Security Deposit Issues in Ijārah Financing: Evidence from the Islamic Banks of Pakistan

Abstract

The purpose of this study is to investigate two important issues in ijārah-based financing in Pakistan’s Islamic banking industry. First, why ijārah contract is permissible with the condition of advance security deposit? Second, how Islamic banks can reduce the rental amount in case of increasing the advance security deposit? Is it a valid practice in the light of Sharī’ah? To investigate these issues, the current study has used semi-structured interviews as an adaptable method to gather data from five Islamic banks of Pakistan. It was observed that the banks treat the required advance amount mainly in four ways: advance rent, purchase price, hamish-jiddiyah (earnest money) and security deposit. The findings revealed that the ijārah-based financing with an advance security deposit is permissible provided that the lessor should not decrease the rental amount due to an increase in advance deposit, and vice versa. Understanding of these issues can strengthen the customers’ confidence in the Islamic banking industry in general and ijārah-based financing specifically. This will also substantiate the Sharī’ah principles in ijārah-based transactions. This study contributes to addressing the issues of the advance security deposit in an ijārah contract as per Islamic law.