Operating Lease

According to this mode the Islamic bank maintains a number of various assets to respond to the needs of different customers. These assets usually have a high degree of marketability. The bank lets these assets to any party so desirous to utilize for a term to be agreed upon. After the termination of the lease period the assets are returned to the bank. On its part the bank looks for a new lessee.

The distinguishing feature of this mode is that the assets remain the property of the Islamic bank to put them up for rent every time the lease period terminates so as not to remain unutilized for long periods of time.

Under this mode the bank bears the risk that the price or market ability of assets may decline.

The operatiing lease divides into:

• Specific or determined lease: it is the lease of a tangible property or any other identifiable asset.
• Lease described on liability: It is the lease of an asset determined by specifications agreed upon to be on liability such as a car or a ship, not particular but precisely described to avoid any dispute.

FEATURES

1. Finances capital assets on medium to long term basis.
2. Tenor minimum 1 year-maximum 7 years.
3. Flexible repayment terms.
4. Competitive pricing.
5. Minimum lease $ 150,000/-

The practical steps of operating lease:

1. Equipment purchase contract:

The bank: After studying and evaluating the market, the bank purchases the equipment and pays the seller immediately or defers the payment.

The seller: Agrees on the sale and delivers the equipment to the bank.

2. The first lease contract:

The bank: Looks for a lessee to the equipment exchange of recompense.

The lessee: Pays the agreed upon rental on the specified periods and returns the equipment to the bank at the end of the lease period.

3. The following lease contract:

The bank: Once leased asset is agreed is returned, the bank looks for new lessee to let the equipment for another lease period.

The new lessee: Pays the agreed upon rental for the specified period, then returns the asset to the bank at the end of the lease term.

Note: At the end of each lease period the bank looks for a new lessee; however at times the bank may choose to scrap or dispose off the assets finally.

AREAS OF APPLICATIONS

• The operating lease as well as Transactions are suitable for high cost assets that require long time production.
  
  
• For example, aircraft and ship are assets financed under operating lease because of their high cost and long period required for their completion.
  
  
• The Islamic banks provide operating leases for industrial equipment and agricultural machinery as well as means of transportation. All these can satisfy the needs of various parties.
  
  
• The bank benefits from this mode by retaining the assets in its possession and at the same time receiving returns from leasing. The lessee also benefits by meeting its immediate needs and achieving its objectives in a timely manner without incurring large capital expenditure.

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