(Syariah Financial Accounting)

IJARAH

Ijarah in the Arabic dictionary means rent, wages, services and rewards. Ijarah or commonly
referred to as renting a lot done by people in a variety of needs or their needs which are
usually used in the period of daily, monthly, and yearly.

In the opinion of Malikiyah, ijarah is a contract that gives ownership rights to the benefits of
goods or objects that are changed for a certain period in exchange for benefits that are not
derived from benefits. Whereas in the opinion of Hanafiyah Ijarah is a contract of benefits in
return for assets.

So the conclusion of the definition of ijarah is the transfer of a contract of use rights
(expediency) on an object or certain items, with lease payments without being followed by
the transfer of ownership of the object or goods leased and the contract for benefits with
benefits agreed between the two parties.

Pillars and Ijarah Requirements (tenancy)

According to jumhur ulama, there are 4 pillars of ijarah namely:

 Aqid (people who contract)

 Shigat contract (consent and qobul)
 Ujrah (wages)
 The benefits

According to Hanafiyah scholars, the pillars of ijarah are consent and qobul, among others
by using several sentences: al-ijarah, al-isti'jar, al-iktira 'and al-ikra'.

The terms of the ijarah agreement include:

The conditions for the two people who have the mind are baligh and understanding.
Both parties who made the agreement stated their willingness to do the ijarah agreement.
The benefits that are the object of ijarah must be clearly and clearly known.
Ijarah objects can be submitted and used directly.
The object of ijarah must be something that is permitted by shara '.

ijarah agreement is a transfer agreement for the right to use (benefit) for an item within a
certain time with a lease payment (ujrah) without being followed by a transfer of ownership
of the item

ijarah type:
1. Pure Ijarah (pure rent)
is an ordinary lease where the party still has the same position as the initial agreement, that
is between the leasing party and the party who leases the goods. After the rental period
ends, the parties return to their respective positions.
2. al-ijarah wal iqtina or mutahiyah bi Tamlik (IMBT)

lease with option rights at the end of the lease period, to buy the leased item. in the lease,
the rental payment includes installments on the cost of goods. The renting party (in this
case the bank for example) promises (wa'ad) to the lessee to transfer ownership of the
object after the lease period ends. so, the position of multi and customer will change at the
end of the rental period. finance companies originally are the owner of the goods as the
renting party, will turn into a seller at the end of the rental period. likewise the customer,
who had acted as a tenant, will turn into a buyer at the end of the lease period.

In Islamic banking practices, the IMBT scheme can be used to purchase homes using the KPR
system, where the goods in the IMBT principally belong to the customer concerned.

Example 1:

Bank Shari’ah Berhad entered into an ijarah contract with Takaful Berhad to lease equipment
for a period of 3 years. Bank Shari’ah Berhad purchased an equipment from a local trader on
1st of January 2000 for RM60,000. The Bank also incurred legal fees of RM500 relating to the
ijarah contract, which the bank considered to be material.

Other details about the ijarah are as follows:

Fair value of equipment:

At the beginning of 2000 RM60,000

At the end of the lease
i.e. 31 December 2002 RM2,000
Number of installments on quarterly basis 12
Rentals at the end of each quarter RM6,000
Estimated useful life 3 years
Estimated residual value at the
end of useful life RM4,000
Estimated expenditure incurred
in the second year RM1,200

Required:
(a) Prepare journal entries to record the above ijarah
contract in the books of Bank Shari’ah Berhad assuming
the lease was treated as Ijarah Muntahia Bitamleek
through sale for a token consideration (agreed to be
equivalent to 50% of the estimated residual value at
the end of useful life) for the following periods:
• At the beginning of ijarah;
• On receipt of first rental;
• At the end of first year; and,
• At the end of ijarah term.
(b) Explain the differences between Ijarah Muntahia Bitamleek (as defined by the AAOIFI FAS
8) and Al-Ijarah Thumma Al-Bay’ (AITAB) as practiced by Malaysian financial institutions;
(c) Outline the contractual conditions of ijarah financing
as prescribed by the shari’ah.

Example 2:

Bank Islamiah Malaysia Berhad has entered into an ijarah contract with Amal Sdn. Bhd. To
lease an equipment for a period of 3 years. The Bank purchased a specialized equipment from
a local trader on the 1st of January 2004 for RM1,500,000 and incurred transportation cost of
RM50,000. The Bank also incurred legal fee of RM15,000 relating to the ijarah contract, which
the bank considered to be material. Both parties have agreed that the installments should be
paid every quarter. The rental payment was agreed RM60,000 per month. The fair value of
the equipment in 3 years time is expected to be RM100,000 based on the estimate of certified
valuer. At the beginning of the year 2004, Amal Sdn. Bhd. Incurred repair cost of RM50,000
to enable the equipment to be used properly. In the same year, Amal also found technical
default in the equipment and incurred RM30,000 to repair the equipment necessary to retain
its full working order. Every year, Amal Sdn. Bhd. incurred routine maintenance costs due to
wear and tear amounting to RM1,500 per year.

Required:

(a) Prepare journal entries to record the above ijarah contract in the books of Bank Shari’ah
as Ijarah Muntahia Bitamleek through equivalent value method as prescribed by AAOIFI FAS
8 for the following periods:
• At the beginning of ijarah
• On receipt of first rental
• At the end of first year,
• At the end of second year, and,
• At the end of ijarah term.

(b) Determine the profit on ijarah financing from year 1 to year 3.

(c) Prepare journal entries to record the above ijarah information as required in part (a)
according to Al-Ijarah Thumma Al-Bay’ (AITAB) financing as practiced by most Malaysian
financial institutions.

Example 3:

Bank Shari’ah Berhad entered into an ijarah contract with Takaful Berhad to lease equipment
for a period of 3 years. Bank Shari’ah Berhad purchased an equipment from a local trader on
1st of January 2000 for RM40,000. The Bank also incurred legal fees of RM300 relating to the
ijarah contract, which the bank considered to be material.

Other details about the ijarah are as follows:

Fair value of equipment:
At the beginning of 2000 RM40,000
At the end of the lease
i.e. 31 December 2002 RM1,000
Number of installments on quarterly basis 12
Rentals at the end of each quarter RM5,000
Estimated useful life 3 years
Estimated residual value at the
end of useful life RM3,000
Estimated expenditure incurred
in the second year RM1,100

Required:
(a) Prepare journal entries to record the above ijarah contract in the books of Bank Shari’ah
Berhad assuming the lease was treated as Ijarah Muntahia Bitamleek through sale for a token
consideration (agreed to be equivalent to 50% of the estimated residual value at the end of
useful life) for the following periods:
• At the beginning of ijarah;
• On receipt of first rental;
• At the end of first year; and,
• At the end of ijarah term.

(b) Explain the differences between Ijarah Muntahia Bitamleek (as defined by the AAOIFI FAS
8) and Al-Ijarah Thumma Al-Bay’ (AITAB) as practiced by Malaysian financial institutions;

(c) Outline the contractual conditions of ijarah financing as prescribed by the shari’ah.

(Syariah Financial Accounting)

Exercise 4
Bank Islamiah Malaysia Berhad has entered into an ijarah contract with Amal Sdn. Bhd. To
lease an equipment for a period of 3 years. The Bank purchased a specialized equipment from
a local trader on the 1st of January 2004 for RM1,000,000 and incurred transportation cost of
RM40,000. The Bank also incurred legal fee of RM13,000 relating to the ijarah contract, which
the bank considered to be material. Both parties have agreed that the installments should be
paid every quarter. The rental payment was agreed RM50,000 per month. The fair value of
the equipment in 3 years time is expected to be RM100,000 based on the estimate of certified
valuer. At the beginning of the year 2004, Amal Sdn. Bhd. Incurred repair cost of RM40,000
to enable the equipment to be used properly. In the same year, Amal also found technical
default in the equipment and incurred RM20,000 to repair the equipment necessary to retain
its full working order. Every year, Amal Sdn. Bhd. incurred routine maintenance costs due to
wear and tear amounting to RM1,400 per year.

Required:

(a) Prepare journal entries to record the above ijarah contract in the books of Bank Shari’ah
as Ijarah Muntahia Bitamleek through equivalent value method as prescribed by AAOIFI FAS
8 for the following periods:
• At the beginning of ijarah
• On receipt of first rental
• At the end of first year,
• At the end of second year, and,
• At the end of ijarah term.

(b) Determine the profit on ijarah financing from year 1 to year 3.

(c) Prepare journal entries to record the above ijarah information as required in part (a)
according to Al-Ijarah Thumma Al-Bay’ (AITAB) financing as practiced by most Malaysian
financial institutions.