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Ijarah - Leasing

Essentials of Ijarah contract General juristic rules of Ijarah (Execution, rent determination, sub-lease, security, liabilities, termination, failure in payment etc.) Modern use of Ijarah Islamic banks Ijarah Muntahia bi Tamleek

Islamic Finance, Dr. Waheed Akhter, COMSATS, Lahore

Essentials of Ijarah contract


Lessor vs lessee asset vs. rent Known usufruct is transferred Ijarah vs. Bai (sale) ownership right Consumables items r sold not leased e.g. candles, cotton, food, fuel etc. Monetary items (dirhmas, dinnar, bullions etc.) cannot b leased
Islamic Finance, Dr. Waheed Akhter, COMSATS, Lahore 2

General rules of Ijarah


Contracted usufruct has to b ascertained Lease period must b specified Possible benefiting from the hired asset Execution of ijarah contract before or after possession of asset by lessor Determination of rent set in different phases, or increase @ 5% p.a. or tie up to inflation
Islamic Finance, Dr. Waheed Akhter, COMSATS, Lahore 3

General rules of Ijarah (contd.)


Sub-lease by lessee subject to the consent of lessor If sub-lease actual rent payable
Unanimous opinion

If sub-lease > actual rent payable


Sub-lessor can enjoy surplus (Shafi, Hanbli) Sub-lessor cannot keep surplus (Abu Hanifa)

Contemporary scholars also prefer first one


Islamic Finance, Dr. Waheed Akhter, COMSATS, Lahore 4

General rules of Ijarah (contd.)


Security or guarantee in ijarah Liabilities to the parties
Lessor responsible for tax, natural loss etc. Lessee responsible for water tax, elect. Bills, expenses related to use of house etc.

Termination of the contract by mutual


consent, remaining rent not allowed

Failure in payment of due rent


Islamic Finance, Dr. Waheed Akhter, COMSATS, Lahore 5

Procedure for Ijarah Muntahia bi- Tamleek


Client convey his request to bank, enters into an MOU with some earnest money Bank appoint client as its agent who open an L/C or A/C on behalf or wid bank Bank & client may jointly purchase the asset & bank leases it on dim. Musharka Formal lease agreement after ownership by bank Bank may charge penalty on client willful default Sale and lease back arrangement Destruction / Theft of the asset
Islamic Finance, Dr. Waheed Akhter, COMSATS, Lahore 6

Issues concerning modern use of Ijarah


Burdon of asset on lessor or lessee No rental before deilvery Damage to asset during client as agent Rent reduction due to value depreciation Problem in case of default in payment Gen. perception of fixed return to bank
Risk cannot b separated from ownership Lease & sale r two different contracts
Islamic Finance, Dr. Waheed Akhter, COMSATS, Lahore 7