.5.4 Ijarah (Leasing)

According to the study of Mahmour (2000, pp.13) legally, the lease contract is not a sale of the object, but rather a sale of the usufruct (the right to use the object) for a specified period of time. The sale of usufruct is permissible in Islam (Quran 65:6). The most important financial difference between Islamically permitted leasing and conventional finnancial leasing is that the leasing agency must own the leased object for the duration of the lease.

2.6 Risk faced by Islamic Banks

Conventional banks face risks and Islamic banks are no exception. The environment of universal bank protects Islamic banks from asymmetric information and adverse selection in contrast with commercial counterpart. The fact that borrowers are in a position to hold back information from banks, allows them to use the loans obtained for purposes other than specified in the contract agreement. By doing so, banks are exposed to unknown risks. Since universal banks are allowed to hold equity and carry out operations like trading and insurance, they are better equipped to deal with asymmetric information. They can finance their business customers through a combination of shareholding and lending. Hence, this permits universal bank to monitor their customer while sitting on a board of directors, Iqbal and AL-Jarhi (2001).

On the other hand, Islamic Banks encounter other risks. Using the PLS modes in Islamic Banks changes the nature of the risks of these institutions face. Depositors share the business risk of banking operations with the bank. Khan and Ahmed (2001) demonstrated various risk faced by Islamic Banks as being credit risk, benchmark risk, liquidity risk, operational risk, legal risk, withdrawal risk, fiduciary risk and displaced commercial risk. They also give risk associated with different modes of financing.

In a survey carried out by Khan and Ahmed (2001) on the perceptio