Ijarah 4 Month-Complete

8/12/2019 Ijarah 4 Month-Complete

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IJARAH


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Concept of Ijarah

Process of Ijarah

AAOIFI Sharia Standard # 9

Promise to Lease

Acquisition of the Asset

Subject Matter of Ijarah

Rules governing Lease Rentals

Guarantees in Ijarah Contract

Transfer of Ownership

Presentation Outline


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Concept of Ijarah


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Literally Ijarah means To give something on

rent

The term Ijarah is used in two context:

1. To employ the services of a person on wages

e.g. A hires a porter at the airport to carry

his luggage.

2. Another type of Ijarah relates to paying rentfor use of an asset or property defined as

LAND in Islamic Economics

IJARAH


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Ijarah is an Islamic alternative of Leasing.

Leasing backed by an acceptable contract is an

acceptable transaction under Shariah.

The question of whether or not the transaction

of leasing is Shariah compliant depends on theterms and conditions of the contract.

Several characteristics of conventional

agreements may not conform to Shariah, thus

making the transaction un-Islamic and thereby

invoking a prohibition.

IJARAH


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Process of Ijarah


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CUSTOMERISLAMIC BANK

The customer approaches the Bank with therequest for financing and enters into a promiseto lease agreement.

The Bank purchases the item required forleasing and receives title of ownership from thevendor

The Bank makes payment to the vendor

VENDOR

. .Agreement-1

IJARAH


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CUSTOMERISLAMIC BANK

The Bank leases the asset to the customer afterexecution of lease agreement.

The customer makes periodic payments as perthe contract.

Title transfers to the customer at the end of

lease term.

VENDOR

. .Agreement-2

IJARAH


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Rules of Ijarah


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Master Agreement

A master agreement may be drawn upcovering a number of Ijarah transactionsbetween the institution and the customer,setting out the general terms and conditions

of agreement between the two parties.

There may either be a separate lease contract

for each transaction, or alternatively the twoparties may exchange notices of offer andacceptance by referring to the terms and

conditions contained in the masteragreement.

Promise to Lease


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Security Deposit

It is permissible to require the lease promisor(customer) to pay a sum of money to theinstitution to guarantee the customerscommitment of accepting a lease on the asset

and the subsequent obligations.

If the customer breaches his promise, the

actual damage/loss may be recovered fromsuch security deposit

Promise to Lease


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The lease contract should be preceded byacquisition of either the asset to be leased or

the usufruct of that asset.

If the asset is to be acquired from thecustomer, or from a third party, the Ijarah

contract shall not be executed unless anduntil the institution has acquired that asset.

An asset may be acquired from a party andthen leased to the same party (Sale &Leaseback) provided the Ijarah transaction

is not stipulated as a condition of thepurchase contract.

Acquisition of Asset


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Agency

An institution may appoint one of itscustomers to act as its agent in acquiring onits behalf an asset that is desired by thatcustomer. However, It is preferred that the

agent is someone other than the customer.



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Joint Ownership

A customer may jointly acquire an asset thathe wishes to lease with the institution, andthen lease the institutions share of the assetfrom the institution (Ijarah-tul-Musha).

The rental specified as receivable by theinstitution should only be in proportion to its

share in the ownership of the asset.



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The lease contract is a binding contractwhich neither party may terminate or alter

without the consent of other party.

Duration

The duration of an Ijarah contract must bespecified in the contract.

The period should commence on the date ofexecution of the contract.

Execution of Ijarah


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No rental is due for the period between thecontract date and the date of actual delivery,

if the lessor fails to deliver the asset on thedate specified in the Ijarah contract.

Subject Matter

The leased asset must be capable of beingused while preserving the asset, and the

benefit from an Ijarah must be lawful inSharia.

Subject matter may be a share in anundivided asset held in common with thelessee.

Execution of Ijarah


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The lessee must use the leased asset in asuitable manner or in conformity with

common practice / Shariaa rulings.

The lessor must accept the responsibilityfor any defects of the leased asset which

impair the intended use of the asset, eitherby his own doing or as a result of eventsoutside his control.

If the benefit from the leased asset isimpaired wholly or partially as a result of the

lessees misconduct, the lessee is obliged torestore or repair the usufruct.

Execution of Ijarah


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Major Maintenance

The lessor is liable to undertake Major

Maintenance of the asset that is required tokeep the asset in the condition necessary toprovide contractual benefits under the lease.

The lessor may delegate to the lessee suchtask at the lessors cost.

Ordinary Maintenance

The lessee should carry out operating or

periodical (ordinary) maintenance.

Execution of Ijarah


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Insurance of the asset

The lessor may take out permissibleinsurance on the leased asset wheneverpossible

Such insurance expenses must be borne bythe lessor which may be taken into accountimplicitly when the lease rental is to be fixed.

The lessor may delegate to the lessee suchtask at the lessors expense.

Execution of Ijarah


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Lease Rentals

The rental must be specified, either as lumpsump or by installments.

The lessors entitlement to the rental starts

from the time when the lessee starts tobenefit from the asset or once the lessormakes the usufruct of the asset available to

the lessee.

Execution of Ijarah


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Variable Rentals

In case the rental is subject to changes

(floating rental), it is necessary that the amountof the rental of the first period of Ijarahcontract be specified.

It is then permissible that the rentals forsubsequent periods be determined according toa certain benchmark.

The benchmark must be based on a clearformula which is not subject to dispute and

should be subject to a ceiling, on bothmaximum and minimum levels.

Execution of Ijarah


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Delay in Payment

No increase in the rental due may bestipulated by the lessor in case of delay inpayment by the lessee.

It may be provided in the contract of Ijarahthat a lessee who delays payment for no goodreason undertakes to donate to charitable

causes a certain amount or percentage ofthe rental due.

Guarantees


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If the lessor sells the leased asset to thelessee, the Ijarah contract is terminated dueto transfer the ownership of the asset.

The lessor may sell the leased asset to a thirdparty other than the lessee, and title to the

asset together with the rights and obligationsof the lessor under the Ijarah contract isthereby transferred to the new owner.

Selling of Leased Asset


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In case of total destruction of the leasedasset, the Ijarah contract is terminated if itis concluded on an identified asset. In sucha case, it may not be stipulated that the restof the installments should be paid.

The leased asset in the possession of thelessee is held by the lessee in a fiduciarycapacity on behalf of the lessor. The lessee

will be held liable for any damage ordestruction of the leased asset due to hismisconduct or negligence.

Destruction of Asset


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Partial Destruction

In case of the partial destruction of the leased

asset in a manner that impairs the benefitsexpected from the asset, the lessee mayterminate the Ijarah contract.

Both the lessee and the lessor may also agreeto amend the rental in case of partialdestruction of the leased property.

The lessor is not entitled to rent for theperiod during which the lessee was not able

to benefit from the asset.



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If the lessee stops using the leased asset orreturns it to the owner without the ownersconsent, the rental will continue to be due inrespect of the remaining period of Ijarah, andthe lessor may not lease the property toanother lessee for this period.



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The lease contract can be terminated bymutual consent but:

It is not permissible for one party toterminate it except in case of forcemajeure or there is a defect in the leased

asset that materially impairs its use.

The lessor may stipulate that the Ijarah

contract be terminated if the lessee does notpay the rent or fails to pay it on time.

An Ijarah contract does not terminate withthe death of either party thereto.

Termination of Contract


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An Ijarah may be renewed for another term,and such renewal may be made:

before the expiry of the original term or

automatically by adding a provision in thenew contract for such renewal when thenew term starts.

Renewal of the Contract


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In Ijarah Muntahia Bittamleek, the method oftransferring the title to the lessee can be oneof the following:

a) A promise to sell for a token or otherconsideration, or by accelerating the

payment of the remaining amount ofrental, or by paying the market value ofthe leased property.

b) A promise to give it as a gift (for noconsideration).c) A promise to give it as a gift, contingent

upon the payment of the remaininginstallments.



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The transfer of title must be evidenced in aseparate document independent of the contractof Ijarah Muntahia Bittamleek and cannot betaken as an integral part of Ijarah contract.

A promise to transfer the ownership is a binding

promise by the lessor. Such promise is bindingon the lessor only, while the lessee has theoption not to proceed.

In cases of transfer of ownership by way of giftor sale, it is necessary that a new contract bedrawn up to affect the transfer of ownership.



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Transfer of the ownership in the leasedproperty cannot be made by executing, along

with Ijarah, a sale contract that will becomeeffective on a future date.



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Difference b/w Conventional Lease &

Ijarah


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Difference b/w Conventional Lease & Ijarah

1. The Lessor cannot increase the rent

unilaterally

2. Expenses to be borne by the parties:

Lessor-- expenses relating to the corpusof the asset i.e. insurance, accidentalrepairs etc. will be borne by the lessor

Lessee-- actual operating/overheadexpenses related to running the asset willbe borne by the lessee

Conventional Lease Vs Ijarah


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Sale & Leaseback Guidelines


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In Sale and Lease Back (SLB) transaction, Customer

requires finance for an asset already in the ownership

of the Customer.

Ideally SLB transactions should be avoided and this

option should not be offered to the Customer in the

initial interaction as a regular financing solution.

It should be used in exceptional cases and care should

be taken to ensure that the transaction is genuine and

not merely a source of liquidity /overdraft facility or a

substitute of personal financing.

Sale and Lease Back


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If the leased asset was purchased from the lesseebefore it was leased back to the lessee on the

basis of Ijarah Muntahia Bittamleek, a(reasonable) period of time, between the leasecontract and the time of the sale of the asset tothe lessee, must have expired, to avoid inah.

This period must be long enough (one year as perthe interpretation of MBLs SSB) so that the

leased property or its value could have changed.

Sale and Lease Back


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Sale and Lease Back may be allowed in

following cases:A. Financing of Newly Imported Asset

(machinery, equipment etc)

B. Replacement from Conventional to

Islamic Financing

(for detailed process flow, see PDSC Policy # 25 dated

December 16, 2005)

Sale and Lease Back


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A. Financing of Newly Imported Asset

In cases where the Customer has already opened an

LC through another Bank (without Agency Agreement)

and requires funds to retire the LC alongwith Islamic

Lease financing from MBL, SLB mechanism may be

used.

Here it is important to note that the imported asset

belongs to the Customer and not to that Bank,

because in this case the LC opening Bank has just

acted as an agent for the Importer

Therefore, in order to lease the asset, MBL needs to

purchase the asset from the Customer.

Sale and Lease Back


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Sale and Lease Back is not allowed for

Financing of Old Assets i.e. already acquired. Any deviations from the SLB transactions

defined above would require separate approval

from the Shariah Advisor alongwith the process

to be followed.

Sale and Lease Back


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Ijarah Documentation


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Letter of Agency

Lease Agreement

Undertaking to Purchase

Sale Deed

Undertaking to Lease

Sequence Documents


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In case the asset requires some time for

erection/installation time, the rentals will start

after the asset is in a useable condition.

Total cost of the asset must be determined at

the time of execution of the Lease Agreementand will include all ownership related costs (such

as duties, taxes, transportation etc.)

The rentals for the first period must be fixed at

the time of execution of Lease Agreement and

will remain fixed till the first rental revision date

Ijarah Documentation


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Practical Issues


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Expenses such as Import duties, taxes etc are

not added to the total Cost of the Asset.

Where client himself arranges Insurance:

No Insurance Agency agreement is

executed with the Client

Insurance expense is not reimbursed to

the Client.

In case of loss/damage, the insurance claim

received is shared with the client although theclient has no right to claim such benefit.

Practical Issues


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Sale & Leaseback transactions:

Sale agreement must be executed before

entering into Lease agreement. There

should be a time lag between the

execution of two agreements.

Asset cannot be sold back to the client

before one (1) year passes.

Practical Issues


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Lease Rentals start only after the asset is fully

installed and becomes operative in nature. In

cases of import of asset via Usance LC, rental

should not be delayed till the actual outflow of

funds from the Bank.

At the time of maturity or early termination of

Lease agreement, a Sale deed must beexecuted to effect transfer of ownership.

Practical Issues


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Application


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For long and medium term fixed assetfinancing like plant, equipment, generators

etc.

Retail products like Car financing, Durable

financing, Home Financing

Application


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Unique Selling Proposition

Pakistans first truly Shariah-compliant

Car Financing Scheme.

Available in tenures of 3, 4 and 5 years. Available for locally assembled as well as

Imported cars.

Also available for Used Cars

No application Fee

Car Ijarah

Application


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Ijarah Financing for Assets Imported

via Sight LC


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The Importer opens the LC as an agent of the

Bank.

The Importer places order with the foreign

supplier on behalf of the Bank.

Upon receipt of documents the Bank makes

payment to the foreign supplier.

The bank will enter into an Ijarah agreement

with the customer.

Import Ijarah


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A specified rental will be agreed at this point in

time. However, rental would be charged once

the asset becomes workable in nature.

After the term of Ijarah agreement iscompleted, the bank may sell the asset to the

importer at an agreed price.

Import Ijarah


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Ijarah Financing for Assets Imported

via Usance LC


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After necessary approvals, MBL and the customer

enters into an Ijarah Agency Agreement listing the

assets to be imported .

Under Ijarah agency, MBL appoints the customer as

its agent to import the asset and pay relevant duties,taxes, transportation, and other charges to port

authorities for releasing the asset.

All such payments made by importer shall be

reimbursed by MBL and will constitute part of total

cost of the asset.

Process Flow


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The customer provides an Undertaking to Lease

for taking the asset on Ijarah, once the asset is

installed and becomes usable in nature .

The customer now opens a Usance LC under Ijarah

agency from Meezan Bank counter. Upon arrival of the import documents, the bank

delivers the documents to the customer (acting as

banks agent) as per the normal checking &

acceptance process.

Process Flow


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The customer takes delivery of the asset as banks

agent and pays the applicable duties and taxes etc.

At the time of execution of Lease agreement,

forward cover is taken to fix the cost of the

imported goods in PKR. For determination of the rentals for the first period

(usually 6 month), profit rate will be estimated

based on the respective Benchmark rate (like

KIBOR) and rentals for the first period will be

fixed.

Process Flow


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The fixation of rent will not be delayed till the

outflow of funds from the bank.

After installation of asset, MBL and the customer

enters into an Ijarah Agreement and the lease

rentals starts from the following month. In case the asset requires some time before it

becomes operative/workable, a grace period will be

given and the rentals will commence after its

installation.

Process Flow


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What types of financing modes are possible for financing of following

assets/goods: ( Murabaha, Ijarah or Dim Musharakah)

Car

Generator

Cotton

Factory

Rice

Oil

Machinery

Yarn

HouseSalary

Exercise


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THANK YOU

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