Meezan Bank Car Leasing 'JARAH'

CORPORATE FINANCE II
TERM PAPER





COURSE INSTRUCTOR
Dr. Shahid A. Zia




PREPARED BY
M. Hasan Rabbani




Meezan Bank Car Leasing 'JARAH'

TABLE OF CONTENTS

I Overview of Ijarah
DeIinition and salient Feature oI Ijarah...............3
What is leasing and Types oI lease............................................4
Lease Term and Residual value......................5
Sale and Lease Back and Direct Leasing........................................6
II Lease as mode of financing

DiIIerent Relations oI the Parties................................................10

DiIIerence between Murabaha and Leasing.............................. 10

The Residual value oI the leased Asset ...............................14

III Ijarah - Islamic bank (Meezan Bank)
Basic rules governing Leasing under Islamic Law.........................................19
Advantages oI Ijarah ...............................21

Basic Features (Normal Ijarah)...........22

Residual Value Ijarah.........22

Fatwa Ijarah..................25

Eligibility Criteria...................................27
Application Procedure.................................................28

Conclusion and Recommendation
References


Meezan Bank Car Leasing 'JARAH'

Overview of Ijarah

Definition and salient Feature of Ijarah
Ijarah is an Islamic alternative oI Leasing. Leasing backed by an acceptable contract is an
acceptable transaction under Shariah.'Ijarah is a contract whereby the owner oI an asset, other
than consumable, transIers its usuIruct to another person Ior an agreed period at an agreed
consideration.
Salient Feature of Ijarah
Contrary to Finance Lease, in Ijarah the ownership oI the assets remains with Lessor (the bank)
and only its right oI usage is transIerred to the lessee. Until the assets to be leased are delivered
to the lessee, no lease rentals become due and payable. (i.e. Ijarah cannot be recorded until the
subjected asset is delivered to the lessee.)The title oI the assets remains with the Lessor during
the entire lease term.The Lessor bears all the risk and reward associated with the ownership to
the asset. All cost associated with the asset to bring it into usable Iorm and condition should be
borne by the lessor.

Types/Classification of Ijarah

Operating Ijarah
Operating Ijarah is a lease that does not include a promise that the legal title in the leased asset
will pass to the lessee at the end oI the lease.
Ijarah Muntahia Bittamleek (Ijarah wa Iqtina)
It is a lease that concludes with the legal title in the asset passing to the lessee aIter Ijarah. Ijarah
Muntahia Bittamleek includes:

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Ijarah through giIt. Ijarah & transIer oI legal title at the end oI the lease Ior a token consideration
or other amount as speciIied in the lease. Ijarah through transIer oI title prior to the end oI lease
at a price pre-decided.

Ijarah tul Musha or 1oint ownership Ijarah
It is a lease where Bank & customer jointly owned the leased asset. Bank gives its share to the
customer on lease. AIter the term oI Ijarah, the treatment is similar to Ijarah Muntahia
Bittamleek.

What is Leasing

Leasing is, in essence, an agreement between two parties Ior the rental oI property (land or
asset). It allows one party, the Lessee, to use an asset or property owned by another party, the
Lessor. In this regard, leasing is equivalent to an Ijara, an Islamic mode oI acquiring property.
The lessee makes the economic use oI the lessor`s assets and pays in the Iorm oI a rental Ior this
privilege.


Types of Leases

Leases can be conducted in several diIIerent ways by varying the terms and conditions oI the
contract. However, these can be divided in two broad categories - Finance Leases and Operating
Leases.


1. Operating Lease

An Operating Lease is a pure rental agreement with three distinctive Ieatures: (i) the cost oI the
asset is not Iully amortized over the lease period, (ii) the lessor provides maintenance oI the
asset, and (iii) the asset is usually returned to the lessor. ThereIore, the lessee has the advantage
oI procuring an asset, utilizing it Ior its beneIit and returning the same when it has served its
purpose.

2. Finance Lease

A Finance Lease is in essence similar to a loan because substantially all risks and rewards related
to the leased assets pass on to the lessee. It is mainly characterized by (i) the asset being Iully
amortized over the lease period, (ii) the lessee is responsible Ior maintenance costs, and (iii) the
Meezan Bank Car Leasing 'JARAH'

ownership is usually transIerred to the lessee at the end oI the lease. In this respect, the
involvement oI the lessor is restricted to Iinancier.
Termination These elements are explored in detail below.


Adjusted Lease Amount or Adjusted Capitalized Cost

The starting point in the calculation oI any lease payment is the capitalized cost. This cost is
equivalent to the "purchase price" oI the asset and generally known as the lease amount. It is
reduced by the amount oI any security deposit /down payment, and miscellaneous charges. These
adjustments are called capitalized cost reductions. AIter all adjustments are made, the Iinal
amount is reIerred to as the adjusted lease amount or adjusted capitalized cost. This is the
amount oI Iinancing provided by the lessor to the lessee.

Security Deposit /Down Payment

The security deposit, oIten termed as a Down Payment or Equity Contribution, is the amount
most Lessors obtain at the onset oI a lease. This amount serves as a security Ior the lessor (apart
Irom the asset itselI) and is reIunded to the lessee at the end oI the lease provided the terms and
conditions oI the lease contract have been met. For the lessee, a higher amount yields a lower
adjusted lease amount resulting in reduced rentals. ThereIore, the lessee has to make a trade-oII
between a higher security deposit and higher rentals.


Lease Term

The lease term can vary considerably Irom lease to lease. However, in Pakistan, it is usually
between three to Iive years. The length oI the lease term has a vital role in determining the
payments. In a Iully amortized lease, a longer lease period can reduce the payments while a
shorter period has the opposite eIIect.


Rental

The rental represents periodic payments oI agreed rent over the lease term. It represents a charge
Ior the depreciating asset as well as a rent charge. The rent charge includes the cost oI Iunds,
overheads and services being provided by the lessor. It is the compensation that a lessor claims
Ior providing the lessee the economic use oI the asset.





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Residual Value

The residual value is the amount the asset is considered to be worth at the end oI the lease. It is
generally expressed as a percentage oI the lease amount. In cases where the ownership is
transIerred to the lessee, the residual value Iorms the sale price. Like the security deposit, a
higher residual value can lower the rental payments.


Termination

Most leases cannot be terminated beIore the end oI the lease by design. Terminations are
possible iI the lessee wants to payoII the lessors or when a Iorced termination is undertaken in
the event that the underlying assets are destroyed, i.e. stolen or made unproductive. II one
terminates the lease early, he has to pay Ior the privilege. For the lessor, an early termination
results in generating an unexpected cash inIlow. The lessor looses the expected income Irom the
lease until the terminated amount is redeployed in another investment. Generally, lessors charge
a penalty Ior early termination to avoid this loss oI income.
Forms oI Lease Financing Following are some important Iorms oI lease Iinancing, these Iorms
are varied with respect to the process, time period and other terms and conditions upon which the
lease contract is Iinalized;

1. Sale & Lease Back

2. Direct Lease

3. Leveraged Lease

4. Conditional sale lease


1. Sale and Lease Back

This Iorm lease involves an arrangement where a party sells an asset and again it is taken on
lease back to the vendor. The rental and the sales price are usually interdependent and sold at
market value. The Iirm receives the sale price in cash and the economic use oI the asset during
the basic lease period. In turn promise to pay periodic lease payments and gives up title oI the
asset to the lessor. As a result, the lessor realizes any residual value at the end oI lease term.





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2. Direct Leasing

Under direct leasing, a company acquires the use oI an asset it did not own previously. A Iirm
may lease an asset Irom the manuIacturer, e.g. IBM leases computers, Xerox leases copiers and
Honda Breeze leases cars. Indeed capital goods are abundantly available today on a lease. In
certain cases, a lessor may achieve economies oI scale and may pass it to the lessee in Iorm oI
lower lease payments. Initial direct costs are usually charged to income at the inception oI lease
because they are mainly related to earning the dealer`s or manuIacturer`s proIit.


3. Leveraged Leasing

In recent years a new type oI lease, the leveraged lease, has come into widespread use. There are
three persons involved in leveraged leasing namely lessor, lessee, and lender. From the lessee
point oI view, there is no diIIerence between a leveraged and other lease. However, the lessor
arranges to borrow part oI the required Iunds, generally giving the lender a Iirst mortgage on
plant and equipment being leased. The lessor is also called the equity participant by investing
20 in leased asset.

The lessor still receives the tax shelter associated with accelerated depreciation. However, the
lessor now has a riskier position, because he is junior to that oI the lender, who has Iirst
mortgage on plant or equipment and Iuture lease rentals. Typically, a leveraged lease provides
the lessor with a higher expected NPV per dollar oI invested capital than non-leveraged lease
because the interest component would represent another tax deduction, while the loan repayment
would constitute additional cash outlays. The initial cost would be reduced by the amount oI
loan.

4. Conditional sale Lease

II any oI the conditions just involved in leasing are violated in lease arrangements, then the lease
becomes a conditional lease. A conditional sale lease is one in which simply you can say that
lessee has purchased the lease rather than properly involving into a proper lease agreement, the
lessor is viewed as having Iinanced this purchase via a loan. For tax purpose the lessee treats the
property as owned and claims the depreciation. Lease payments are treated as loan payments.






Meezan Bank Car Leasing 'JARAH'

Benefits of Leasing Leasing


Leasing offer many substantial beneIits both Ior the lessee and the lessor. The Iollowing are
some oI the beneIits that a lessee can derive Irom a lease.

Leasing is acceptable within the Islamic modes oI Iinance as Iixed rental payments are made
and interest is not involved. Large lease payments are Iully tax deductible at the time oI
payment; thereIore an incentive may exist to load payments into a particular tax year. Lower
present value oI aIter-tax leasing costs compared to purchase costs.

Leasing provides long-term lending at Iixed rentals. Leasing assures maximum conservation oI
capital as it makes large investments in Iixed assets unnecessary. The lessee can use this Ior
other purposes such as working capital, trade debts, and seasonal expenditures. Leasing permits
conservation oI existing lines oI credit that can be used Ior other purposes.



Leasing guards against technological obsolescence.

The terms and conditions are Ilexible and can be customized Ior the lessee. Lease rentals can
be structured in accordance with the Lessee`s cash Ilow requirements. Leasing being long-term
provides a hedge against inIlation. Facilitates capital budgeting as rental payments are Iixed. OII
balance sheet Iinancing may enhance ability to borrow by improving apparent liquidity and
enhancing return on investment.
















Meezan Bank Car Leasing 'JARAH'

Lease as a Mode of Financing


Like Murabaha, lease is not originally a mode oI Iinancing. It is simply a transaction meant to
transIer the usuIruct oI a property Irom one person to another Ior an agreed period against an
agreed consideration. However, certain Iinancial institutions have adopted leasing as a mode oI
Iinancing instead oI long term lending on the basis oI interest. This kind oI lease is generally
known as the Iinancial lease` as distinguished Irom the operating lease` and many basic
Ieatures oI actual leasing transaction have been dispensed with therein.

When interest-free financial institutions were established in the near past, they Iound that
leasing is a recognized mode oI Iinance throughout the world. On the other hand, they realized
that leasing is a lawIul transaction according to Shari`ah and it can be used as an interest-Iree
mode oI Iinancing. ThereIore, leasing has been adopted by the Islamic Iinancial institutions, but
very Iew oI them paid attention to the Iinancial lease` have a number oI characteristics more
similar to interest than to the actual lease transaction. That is why they started using the same
model agreements oI leasing as were in vogue among the conventional Iinancial institutions
without any modiIication, while a number oI their provisions were not in conIormity with
Shari`ah.

As mentioned earlier, leasing is not a mode oI Iinancing in its origin. However, the transaction
may be used Ior Iinancing, subject to certain conditions. It is not suIIicient Ior this purpose to
substitute the name oI interest` by the name oI rent` and replace the name mortgage` by the
name oI leased asset`. There must be a substantial diIIerence between leasing and an interest-
bearing loan. That will be possible only by Iollowing all the Islamic rules oI leasing. To be more
speciIic, some basic diIIerences between the contemporary Iinancial leasing and the actual
leasing allowed by the Shari`ah are indicated below.



The Commencement of Lease

Unlike the contract oI sale, the agreement oI Ijarah can be aIIected Ior a Iuture date. Thus, while
a Iorward sale is not allowed in Shari`ah, an Ijarah` Ior a Iuture date is allowed, on the condition
that the rent will be payable only aIter the leased asset is delivered to the lessee. In most cases oI
the Iinancial lease` the lessor i.e. the Iinancial institution purchases the asset through the lessee
himselI. The lessee purchases the asset on behalI oI the lessor who pays its price to the supplier,
either directly or through the lessee.




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Different Relations of the Parties

It should be clearly understood that when the lessee himselI has been entrusted with the purchase
oI the asset intended to be leased, there are two separate relations between the institution and the
client which come into operation one aIter the other. In the Iirst instance, the client is an agent oI
the institution to purchase the asset on latter`s behalI. At this stage, the relation between the
parties is nothing more than the relation oI a principal and his agent.


Lease vs. Buy

The primary diIIerence between Leasing and Buying is the ownership oI the asset. A straight
purchase gives a person an immediate ownership oI the asset. However, in a lease, the ownership
oI the asset vests with lessor. The lessee beneIits Irom the economic use oI an asset that does not
belong to him. A closer look reveals that it is the usage oI the asset that is important rather than
its ownership. The economic beneIit oI the asset lies with a person whether he leases or buys the
asset. For personal usage, it is the pleasure oI say, driving a new car. For business purposes, it`s
the usage that translates into proIits. Another diIIerence is the initial cash outlay requirement.
When buying, a person pays the cost oI the asset as a lump-sum amount at the onset. However,
leasing enables a person to pay only a part oI the cost (down payment) and begin utilization oI
the asset beIore repaying the Iull amount. The remaining amount is repaid with Iixed payments
over a period oI time.


Difference between Murabaha and leasing

In Murabaha, as mentioned earlier, actual sale should take place aIter the client takes delivery
Irom the supplier, and the previous agreement oI Murabaha is not enough Ior aIIecting the actual
sale. ThereIore, aIter taking possession oI the asset as an agent, he is bound to give intimation to
the institution and make an oIIer Ior the purchase Irom him. The sale takes place aIter the
institution accepts the oIIer.


In Murabaha actual sale should take place aIter the client takes delivery Irom the supplier, and
the previous agreement oI Murabaha is not enough Ior aIIecting the actual sale.
The procedure in leasing is diIIerent, and a little shorter. Here, the parties need not aIIect the
lease contract aIter taking delivery. II the institution, while appointing the client its agent, has
agreed to lease the asset with eIIect Irom the date oI delivery, the lease will automatically start
on the date without any additional procedure.

There are two reasons Ior this diIIerence between Murabaha and leasing: Firstly, it is a necessary
condition Ior a valid sale that it should be aIIected instantly. Thus, a sale attributed to a Iuture
date is invalid in Shari`ah. But leasing can be attributed to a Iuture date. ThereIore, the previous
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agreement is not suIIicient in the case oI Murabaha, while it is quite enough in the case oI
leasing. Secondly, the basic principle oI Shari`ah is that one cannot claim a proIit or a Iee Ior a
property the risk which was never borne by him.

Applying this principle to Murabaha, the seller cannot claim a proIit over a property which never
remained under his risk Ior a moment. ThereIore, iI the previous agreement is held to be
suIIicient Ior aIIecting a sale between the client and the institution, the asset shall be transIerred
to the client simultaneously when he takes its possession, and the asset shall not come into the
risk oI the seller even Ior a moment.


Expenses Consequent to Ownership

As the lessor is the owner oI the asset, and he has purchased it Irom the supplier through his
agent, he is liable to pay all the expenses incurred in the process oI its purchase and its import to
the country oI the lessor. Consequently, he is liable to pay the Ireight and the customs duty etc.
He can, oI course, include all these expenses in his cost and can take them into consideration
while Iixing the rentals, but as a matter oI principle, he is liable to bear all these expenses as the
owner oI the asset. Any agreement to the contrary, as is Iound in the traditional Iinancial leases,
is not in conIormity with Shari`ah.

Liability of the Parties in case of Loss of Asset

As mentioned in the basic principles oI leasing, the lessee is responsible Ior any loss caused to
the asset by his misuse or negligence. He can also be made liable to the wear and tear which
normally occurs during its use. But he cannot be made liable to a loss caused by the Iactors
beyond his control. The agreements oI the traditional Iinancial lease` generally do not
diIIerentiate between the two institutions. In a lease based on the Islamic principles, both the
situations should be dealt with separately.


Variable Rentals in Long Term Leases

In the long term lease agreements it is mostly not in the beneIit oI the lessor to Iix one amount
Ior rent Ior the whole period oI lease, because the market conditions change Irom time to time. In
this case the lessor has two options: a) He can contract lease with a condition that the rent shall
be increased accordingly to a speciIied proportion (e.g. 5) aIter a speciIied period (like one
year). He can contract lease Ior a shorter period aIter which the parties can renew the lease at
new terms and by mutual consent, with Iull liberty to each one oI them to reIuse the renewal, in
which case the lessee is bound to vacate the leased property and return it back to the lessor.
These two options are available to the lessor according to the classical rules oI Islamic Fiqh.
However, some contemporary scholars have allowed, in long term leases, to tie up the rental




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amount with a variable benchmark which is so well-known and well-deIined that it does not
leave room Ior any dispute.

For example, it is permissible according to provide in the lease contract that in case oI any
increase in the taxes imposed by the government on the lessor, the rent will be increased to the
extent oI the same amount. Similarly it is allowed by them that the annual increase in the rent is
tied up with the rate oI inIlation. ThereIore iI there is an increase oI 5 in the rate oI inIlation, it
will result in an increase oI 5 in the rent as well. Based on the same principle, some Islamic



banks use the rate oI interest as a benchmark to determine the rental amounts. They want to earn
the same proIit through leasing as is earned by conventional banks through advancing loans on
the basis oI interest.

Responding to this objection, one may say that the Jahalah has been prohibited Ior two reasons:
One reason is that it may lead to dispute between parties. This reason is not applicable here,
because both parties have agreed with mutual consent upon a well deIined benchmark that will
serve as a criterion Ior determining the rent, and whatever amount is determined, based on this
benchmark, will be acceptable to both parties. ThereIore, there is no question oI any dispute
between them.
The second reason Ior the prohibition oI Jahalah is that it renders the parties susceptible to an
unIoreseen loss. It is possible that the rate oI interest, in a particular period, zooms up to an
unexpected level in which case the lessee will suIIer. It is equally possible that the rate oI interest
zooms down to an unexpected level, in which case the lessor may suIIer. In order to meet the
risks involved in such possibilities, it is suggested by some contemporary scholars that the
relation between rent and the rate oI interest is subjected to a limit or ceiling.
For example, it may be provided in the base contract that the rental amount aIter a given period
will be changed according to the change in the rate oI interest, but it will in no case be higher
than 15 or lower than 5 oI the previous monthly rent. . It will mean that iI the increase in the
rate oI interest is more than 15 the rent will be increased only up to 15. Conversely, iI the
decrease in the rate oI interest is more than 5 the rent will not be decreased to more than 5.

Penalty for Late Payment of Rent

In some agreements oI Iinancial leases, a penalty is imposed on the lessee in case he delays the
payment oI rent aIter the due date. This penalty, iI meant to add to the income oI the lessor, is
not warranted by the Shari`ah. The reason is that the rent aIter it becomes due, is a debt payable




Meezan Bank Car Leasing 'JARAH'

by the lessee, and is subject to all the rules prescribed Ior a debt. A monetary charge Irom a
debtor Ior his late payment is exactly the riba prohibited by the Holy Qur`an. ThereIore, the
lessor cannot charge an additional amount in case the lessee delays payment oI the rent.
However, in order to avoid the adverse consequences resulting Irom the misuse oI this
prohibition, another alternative may be resorted to. The lessee may be asked to undertake that, iI
he Iails to pay rent on its due date, he will pay a certain amount to a charity.

The agreement oI the lease may contain the Iollowing clause Ior this purpose: 'The Lessee
hereby undertakes that, iI he Iails to pay rent at its due date, he shall pay an amount calculated at
. p.a. to the charity Fund maintained by the Lessor which will be used by the Lessor
exclusively Ior charitable purposes approved by the Shari`ah and shall in no case Iorm part oI the
income oI the Lessor.
This arrangement though does not compensate the lessor Ior his opportunity cost oI the period oI
deIault, yet it may serve as a strong deterrent Ior the lessee to pay the rent promptly. The
justiIication Ior such undertaking oI the lessee, and inability oI any penalty or compensation
claimed by the lessor Ior his own beneIit is discussed in Iull in the chapter Murabaha` in the
present book which may be consulted Ior details.

Termination of Lease

II the lessee contravenes any term oI the agreement, the lessor has a right to terminate the lease
contract unilaterally. However, iI there is no contravention on the part oI the lessee, the lessee
cannot be terminated without mutual consent. In some agreements oI the Iinancial lease` it has
been noticed that the lessor has been given an unrestricted power to terminate the lease
unilaterally whenever he wishes, according to his sole judgment. This is again contrary to the
principles oI Shari`ah. In some agreements oI the Iinancial lease` a condition has been Iound to
the eIIect that in case oI the termination oI the lease, even at the option oI the lessor, the rent oI
the remaining lease period shall be paid by the lessee. This condition is obviously against
Shari`ah and the principles oI equity and justice.
The basic reason Ior inserting such conditions in the agreement oI lease is that the main concept
behind the agreement is to give an interest-bearing loan under the ostensible cover oI lease. That
is why every eIIort is made to avoid the logical consequences oI the lease contract. Naturally,
such a condition cannot be acceptable to Shari`ah. The logical consequence oI the termination oI
lease is that the asset should be taken back by the lessor. The lessee should be asked to pay the
rent as due up to the date oI termination. II the termination has been eIIected due to the misuse or
negligence on the part oI the lessee, he can also be asked to compensate the lessor Ior the loss


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caused by such misuse or negligence. But he cannot be compelled to pay the rent oI the
remaining period.

Insurance of the Assets

II the leased property is insured under the Islamic mode oI takaIul, it should be at the expense oI
the lessor and not at the expense oI the lessee, as is generally provided in the agreements oI the
current Iinancial leases`.



The Residual Value of the Leased Asset

Another important Ieatures oI the modern Iinancial leases` is that aIter the expiry oI the lease
period, the corpus oI the leased asset is normally transIerred to the lessee. As the lessor already
recovers his cost along with an additional proIit thereon, which is normally equal to the amount
oI interest which could have been earned on a loan oI that amount advanced Ior that period, the
lessor has no Iurther interest in the leased asset. On the other hand, the lessee wants to retain the
asset aIter the expiry oI the leased period. For these reasons, the leased asset is generally
transIerred to the lessee at the end oI the lease, either Iree oI any charge or at a nominal token
price.

In order to ensure that the asset will be transIerred to the lessee, sometimes the lease contract has
an express clause to this eIIect. Sometimes this condition is not mentioned in the contract
expressly; however, it is understood between the parties that the title oI the asset will be passed
on to the lessee at the end oI the lease term. This condition, whether it is express or implied, is
not in accordance with the principles oI Shari`ah. It is a well settled rule oI Islamic jurisprudence
that one transaction cannot be tied up with another transaction so as to make the Iormer a pre-
condition Ior the other.

The original position in Shari`ah is that the asset shall be the sole property oI the lessor, and aIter
the expiry oI the lease period, the lessor shall be at liberty to take the asset back, or to renew the
lease or to lease it out to another party, or sell it to the lessee or to any other person. The lessee
cannot Iorce him to sell it to him at a nominal price, nor can such condition be imposed on the
lessor in the lease agreement.

The validity oI this arrangement is subject on two basic conditions: Firstly, the agreement oI
Ijarah itselI should not be subjected to signing this promise oI sale or giIt but the promise should
be recorded in a separate document. Secondly, the promise should be unilateral and binding on
the promisor only. It should not be a bilateral promise binding on both parties because in this


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case it will be a Iull contract aIIected to a Iuture date which is not allowed in the case oI sale or
giIt.

Sub-Lease

II the leased asset is used diIIerently by diIIerent users, the lessee cannot sub-lease the leased
asset except with the express permission oI the lessor. II the lessor permits the lessee Ior
subleasing, he may sublease it. II the rent claimed Irom the sub-lessee is equal to or less than the
rent payable to the owner / original lessor, all the recognized schools oI Islamic jurisprudence are
unanimous on the permissibility oI the sublease. However, the opinions are diIIerent in case the
rent charged Irom the sub lessee is higher than the rent payable to the owner. On the other hand,
Imam abu HaniIah is oI the view that the surplus received Irom the sub lessee in this case is not
permissible Ior the sub lessor to keep and he will have to give that surplus to charity.
Although the view oI Imam Abu HaniIah is more precautious which should be acted upon to the
best possible extent, in cases oI need the view oI ShaIi` and Hanbali schools may be Iollowed
because there is no express prohibition in the Holy Qur`an or in the Sunnah against the surplus
claimed Irom the lessee. Ibn Qudamah has argued Ior the permissibility oI surplus on IorceIul
grounds.
Assigning of the Lease

The lessor can sell the leased property to a third party whereby the relation oI lessor and lessee
shall be established between the new owner and the lessee. However, the assigning oI the lease
itselI (without assigning the ownership in the leased asset) Ior a monetary consideration is not
permissible. The diIIerence between the two situations is that in the latter case the ownership oI
the asset is not transIerred to the assignee, but he becomes entitled to receive the rent oI the asset
only. This kind oI assignment is allowed in Shari`ah only where no monetary consideration is
charged Irom the assignee Ior this assignment.

Securitization of Ijarah

The arrangement oI Ijarah has a good potential oI securitization which may help create a
secondary market Ior the Iinanciers on the basis oI Ijarah. Since the lessor in Ijarah owns the
leased assets, he can sell the asset, in whole or in part, to a third party who may purchase it and
may replace the seller in the rights and obligations oI the lessor with regard to the purchased part
oI the asset.

ThereIore, iI the lessor, aIter entering into Ijarah, wished to recover his cost oI purchase oI the
asset with a proIit thereon, he can sell the leased asset wholly or partially either to one party or to



Meezan Bank Car Leasing 'JARAH'

a number oI individuals. In the latter case, the purchase oI a proportion oI the asset by each
Individual may be evidenced by a certiIicate which may be called Ijarah certiIicate`.

This certiIicate will represent the holder`s proportionate ownership in the leased asset and he will
assume the rights and obligations oI the owner / lessor to that extent. Since the asset is already
leased to the lessee, the lease will continue with the new owners, each one oI the holders oI this
certiIicate will have the right to enjoy a part oI the rent according to his proportion oI ownership
in the asset. ThereIore, he assigns a part oI this right to other persons. It is already explained in
detail that this right cannot be traded in, because it amounts to selling a receivable debt at a
discount which is one oI the Iorms oI riba prohibited by the Holy Qur`an and Sunnah.

ThereIore this concept is not acceptable. These are some basic Ieatures oI the Iinancial lease`
which are not in conIormity with the dictates oI Shari`ah. The list oI the possible shortcomings in
the lease agreement is not restricted to what has been mentioned above, but only the basic errors
Iound in diIIerent agreements have been pointed out, and the basic principles oI Islamic leasing
have been summarized. An Islamic lease agreement must conIorm to all oI them.





















Meezan Bank Car Leasing 'JARAH'

Applications of Ijara

Meezan Bank`s (Car Ijarah, Pakistan`s First Islamic Car Financing)

As a step towards Meezan Bank`s mission to provide a one-stop shop Ior innovative value added
Shari`ah compliant products, Meezan Bank`s Car Ijarah` unit provides a car Iinancing, based on
the principles oI Ijarah and is Iree oI the element oI interest. Car Ijarah is Pakistan`s Iirst
"Interest Free" car Iinancing based on the Islamic Iinancing mode oI Ijarah (Islamic leasing).
This product is ideal Ior individuals looking Ior car Iinancing while avoiding an interest-based
transaction. Car Ijarah is unique and is approved by Meezan Banks Shari`ah Board. Car Ijarah,
designed under the supervision oI Meezan Banks Shari`ah Supervisory Board, is unique to car
leasing Iacilities provided by other banks.

Economic BeneIits oI Islamic Leasing let us proceed to discuss the economic beneIits oI Islamic
leasing. Five distinct beneIits oI Islamic leasing can be mentioned:
As noted above, Islamic leasing necessarily involves real assets. This ensures and strengthens
the linkage between the Iinancial sector oI the economy and the real sector contributing to
economic stability. In this way lease Iinance relates to a distinctive Ieature oI Islamic Iinance, a
Ieature missing in the conventional system. ProliIeration oI Iinancial assets without any
counterpart in the real sector oI the economy makes the Iinancial markets vulnerable to
speculative games threatening to turn these markets into a casino. It also engages a large number
oI highly skilled people into maneuvers that have nothing to do with production oI goods and
services. Incomes generated by these activities have contributed to the increase in the inequality
in the distribution oI income and wealth in the society.
Islamic leasing creates a great potential for securitization. Sukuk based on ijara can be traded
in the market, aIIording a convenient instrument Ior investing savings to the people oI small
incomes who constitute the overwhelming majority in the developing countries in general and in
the Muslim countries in particular.
Islamic leasing is especially suitable for some sectors oI the economy Ior which sharing-based
modes proved to be rather diIIicult to practice, e.g. the consumers sector and the public sector. It
can take care oI the public sector projects related to inIrastructure building, e.g., roads and
bridges, airports, irrigation systems, hospitals, schools, etc. As a matter oI Iact most oI the
leasing based sukuk issued recently belong to this category.
Lease finance is easier to practice as it involves less documentation and takes less time to
conclude a deal. Unlike lending, it does not need collateral and no thorough enquiries into the
creditworthiness oI the lessee are called Ior. The physical presence oI a tangible asset, the subject
oI the lease, whose ownership may remain with the lessor, makes these Iormalities unnecessary.
Meezan Bank Car Leasing 'JARAH'

This may make it especially suitable Ior the rural sector, where Iormalities may hamper
operations.
Lease finance has some of the good features oI debt Iinance and, at the same time, is Iree oI
some oI the weaknesses oI sharing-based modes oI Iinance. There is less possibility oI moral
hazard/adverse selection than the sharing modes. There is no agency relationship between the
lessor and the lessee, as is in the case oI mudarabah (proIit sharing), Ior example. The payment
obligation oI the lessee, the rent, is Iixed, as in case oI debt. It is not a case Ior adverse selection
as no part oI unIoreseen losses/costs can be passed over to the lessor.

























Meezan Bank Car Leasing 'JARAH'

Ijarah


'Ijarah is a term oI Islamic Iiqh. Lexically, it means to give something on rent`. In the Islamic
jurisprudence, the term Ijarah` is used Ior two diIIerent situations. In the Iirst place, it means to
employ services oI a person on wages given to him as a consideration Ior his hired services`. The
employer is called musta`jir` while the employee is called ajir`.
Ijarah means lease, rent or wage. Generally, Ijarah concept means selling beneIit or use or
service Ior a Iixed price or wage. Under this concept, the Bank makes available to the customer
the use oI service oI assets / equipments such as plant, oIIice automation, motor vehicle Ior a
Iixed period and price.

ThereIore, iI A has employed B in his oIIice as a manager or as a clerk on a monthly salary, A is
a musta`jir, and B is an ajir. Similarly, iI A has hired the services oI a porter to carry his baggage
to the airport, A is a musta`jir while the porter is an ajir, and in both cases the transactions
between the parties is termed as Ijarah. This type oI Ijarah includes every transaction where the
services oI a person are hired by someone else. He may be a doctor, a lawyer, a teacher, a
labourer or any other person who can render some valuable services. Each one oI them may be
called an ajir` according to the terminology oI Islamic Law, and the person who hires their
services is called a musta`jir` while the waged paid to the ajir` are called their ujrah`.


Basic rules governing Leasing under Islamic Law

Lease is a contract whereby the owner oI an asset transIers its beneIits to another person Ior an
agreed period, at an agreed consideration. The object being leased must have a valuable use. It is
necessary Ior a valid lease contract that the leased asset remains in the ownership oI the seller,
and only its usage is transIerred to the lessee. A lease cannot be aIIected in respect oI
consumables, Iuel, ammunition, etc. because their use is not possible unless they are consumed.

As the leased property remains in the ownership oI the lessor, all the liabilities emerging Irom
the ownership shall be borne by the lessor, but the liabilities arising Irom the use oI the property
shall be borne by the lessee. The period oI lease must be deIined. The lessee cannot use the
leased asset Ior any purpose other than the purpose speciIied in the lease agreement. The lessee
is liable to compensate the lessor Ior any damage to the leased asset caused by any misuse or
negligence on the part oI the lessee.





Meezan Bank Car Leasing 'JARAH'

Any harm or loss incurred during the lease period and caused by Iactors beyond the control oI
the lessee shall be borne by the lessor. A property jointly owned by two or more persons can be
leased out, and the rental shall be distributed between all the joint owners according to the
proportion oI their respective shares in the property. It is necessary Ior a valid lease that the
leased asset is Iully identiIied by the parties.

The rental must be determined at the time oI contract Ior the whole period oI lease. It is
permissible that diIIerent amounts oI rent are Iixed Ior diIIerent phases during the lease period,
provided that the amount oI rent Ior each phase is speciIically agreed upon at the time oI
aIIecting a lease. II the rent Ior a subsequent phase oI the lease period has not been determined or
has been leIt at the option oI the lessor, the lease is not valid.

The determination of rental on the basis oI the aggregate cost incurred in the purchase oI the
asset by the lessor, as normally done in Iinancial leases, is not against the rules oI the Shari`ah, iI
both parties agree to it, provided that all other conditions oI a valid lease prescribed by the
Shari`ah are Iully adhered to. The lessor cannot increase the rent unilaterally, and any agreement
to this eIIect is void.

The lease period shall commence Irom the date on which the leased asset has been delivered to
the lessee, no matter whether the lessee has started using it or not. II the leased asset has totally
lost the Iunction Ior which it was leased, and no repair is possible, the lease shall terminate on
the day in which such loss has been caused. However, iI the loss is caused by the misuse or by
the negligence oI the lessee, he will be liable to compensate the lessor Ior the depreciated value
oI the asset as, it was immediately beIore the loss.












Meezan Bank Car Leasing 'JARAH'

Advantages of Ijarah


The Iollowing are the advantage oI Ijarah to lessee:


Ijarah conserves capital as it may provide 100 Iinancing. Ijarah enables the Lessee to have
the use oI the equipment on payment oI the Iirst rental. This is important since it is the use (and
not ownership) oI the equipment that generates income. Ijarah arrangements are Ilexible because
the terms and rental provision may be tailored to suit the needs oI the Lessee. ThereIore, it aids
corporate planning and budgeting

All payments of rentals are treated as payment oI operating expenses and are thereIore, Iully
tax-deductible. Leasing thereIore oIIers tax-advantages to proIit making concerns.

There are many types of equipment, which becomes obsolete beIore the end oI its actual
economic liIe. This is particularly true in high technology equipment like computers. Thus the
risk is passed onto the Lessor who will undoubtedly charge a premium into the lease rate to
compensate Ior the risk. A Lessee may be willing to pay the said premium as an insurance
against obsolescence.


If the equipment use is Ior a relatively short period oI time, it may be more proIitable to lease
than to buy. If the equipment is for short duration and the equipment has a very poor second
hand value (resale value), leasing would be the best method Ior acquisition.





















Meezan Bank Car Leasing 'JARAH'

Basic Features - Normal Ijarah (Indus)



Parameters

Details

Asset (vehicle) All variants oI Indus
Ownership Ownership lays with Meezan Bank limited
Period oI Iacility 3, 4 & 5 years
Periodicity Pre-determined monthly rentals
Advance Rent / Security deposit
Minimum 20 oI cost oI the vehicle
Maximum 50 oI the cost oI the vehicle
Processing charges Rs. 4,000/-
TakaIul provisioning 4.25 with tracker
Tracker
Free Tracker (no installation & monitoring charges) to be installed in all
vehicles.
Free Accidental Death Coverage Upto Rs. 400,000/-
Mode oI payment Through post dated cheques




What is Residual Value Ijarah?

The value oI an asset at the conclusion oI the lease term or the price at which a Iixed asset is expected to be sold
at the end oI its useIul liIe is commonly reIerred as Residual Value (RV).

The average car buyer should take some eIIort to determine the estimated value oI their new car in the Iuture it
would be best to know how much your car is worth in the Iuture.

Based on the above deIinition, Meezan Bank Car Ijarah is introducing Residual Value Financing, enabling
customer to aIIord luxury with economy, where the customer can enjoy the beneIits oI eased rental. A high
residual value would result in a lower monthly lease.

Meezan Bank Car Leasing 'JARAH'

Basic Features



Parameters

Details

Asset (vehicle)
All new variants oI Toyota Corolla, Daihatsu Coure &
Toyota Hilux)
Ownership Ownership lays with MBL
Period oI Iacility 3, 4 & 5 years
Periodicity Pre-determined monthly rentals
Advance Rent / Security deposit
Minimum 10 oI cost oI the vehicle
Maximum 25 oI the cost oI the vehicle
Residual value (RV)
3 Year 10 to 55
4 Year 10 to 50
5 Year 10 to 45
Processing charges Rs. 4,000/-
TakaIul provisioning 4.25 with tracker
Free Accidental Death Coverage Upto Rs. 400,000/-
Mode oI payment Through post dated cheques








Meezan Bank Car Leasing 'JARAH'

Unique Selling Points

O Pakistan`s Iirst truly / completely
O Shariah-compliant Car Financing Scheme
O Ready delivery Ior all IMC variants
O Lowest per month rent Much lower than normal Ijarah
O Lowest processing charges
O Lowest up Iront payment
O First rent aIter one month oI delivery
O Availability oI TakaIul
O Free accidental death coverage upto Rs. 400k
O Free Tracker (with installation & annual monitoring charges)
O Competitive Service


Premature Termination

In case the customer wishes to terminate the Agreement beIore the agreed period, the customer
will have an option to buy the vehicle on the agreed purchase price as mentioned in the
Terminal-value schedule Iorming part oI the lease documents. The purchase price takes into
consideration the Iollowing amounts:

O The principal outstanding as determined by the amortization schedule oI the lease.
O Residual value amount.


Maturity of RV Ijarah

At the end oI the Ijarah period, Meezan Bank will make Iollowing oIIers to the customer:

Purchase Option: Customer will have an option to purchase the vehicle Irom MBL on pre-
agreed Residual Value.
Return Option: Customer will have an option to return the vehicle to MBL (MBL conduct 3rd
part vehicle assessment oI condition)




Meezan Bank Car Leasing 'JARAH'

FATWA CAR I1ARAH

Meezan Bank Car Leasing 'JARAH'

Meezan Bank Car Leasing 'JARAH'

Eligibility criteria


You can enjoy the beneIits oI Car Ijarah iI you:

O Are a salaried individual/ selI-employed proIessional/businessman
O Have a net take home income exceeding three times your monthly rental
O Have two years working / proIessional / business experience
O Are working with your present employer Ior at least six months (Ior salaried individuals)


To apply Ior Meezan Bank`s Car Ijarah, Iill out a customer application Iorm (available at any Branch), attach the
required documents and get your Iinancing approved in a 1-2 working days.



Required Documentation

II you meet the requirements and wish to apply Ior Car Ijarah, simply Iill out an application Iorm
and bring the Iollowing documents to your nearest Meezan Bank branch.

O Application Iorm duly Iilled and signed by the applicant
O Copy oI CNIC
O One recent passport sized photograph
O Any paid utility bill (Electric/Gas/Water) received at the residential address
O Original or certiIied copy oI Recent Pay slip (Ior Salaried Individuals only)
O Last Six Month Bank Statement
O Specimen signature card duly signed & stamped by the bank
O Copy oI Rent Agreement (iI applicable)











Meezan Bank Car Leasing 'JARAH'

Application Procedure:


Processing & vehicle valuation charges



Domestic Vehicles - New

Cost of Vehicle Charges Amount (PKR)
Less than 1.00 million (999,999/-) Processing 4,000/-
Greater than 1.00 million Processing 5,000/-



Domestic Vehicles - Used / Imported

Cost of Vehicle Charges Amount (PKR)
Less than 1.00 million (999,999/-)
Processing 3,000/-
Valuation 1,500/-
Total 4,500/-
Between 1.00 million & 1.5 million
Processing 4,000/-
Valuation 1,500/-
Total 5,500/-

Note: Valuation changes Ior vehicle greater than 1.5 million will be charged at actual. Processing charges
will remain unchanged.









Meezan Bank Car Leasing 'JARAH'

Commercial Vehicles - New


Cost of Vehicle Charges Amount (PKR)
Less than 1.00 million (999,999/-)
Processing 4,000/-



Out Station Verification Charges


Cost of Vehicle Charges Amount (PKR)
Less than 1.00 million (999,999/-)
Processing 4,000/-



























Meezan Bank Car Leasing 'JARAH'

CONCLUSION


As a step towards Meezan Bank`s mission to provide a one-stop shop Ior innovative value-added
Shariah compliant products, Meezan Bank`s Car Ijarah unit provides car Iinancing based on the
principles oI Ijarah and is Iree oI the element oI interest.

Car Ijarah is Pakistan`s Iirst Interest Free car Iinancing based on the Islamic Iinancing mode oI
Ijarah (Islamic leasing). This product is ideal Ior individuals looking Ior car Iinancing while
avoiding an interest-based transaction.

Meezan Bank` Car Ijarah is a car rental agreement, under which the Bank purchases the car and
rents it out to the customer Ior a period oI 3 to 5 years, agreed at the time oI the contract. Upon
completion oI the lease period the customer gets ownership oI the car against his initial security
deposit.



















Meezan Bank Car Leasing 'JARAH'

REFERENCES


Mr. Ali Tariq Farooqi
Vice President
Meezan Bank
Main Boulevard, Lahore


Mrs. Hina Fatima
Customer Relationship Manager
Meezan Bank
Main Boulevard, Lahore

Mr. Muhammad Raza
Consumer Banking
Meezan Bank


www.meezanbank.com

www.naIseislam.com

www.paklinks.com

www.google.com