Ijara

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Ijara
Two Days Specialized Training Workshop On
Islamic
Microfinance
Abdul Samad AlHuda CIBE
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What is Ijara?

• Transferring of usufruct of an asset to another
  person for an agreed period, at an agreed
  consideration

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Basic Rules of Ijara

• Ø  Anything, which cannot be used without
  consuming, cannot be leased out. e.g. Money,
  wheat etc.
• Ø      Leasing is not originally a mode of
  financing but it is a sale transaction. So all
  basic elements of lawful sale transaction must be
  present.
• Ø    It is necessary for valid lease that the
  leased asset is fully identified by the parties.

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Basic Rules of Ijara

• Ø  It is necessary for valid lease that the
  corpus of the leases property remains in the
  ownership of the lessor.
• Ø   The period of lease must be determined in
  clear terms.
• Ø The lease period shall start from the date on
  which the leased asset has been delivered.

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Liabilities of Parties 

• Lessor Responsibilities
• Ø      Since corpus of leased property remains in
  the ownership of the lessor therefore all
  liabilities of ownership are borne by lessor.
• Expenses
• Ø      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 example expenses of
  shipment and customs duty etc.

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Lessee Responsibilities

• Ø      Being user of the lease asset lessee can
  be made liable to any normally occurring wear and
  tear.
• Ø      The lessee cannot use the leased asset for
  any purpose other then the purpose specified in
  the lease agreement.
• Ø      If no such purpose is not specified in the
  agreement, the lessee can use it for whatever
  purpose it is use in normal course.

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Lessee as Ameen

• Ø      The lessee is liable to compensate the
  lessor for every harm caused to the leased asset
  by his misuse or negligence.

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Rental

• Ø  The rental must be determined at the time of
  contract for the whole period of lease.
• Ø  It is permissible that different amount of
  rent are fixed for different phases provided that
  the amount of rent for each phase is specifically
  agreed upon at the time of affecting a lease.
• Ø   The lessor cannot increase the rent
  unilaterally and any agreement to this effect is
  vied.

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Rental

• Ø      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).
• Ø      The rent or any part thereof may be
  payable in advance before the delivery of the
  asset to the lessee, but that amount so collected
  by the lessor shall remain with him as Amana and
  shall be adjusted towards the rent after its
  being due.

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In Case of Late Payment

• Ø      The lessor cannot charge an additional
  amount in case the lessee delays payment of the
  rent.
• Ø   Penalty of late payment is given to charity
  by lessee.

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Insurance of the Assets

• Ø Legally, it is required for all leasing
  companies to insure the leased asset. Presently
  Islamic banks insure its leased assets. However
  our BoK Ijara policy clearly stated that BoK will
  use Conventional Insurance as long as Takaful is
  not available.

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Termination contractual 

• Ø   Lease is binding contract.
• Ø  It cane be terminated by mutual consent.
• Ø The lessor may terminate it when the lessee
  doesnt pay the rent or fails to pay it on time
  or because of violation of any other term and
  condition of the agreement.

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Termination contractual

• Ø   With total destruction of the leased asset
• Ø    Upon the expiry of term.
• Ø  Two parties may terminate it before it begins
  to run.

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Difference Between Murabaha and Ijara 

• Murabaha is permissible for consumable and
  non-consumable assets while Ijara is permissible
  in non-consumable assets only. 
• Murabaha attributed to future date is invalid in
  Shariah. But leasing can be attributed to a
  future date.

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Difference Between Murabaha and Ijara

• A Murabaha cannot be transacted on a future date,
  as the sale would be executed simultaneously
  after taking delivery from the supplier. But in
  leasing it is permissible, because in leasing the
  assets remain under the risk and ownership of the
  lessor throughout the leasing period.

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Difference Between Murabaha and Ijara

• In Murabaha once the sale is completed the entire
  risk is shifted to the purchaser while in lessee
  only usufruct is transferred to the lessee and
  risks remain with the lessor. 
• In Ijara if the lessee acts as the banks agent
  and makes payment he is not required to inform
  the bank that he has taken possession as is the
  case in Murabaha but once he has taken possession
  the rent will start immediately.

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Difference Between Ijara and Conventional lease

• There are two types of contracts. Financial lease
  and loan for a car financing. Both these
  contract contain conditions, which are unlawful.
• Financing lease contain conditions of hire and
  purchase, which in not permissible in Shariah.
• Car financing or loan agreement contains
  condition of interest.
• Ijara contract doesnt contain any condition that
  makes the transaction void in Shariah

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Difference Between Ijara and Conventional lease 

• In Conventional Car Loan the costumer is
  responsible for all kind of loss or damage in the
  vehicle, irrespective of the circumstances being
  in his control.
• In Ijara all risk pertaining to ownership are
  borne by lessor.
• If the insurance company doesnt compensate the
  entire outstanding amount in case of total loss,
  the customer is liable to pay the balance.
• In Ijara lessor bears the risk of insurance claim
  settlement.

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Difference Between Ijara and Conventional lease

• If the leased vehicle is stolen or completely
  destroyed the conventional leasing company would
  continue charging the lease rent till the
  settlement of the total loan.
• Under Islamic system rent is consideration for
  usage of the leased asset and if the asset has
  been stolen or destroyed the concept of rental
  become void.

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Difference Between Ijara and Conventional lease

• In most contemporary lease an extra amount is
  charged if rent is not paid on time. This extra
  amount is the considered Riba and is Haram. This
  amount is taken by the leasing institution into
  their income.
• Under Ijara the lessee may be asked to undertake
  that if he fails to pay rent on its due date, he
  will pay a certain amount to charity.

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Difference Between Ijara and Conventional lease

• The Insurance expense of the asset is directly
  borne by the lessee.
• Takaful / insurance should be at the expense of
  the lessor and not at the expense of the lessee.
• Under conventional leasing contract the vehicle
  is automatically transferred in the name of the
  customer upon the completion of the lease period
  whether or not he want to purchase it.
• Under Ijara at the end of Ijara agreement the
  customer is not obliged to purchase the vehicle.

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ISSUES RELATE TO IJARAH
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Expenses Related To Ownership
Issue In certain transaction of Ijarah, all expenses related to the ownership is born by the customer. Solution All expenses other than expense related to normal wear and tear of the Ijarah asset should be born by the bank and may be included into the list price of Ijarah assets.

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Recovery of Rental

Issue The banks start recovering the rental as soon as he disburses the amount to the supplier and before actually receiving the Ijarah asset by the customer. Solution The banks should recover rentals only after the delivery of vehicle. It is an unanimous opinion of all the Sharaih Scholars that it is not allowed to recover rentals before delivery.
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Increase in Price of Ijarah Asset
Issue When the price increases before Ijarah Agreement, customer pays the short fall without getting joint ownership. Solution In all such cases, bank should give the proportionate owner in the Ijarah asset.
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Sale and Lease Back
Issue We have noted that bank enter into the sale and lease back transaction for just fulfilling the liquidity requirement of the client. Solution For just liquidity requirement this transaction should not be allowed. Therefore, banks should consult Shariah Adviosr in every case. This transaction should be allowed only for paying conventional debts.
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Sale and Lease Back
Issue We have noted that bank enter into the sale and lease back transaction for just fulfilling the liquidity requirement of the client. Solution For just liquidity requirement this transaction should not be allowed. Therefore, banks should consult Shariah Adviosr in every case. This transaction should be allowed only for paying conventional debts.
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Sale and Lease Back
Issue The sale and lease back transaction without signing proper sale agreement with the customer before the execution of Ijarah agreement. Solution The bank should execute the proper sale agreement with the customer before entering into lease agreement. Otherwise the transaction becomes questionable in the eyes of Shariah.
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