Islamiclease(Ijara):

TheArabictermijarameansprovidingservicesandgoodstemporarilyforawage.Ijaraisa
modeofIslamicleasingcontract,involvingalessorandalessee,wherethelessortransfersthe
righttouseaspecificassettothelesseeforapredeterminedlengthoftimeandinreturnfor
someperiodicrentalpayment.Thelessor,however,retainstherightofownershipoftheasset
andislegallyboundtobeartherisksoftheasset,whichalsoincludesobligationstorepairany
damagecausednaturallyorduetowearandtear.Thelesseehastocompensateanydamageto
theassetarisingoutofhisnegligence.Islamicleaseisverysimilartoconventionallease,however,
ithassomedifferences. Somegenerallyagreedconditionsforijaraareasfollows:

RulesofIslamicLeasing(Ijarah):
Islamicleasefinancingfollowsomeruleincaseofsuchtransaction.Someoftheseruleshavethe
similaritywiththeconventionallease.Buttherearemanydifferencestoo.
1.Leasingisacontractwherebytheownerofsomethingtransfersitsusufructtoanother
personforanagreedperiod,atanagreedconsideration.
2.Thesubjectofleasemusthaveavaluableuse.Therefore,thingshavingnousufructatall
cannotbeleased.
3.Itisnecessaryforavalidcontractofleasethatthecorpusoftheleasedpropertyremains
intheownershipoftheseller,andonlyitsusufructistransferredtothelessee.Thus,anything
whichcannotbeusedwithoutconsumingcannotbeleasedout.Therefore,theleasecannot
beeffectedinrespectofmoney,eatables,fuelandammunitionetc.becausetheiruseisnot
possibleunlesstheyareconsumed.Ifanythingofthisnatureisleasedout,itwillbedeemed
tobealoanandalltherulesconcerningthetransactionofloanshallaccordinglyapply.Any
rentchargedonthisinvalidleaseshallbeaninterestchargedonaloan.
4.Theperiodofleasemustbedeterminedinclearterms.

5.Thelesseecannotusetheleasedassetforanypurposeotherthanthepurposespecified
intheleaseagreement.Ifnosuchpurposeisspecifiedintheagreement,thelesseecanuse
itforwhateverpurposeitisusedinthenormalcourse.Howeverifhewishestouseitforan
abnormalpurpose,hecannotdosounlessthelessorallowshiminexpressterms.
6.Thelesseeisliabletocompensatethelessorforeveryharmtotheleasedassetcausedby
anymisuseornegligenceonthepartofthelessee.
7.Theleasedassetshallremainintheriskofthelessorthroughouttheleaseperiodinthe
sensethatanyharmorlosscausedbythefactorsbeyondthecontrolofthelesseeshallbe
bornebythelessor.
8.Apropertyjointlyownedbytwoormorepersonscanbeleasedout,andtherentalshall
bedistributedbetweenallthejointownersaccordingtotheproportionoftheirrespective
sharesintheproperty.
9.Ajointownerofapropertycanleasehisproportionatesharetohiscoshareronly,andnot
toanyotherperson.
10.Itisnecessaryforavalidleasethattheleasedassetisfullyidentifiedbytheparties.
Example:AsaidtoB.Ileaseyouoneofmytwoshops.Bagreed.Theleaseisvoid,unless
theleasedshopisclearlydeterminedandidentified.
11.Therentalmustbedeterminedatthetimeofcontractforthewholeperiodoflease.Itis
permissible that different amounts of rent are fixed for different phases during the lease
period,providedthattheamountofrentforeachphaseisspecificallyagreeduponatthe
timeofeffectingalease.Iftherentforasubsequentphaseoftheleaseperiodhasnotbeen
determinedorhasbeenleftattheoptionofthelessor,theleaseisnotvalid.

Example(1):AleaseshishousetoBforatotalperiodof5years.Therentforthefirstyear
isfixedasRs.2000/permonthanditisagreedthattherentofeverysubsequentyear
shallbe10%morethanthepreviousone.Theleaseisvalid.
Example(2):Intheaboveexample,Aputsaconditionintheagreementthattherentof
Rs.2000/permonthisfixedforthefirstyearonly.Therentforthesubsequentyears
shallbefixedeachyearattheoptionofthelessor.Theleaseisvoid,becausetherentis
uncertain.
Thedeterminationofrentalonthebasisoftheaggregatecostincurredinthepurchaseofthe
assetbythelessor,asnormallydoneinfinancialleases,isnotagainsttherulesofShariah,if
bothpartiesagreetoit,providedthatallotherconditionsofavalidleaseprescribedbythe
Shariaharefullyadheredto.
12.Thelessorcannotincreasetherentunilaterally,andanyagreementtothiseffectisvoid.
13. The lease period shall commence from the date on which the leased asset has been
deliveredtothelessee,nomatterwhetherthelesseehasstartedusingitornot.
14.Iftheleasedassethastotallylostthefunctionforwhichitwasleased,andnorepairis
possible,theleaseshallterminateonthedayonwhichsuchlosshasbeencaused.However,
if the loss is caused by the misuse or by the negligence of the lessee, he will be liable to
compensatethelessorforthedepreciatedvalueoftheassetas,itwasimmediatelybefore
theloss.

FeaturesofIslamicLease:
Unlikethecontractofsale,theagreementofIjarahcanbeeffectedforafuturedate.
Rentshouldbechargedafterthedeliveryoftheleasedassettothelesseeandnotfrom
thedaythepricehasbeenpaid.Ifthesupplierhasdelayedthedeliveryafterreceiving
thefullprice,thelesseeshouldnotbeliablefortherentoftheperiodofdelay.
Therearetwoseparaterelationsbetweentheinstitutionandtheclient:oneofanagent
andtheotherofalessee.
Thelessormustowntheassetsforthefullleaseperiod.

 Ifthelesseedefaultsonpaymentsordelayspayments,thelessorcantchargecompound
interest.
Theleasedassetsuseisspecifiedinthecontract.

TypesofLeaseorIjara:
Threetypesofijaraarrangementscanexistaccordingtoshariaprinciples:
1. Leaseendingownership/leasewithownership(ijarawaiqtina):Inthisijaracontract,the
lessee owns the leased asset at the end of the lease period. This lease contract doesnt
containanypromisetobuyorselltheassets,butthebankmayoffera(verbal)unilateral
promiseoftransferofownershiporofferapurchaseschedulefortheasset.
Thelesseealsoisallowedtomakea(verbal)unilateralpromisetopurchasetheasset.The
purchasepriceisultimatelydecidedbythemarketvalueoftheassetoranegotiatedprice.
2. Operatinglease(operatingijara):Thistypeofijaracontractdoesntincludethepromiseto
purchasetheassetattheendofthecontract.Basically,thissetupisahirearrangementwith
thelessor.
3. Forwardlease(ijaramawsoofabilthimma):Thiscontractisacombinationofconstruction
finance(istisna)andaredeemableleasingagreement.Becausethisleaseisexecutedfora
future date, its called forward leasing. The forward leasing contract buys out the project
(generallyaconstructionproject)asawholeatitscompletionoftheproject.

Manyijaraproductsareonthemarketwithdifferentcombinationsofcontracts.Forexample,
Malaysianbased Maybank offers car financing with a combination of an ijara contract and
abuy(purchase)contract.ADCB(AbuDhabiCommercialBank)offersijarahomefinancing,as
doesSABB(SaudiBritishBank)Amanah.

PotentialofIjarah
TherearemanyIslamicfinancestructureswhereIjarahcanbeused.Islamicbanksusethismode
offinancingwiththepurposeofenablingcustomerstousedurablegoodsandequipmentsuch
asships,housing,heavymachinesandplantsinproductiveenterpriseswhomaybeunableto
buythemfortheirproductionpurposes.Ijarahhasalsohugepotentialasafinancingmodefor
retail, corporate and the public sectors and can also play a crucial role in promoting Islamic
financeindustry.Itcanbeusedasincentivetoeconomicdevelopmentasitisusuallylongterm
andofferspotentialforstimulatingproductiveindustries.
Leasing is an attractive mode of investment for Islamic banks because assets acquired under
these contracts are usually of high quality, marketable and maintain their market value well
above book value. And since the Islamic bank acquires the desired asset only when a client
requestsitandcommitshimselftoenterintoaleasecontractwiththebank,thepossibilityof
misuseoffundsandassetsisminimizedandthebankcanmakeaprofitbysettingtherentata
levelthatcovers,overtheleaseperiod,thepurchasepriceaswellasareturninlinewiththe
currentrateofmarkup.Infact,Islamicbankscangetvariableandfloatingreturnonlongterm
investments.AndalthoughIjarahisalongertermfinancinginstrument,aleasingcontractcanbe
reviewedperiodically.Thefinancingpartythusnottieddowntoafixedreturnthatmaynotbe
initsinvestmentgoals.
Furthermore, Ijarah offers the advantage of not requiring collateral and thus of simpler
repossessionproceduressinceownershipoftheassetlieswiththelessor.Italsomeansthatit
hasgreaterinbuiltstabilitytocontaininflationarypressuresintheeconomy.Thelessorisonly
exposedtoalowlevelcreditriskfromthelesseeastheleasetransactionisassetbacked.Ijarah
hasalsobecomepopularduetoataxadvantagesastherentalcanbeoffsetagainstcorporate
taxbythelessee.