Asset ’ijarah bond

Dictionary term

Definition of "Asset ’ijarah bond"

A proposed financial instrument for mobilizing finances for durable assets. The proposed bonds are securities of equal denomination for each issue, representing physical durable assets that are tied to an ’ijarah contract as defined in the shari‘ah. In its simplest form, the AIB is based on a leased asset, say, a building of school leased to the government. The lease contract becomes the AIB, generating a stream of rents periodically. The AIB contract can be sold and bought in the market at a market price that is formulated by the market demand and supply. Against one lease contract, AIBs of smaller denominations can be issued. Each holder of the AIB can claim his entitlement of the rent on due date from the government. More sophisticated forms of AIBs are possible by introducing banks as intermediaries. The banks can raise funds for financing the purchase of assets and then leasing the asset on behalf of the owners to government or any other agency. The agreed rent can be translated into AIBs of suitable denominations according to the funds provided by each investor. Provision for the ultimate sale of asset to the lessee at the end of lease contract can also be made. The return on AIB can also be made variable or indexed with inflation rate over longer period. They can also incorporate a variable period for payment of rent which can be different from the period of the lease. Similarly, AIBs can apply some restrictions on the use of assets. They have also been termed as asset ’ijarah securities.

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