Reconstructing lease-to-own contracts: A contemporary approach to Islamic banking standards

The Palestinian Monetary Authority issued decision No. 15 of 2019 demanding Islamic banks to act according to Islamic standards set by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI). Among the essential financial services, Islamic banks offer Ijārah Muntahiyah bi-t-tamlīk contracts (lease-to-own), which share a similar purpose with financial leasing contracts. This decision places Islamic banks in a challenging predicament, caught between the modern doctrinal orientations of AAOIFI standards and the traditional orientations provided in Al-Majjahllah Code. The formation of Ijārah Muntahiyah bi-t-tamlīk contracts relies on a promise of sale issued by the bank to the tenant, contingent on the complete payment of agreed-upon installments. The first challenge arises because the general rules do not recognize the unilateral promise as a source of legal obligations, thus rendering it without legal value. The second issue stems from several contract clauses that contravene AAOIFI standards by burdening the tenant with most of the bank's obligations. Despite the importance of resolving these contradictions, no comprehensive review has been undertaken to date. This research introduces specific recommendations to ensure the consistency of these transactions with Islamic standards and relevant legislative provisions as provided in national law. By bridging this gap, the study seeks to enhance the effectiveness and compliance of lease-to-own contracts in Palestinian Islamic banks, fostering a more robust and Sharia-compliant financial system.