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Introduction to Ijarah
• Ijarah is a term of Islamic Fiqh
• Literally, it means “To give something on rent”
• The term “Ijarah” is used in two situations:
1. It means ‘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 rent for use of an asset or property defined as “LAND” in Islamic Economics
Ijarah
• 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 the
terms 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 as a mode of financing
• Risk and rewards of ownership lies with the owner i.e. any loss to the asset beyond the control of the lessee should be borne by the Lessor.
• Late payment penalty cannot be charged to the income of the Lessor.
• Lease and Sale agreement should be separate and non contingent.
Ijarah-Key Difference
Lease of Usufruct
Ijarah: Transfer of Ownership to Lessee
Standard Ijarah Ijarah Wa iqtina
• Lessee benefits from asset but no transfer of ownership.
• Only usufructs are transferred.
• Ijarah is conducted solely for the purpose of transfer of ownership
• Independent/separate contract of sale is formed at the end of lease agreement.
Process of Ijarah
CUSTOMER
MECHANICS
ISLAMIC BANK
The Bank makes payment to the vendor
The Bank purchases the item required for leasing and receives title of ownership from the vendor
The customer approaches the Bank with the request for financing and enters into a promise to lease agreement.
VENDOR. .
Agreement-1
Ijarah
CUSTOMER
MECHANICS
ISLAMIC BANK
The customer makes periodic rental payments as per the contract
The Bank leases the asset to the customer after execution of lease agreement.
VENDOR
At the end of the tenure customer can purchase the asset from the bank with the help of separate Sale agreement.
. .Agreement-2
Ijarah as a mode of financing
Rules governing Ijarah
• Rules governing Ijarah are similar to the rules
governing sale.
• Because in both cases something is transferred from one person to another
The only difference is:
• In case of sale, title of property is transferred
to Buyer
• In case of Ijarah, title remain with the Lessor
• Only the use of the property is transferred to
Lessee
Ijarah
1. Leasing is a contract where the owner of an
asset transfers its use to another person against
an agreed price.
2. However, ownership of the leased asset remains
with the Lessor
Rules of Ijarah
3. Since ownership of the leased asset remains
with the Lessor, all rights and liabilities relating
to ownership are borne by the Lessor.
All rights and liabilities relating to use are borne
by the Lessee e.g. “A” gives his house to
“B” on rent.Property taxes are to be borne by
the owner. Water tax, electricity bill etc are to
be borne by the Lessee
Rules of Ijarah
4. Subject matter of Lease should be Valuable,
Identified and Quantified.
5. The period of Lease must be determined in
clear terms.
6. The Lessee is responsible for damage to the
asset caused by fraud or negligence.
7. Any damage to the asset not caused by the
Lessee’s neglect, is to be borne by the Lessor.
Rules of Ijarah
8. Normal maintenance is Lessee’s responsibility
9. Lease rentals for the entire lease period must
be fixed at the time of Lease Agreement;
a) Different amounts of rents can be fixed for
different periods, but they must be known.
b) The rent may be tied to a known benchmark,
acceptable to both the parties.
Rules of Ijarah
10.The Lessor cannot increase the rent unilaterally
11.The Lessor may receive the rent in advance, but
such payment should be recorded as an Advance
rental. Balance Sheet should reflect this payment
as Liability, since rent can be received only for
use of an asset.
Rules of Ijarah
12.The Lease period will start when the asset has
been delivered to the Lessee
- in a usable condition
- whether or not the Lessee has started using it
13.If the leased asset is destroyed, the lease will
terminate.
14.If the Lessee is at fault, he is liable to
compensate the Lessor for the loss
Rules of Ijarah
• If the Lessee contravenes any term of the Lease
agreement the Lessor may unilaterally terminate
the agreement
• If there is no contravention, the agreement can
only be terminated by mutual consent
• Conventional Financial Lease agreements give
termination right to Lessor in all cases. This is
contrary to Shariah laws
Termination of Ijarah
Description Conventional Lease(Non-Islamic)
Islamic Concept (Ijara)
1. Penalty on delay rental Income of the lessor Penalty shall be used as a charitable purpose.
2. Rental due Before possession After possession
2. Pre rental before the delivery of leased asset
Can be possible Prohibited and Haram
3. Even if no contravention on the part of the lessee, lessor can terminate the contract unilaterally
Yes ( in some cases lessor has been given unrestricted power)
No
DIFFERENCE BETWEEN CONVENTIONAL LEASE & IJARA
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Explanation:
The contract is invalid because fuel cannot be rented out because it cannot maintain its corpus when it is used.
Case:
The Islamic Bank has entered into a Ijarah contract with M/s Pak Petroleum Ltd. to supply fuel worth Rs. 5 Million for five years. The rent has been fixed to be Rs. 10,000 /= per month. Is this Ijarah contract valid?
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Explanation:
Since the subject matter is not in usable form, therefore, the rental may start after it is in usable form i.e. after 31st March 2008
Case:
The Islamic Bank has rented out a building to M/s Basheer Sons on January 01, 2008. The building is under renovation which would finish within three months. The Ijarah Agreement has been signed and bank is charging the rent from the date of signing the Ijarah Agreement.
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Explanation:
This clause is making selling of the leased asset contingent upon the Ijarah agreement; therefore, the contract would be invalid.
Case:
Ijarah contract contains a clause that the asset would be sold to the lessee after the lease period if he makes the rental payments on time.
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Explanation:
The lease is valid since the rents have been fixed at the beginning of the Ijarah period.
Case:
The banks leases a machinery to Mr. B for 5 years. The rent for the first year is fixed as Rs. 20,000/- per month and it is agreed that the rent of every subsequent year shall be 10% more than the previous one.
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Basic Rules of Ijarah
17. If the leased asset has totally lost the function for which it was leased, and no repair is possible, the lease shall terminate on the day in which such loss has been caused. However, if the loss is caused by the misuse or by the negligence of the lessee, he will be liable to compensate the lessor for the depreciated value of the asset as, it was immediately before the loss.
