ACCA Financial Management (F9) Certification Practice Exam

What does the concept of Ijara specifically denote in Islamic finance?

1. Partnership with shared responsibilities

2. A leasing agreement where assets are used

3. A direct sale of financial assets

4. A contract involving profit sharing

The correct answer is: A leasing agreement where assets are used

Ijara in Islamic finance refers specifically to a leasing agreement, where a financial institution buys and leases out an asset to a client. Under this arrangement, the client has the right to use the asset for a specified period while making periodic lease payments. This concept aligns with Islamic principles, as it allows for the use of assets without engaging in interest-bearing loans, which are prohibited in Islamic finance. The leasing agreement typically involves a clear contract that stipulates the terms of the lease, maintenance responsibilities, and the treatment of the asset at the end of the lease period, which might include the transfer of ownership to the lessee. This structure supports economic activity while adhering to the ethical principles of Islamic finance, as it fosters transparency and mutual benefits in financial transactions. Other options involve different concepts in Islamic finance. For example, partnership arrangements relate to shared responsibilities and collaborative ventures but do not specifically define Ijara. A direct sale of financial assets and profit-sharing contracts involve other financial instruments and agreements but do not reflect the leasing nature of Ijara. Thus, the defining characteristic of Ijara being a leasing agreement solidifies why this option is the most accurate depiction of the term in the context of Islamic finance.