THE CONCEPT OF IJARA

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THE CONCEPT OF IJARA

• Dr. Muhammad Zubair Usmani
• Sharia Advisor
• Muslim Commercial Bank Ltd.
• Jamia Darul Uloom Karachi
• at AlHuda CIBE NIBAF Islamabad.

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BASIC RULES OF IJARA

• Transferring of usufruct not ownership
• To another person for an agreed price, at an
  agreed consideration.
• Subject of lease
• Valuable, Identified and Quantified
• Consumable things cannot be leased out
• Anything which cannot be used without consuming
  cannot be leased out e.g., money, wheat etc.

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BASIC RULES OF IJARA

• All Liabilities of ownership are borne by lessor
• Corpus of leased property remains in the
  ownership of the seller.
• Period of lease
• Must be determined in clear terms at the time of
  contract
• Lease for specific purpose only
• If no specific purpose is identified in the
  agreement, then it can be used for any purpose
  for which it is used in normal course

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BASIC RULES OF IJARA

• Lessee as Ameen
• The lessee is liable to compensate the lessor
  for every harm to the leased asset caused by any
  misuse or negligence. The leased asset shall
  remain in the risk of the lessor throughout the
  lease period.
• Lease of jointly owned property
• Is permitted and rentals shall be distributed
  between all the joint owners according to the
  proportion of their respective shares in the
  property.

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BASIC RULES OF IJARA

• Determination of Rental
• The rental must be determined at the time of
  contract for the whole period of lease.
• It is permissible that different amounts of rent
  are fixed for different phases during the lease
  period, provided that the amount of rent for each
  phase is specifically agreed upon at the time of
  effecting a lease.
• The determination of rental on the basis of the
  aggregate cost incurred in the purchase of the
  asset by the lessor, as normally done in
  financial leases, is not against the rules of
  Shariah.

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BASIC RULES OF IJARA

• Determination of Rental
• The lessor cannot increase the rent
  unilaterally, and any agreement to this effect is
  void.
• The lease period shall commence from the date on
  which the leased asset has been delivered to the
  lessee.
• Rental will be charged when the Leased asset is
  handed over to the lessee.

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IJARA AS A MODE OF FINANCING

• Leasing should not be interest-based loan or
  replacing interest with rent, rather it should
  comply with all of the following conditions of
  Islamic leasing

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IJARA AS A MODE OF FINANCING

• 1. The commencement of lease
• Unlike the contract of sale, the agreement of
  Ijarah can be effected for a future date. Hence,
  it is different from Murabaha.
• 2. Rent should be charged after the delivery of
  the leased asset to the lessee
• and not from the day the price has been paid. If
  the supplier has delayed the delivery after
  receiving the full price, the lessee should not
  be liable for the rent of the period of delay.
• 3. Different relations of the parties
• There are two separate relations between the
  institution and the client one of an agent and
  the other of a lessee.

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IJARA AS A MODE OF FINANCING

• 4. Difference between Murabahah and leasing
• A Murabahah attributed to a future date is
  invalid in Shariah. But leasing can be attributed
  to a future date.
• A Murabaha can not be transacted on a future
  date as the sale would be executed simultaneously
  after taking delivery from the supplier and
  seller would never bear its risk which Shariah
  does not permit . But in leasing it is
  permissible, because in leasing the asset remains
  under the risk and ownership of the lessor
  throughout the leasing period.

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IJARA AS A MODE OF FINANCING

• 5. Expenses consequent to ownership to the lessor
• As the lessor is the owner of the asset, he is
  liable to pay all the expenses incurred in the
  process of its purchase and its import to the
  country of the lessor for example expenses of
  freight and customs duty etc.
• 6. Lessee as Ameen
• The lessee is responsible for any loss caused to
  the asset by his misuse or negligence. He can
  also be made liable to any normally occurring
  wear and tear.

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IJARA AS A MODE OF FINANCING

• 7. Variable Rentals in Long Term Leases
• In this case the lessor has two options
• A lease contract can have a condition that the
  rent shall be increased according to a specified
  proportion (e.g. 5) after a specified period
  (like one year).
• He can contract lease for a shorter period after
  which the parties can renew the lease at new
  terms and by mutual consent

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IJARA AS A MODE OF FINANCING

• 8. Penalty for late payment of Rent
• The lessor cannot charge an additional amount in
  case the lessee delays payment of the rent.
  Penalty of late payment is given to charity by
  lessee
• 9. Termination of Lease
• If the lessee contravenes any term of the
  agreement, the lessor has a right to terminate
  the lease contract unilaterally. If not then it
  can be terminated through mutual consent only.
  However, in such a case he cannot charge rentals
  of remaining period. Further more, the
  destruction of the asset also terminates the
  lease. In the event of lessees death the lease
  will also be terminated

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IJARA AS A MODE OF FINANCING

• 10. Insurance of the assets
• If the leased property is insured under the
  Islamic mode of Takaful, it should be at the
  expense of the lessor and not at the expense of
  the lessee
• 11. The residual value of the leased asset
• Through a mutual agreement of Lease, after the
  expiry of the lease period, the corpus of the
  leased asset cannot be transferred to the lessee,
  otherwise it becomes hire purchase.
• It is a well-settled rule of Islamic
  jurisprudence that one transaction cannot be tied
  up with another transaction so as to make the
  former a pre-condition for the other.
• However, the lessor may enter into a unilateral
  undertaking to sell the leased asset to the
  lessee at the end of the lease period. This
  undertaking will be binding on the lessor only.

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IJARA AS A MODE OF FINANCING

• 12. Ijarah Wa Iqtina
• The lessor may sign a separate promise to
  gift/Sale the leased asset to the lessee at the
  end of the lease period, subject to his payment
  of all amounts of rent. The validity of this
  arrangement is subject to two basic conditions
• Firstly, the agreement of Ijarah itself should
  not be subjected to signing this promise of sale
  or gift.
• Secondly, the promise should be unilateral and
  binding on the promisor only.
• 13. Sub-Lease
• If the leased asset is used differently by
  different users, the lessee cannot sub-lease the
  leased asset except with the express permission
  of the lessor.

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SALE AND LEASE BACK

• When the client sells the asset to the bank the
  entire risk and rewards are transferred to the
  bank who is then is responsible for the ownership
  related expenses
• In this case the bank is allowed to lease the
  asset to the client but there are conditions
  which have to be followed to make the entire
  transaction Sharia compliant.
• There should be at least one year lease period
• There should be separate contracts for sale and
  lease
• The agreement to sell at the end of the lease
  must be separate
• The intention of the client is to avoid interest
  related transactions