MURABAHA OR IJARA: THE BEST FINANCING

Abstract

Abstract In contemporary society, Islamic finance has experienced an upturn and gained status on the domain’s financial markets. Evidence in the literature reveals that there exist various Islamic financing tools which are guided by Sharia laws. This paper, and borrowing from the constructs of Islamic finance, aims at exploring the key differences between Murabaha and Financing Ijara and the best financing system for banks and clients. As such, the paper embarks on a comprehensive understanding of Islamic finance and Islamic law pertaining to the two financing options. The various types of Murabaha and Ijara are covered and their benefits and disadvantages contrasted against each other. This paper employs secondary data from books and Islamic body of literature covering the topic of Islamic finance. The paper will reveal that there exist various differences between the two financial instruments of Islamic finance. The conclusion of this study is that the various differences that exist between Murabaha and Ijara modes of Islamic finance serve an important part in impacting banks and consumers’ alignment. Here, the paper details why consumers prefer Ijara mode of financing while banks are more comfortable with Murabaha mode of Islamic finance despite the underlying risks and challenges.