Rent to Own Leases (Ijara wa iqtina’): Fringe Banking & Financial Distress

Legal Theory Blog posts about Regulating on the Fringe: Reexamining the Link Between Fringe Banking and Financial Distress (Indiana Law Journal, Forthcoming) on SSRN.

I’m interested in the guarantee mentioned below. Does Islamic Finance allow for a guaranteed return, even if done through Lease (Ijara)? Because Islamic Finance is not contained by one single regulatory system, some of the arguments made will be difficult to apply. However, given that Islamic Finance makes a claim of ethical perdominance, can we say that this sort of guarantee goes against the ethical framework Islamic finance is to promote?

Highlights from the abstract:

• Critics of fringe banking – products like payday loans, pawn loans, and rent-to-own leases – frequently argue that using these products causes borrowers to experience financial distress. This argument has enormous intuitive appeal: Fringe credit is very costly, and usually the borrowers who are forced to use it are already in a serious financial bind. Taking on additional debt and paying high costs for it, the reasoning goes, drives them over the brink.

• This Article represents the first attempt to uncover the relationship between fringe banking and financial distress by systematically analyzing the structure of fringe credit markets and characteristics of specific fringe credit transactions.

• I argue that the link between fringe banking and financial distress is dubious. Because fringe creditors cannot rely on borrowers’ credit scores to predict whether they will be repaid, creditors structure fringe credit products to virtually guarantee repayment.

• Because repayment is guaranteed by the structure of the transaction, it is nearly impossible for borrowers to take on unmanageable debt loads.

• Policymakers lump fringe credit together with other forms of credit that do cause financial distress, resulting in misguided and overly broad policies.