that future Islamic finance and Islamic leasing markets may include Central Asia, East & West Africa, Eastern Europe, India, and Russia.

In addition, Sukuk Ijarah future markets are expected to be in Central Asia, West Africa, and Nigeria. Finally, future markets in 2022 for Islamic microfinance products include Egypt, Jordan, Palestine, India, Albania, Turkey, Senegal, Togo, and Tanzania.

Conclusion. The Islamic leasing industry represents untapped opportunities that needs to be addressed by global  policy makers to create a level playing field.

The major challenges faced by the Islamic finance industry in general, and the Islamic leasing sector in particular include: the need to develop a uniform regulatory and legal framework, scarcity of Shariah compliant sources of funds and Shariah compliant structure, lack of standardisation of the products, double taxation issues especially in sale and lease back transactions, scarcity of accounting & IT systems and rating agencies, and development of Shariah expertise.


Prof. Dr. Shahinaz Rashad

Senior Financial Advisor, Egyption Leasing Association