Islamic Financial

Products and Processes

Ameenullah Sheikh
ameenullah.shaikh@iqra.edu.pk




Literally Ijarah means To give something on rent

Ijarah Financing is a contract in which a lessee requests for an
equipment or a property for use and Lessor provides
requested equipment or property against rent.

The Lessee agrees to pay a monthly, quarterly, semi-annual or
annual rent to Lessor against the right to use the equipment
for an agreed time i.e. 12, 24, 36, 48, or 60 months OR what
ever time is agreed.

Ijarah is an Islamic alternative of Conventional Leasing.



IJARAH

The term Ijarah is used in two contexts:
1. Services Ijarah To employ the services of a person on wages
e.g. Mr. A while going to Disneyland hires a porter at the airport
to carry his luggage.
e.g. Employee of a company
1. Asset Ijarah Another type of Ijarah relates to paying rent for
the use of an asset or property (defined as LAND in Islamic
Economics). e.g. Mr. A gives his house/car/cell phone to Mr. B
on Ijarah/rent for 12 months.

TYPES OF IJARAH
The Ijarah contract should be preceded by an acquisition of
either the asset to be leased or the usufruct of that asset.


Acquisition of Asset
The leased asset must be capable of being used while
preserving the asset, and the benefit from an Ijarah must be
lawful in Sharia.


Subject Matter
The lessee must use the leased asset in a suitable manner or
in conformity with common practice / Shariaa rulings.

The lessor must accept the responsibility for any defects of
the leased asset which impair the intended use of the asset,
either by his own doing or as a result of events outside his
control.

If the benefit from the leased asset is impaired wholly or
partially as a result of the lessees misconduct, the lessee is
obliged to restore or repair the usufruct.
Subject Matter

Duration

The duration of an Ijarah contract must be specified in the
contract.

The rental must be specified, either as lump sump or by
installments.

No rental is due for the period between the contract date and
the date of actual delivery, if the lessor fails to deliver the
asset on the date specified in the Ijarah contract.

Execution of Ijarah
Major Maintenance

The lessor is liable to undertake Major Maintenance of the
asset that is required to keep the asset in the condition
necessary to provide contractual benefits under the lease.

The lessor may delegate to the lessee such task at the
lessors cost.

Ordinary Maintenance

The lessee should carry out operating or periodical (ordinary)
maintenance.
Ijarah-Maintenance
Delay in Payment

No increase in the rental due may be stipulated by the lessor
in case of delay in payment by the lessee.

It may be provided in the contract of Ijarah that a lessee who
delays payment for no good reason undertakes to donate to
charitable causes a certain amount or percentage of the rental
due.

Guarantees
The lease contract can be terminated by mutual consent but:

It is not permissible for one party to terminate it except in
case of force majeure or there is a defect in the leased
asset that materially impairs its use.

The lessor may stipulate that the Ijarah contract be terminated
if the lessee does not pay the rent or fails to pay it on time.

An Ijarah contract does not terminate with the death of either
party thereto.
Termination of Contract
CUSTOMER ISLAMIC BANK
The customer approaches the Bank with the request for
financing and enters into a promise to lease agreement.
The Bank purchases the item required for leasing and receives
title of ownership from the vendor
The Bank makes payment to the vendor
VENDOR
. .
Agreement-1
IJARAH PROCESS FLOW
CUSTOMER
ISLAMIC BANK
The Bank leases the asset to the customer after execution of
lease agreement.
The customer makes periodic payments as per the contract.
Title transfers to the customer at the end of lease term.
VENDOR
. .
Agreement-2
IJARAH PROCESS FLOW
The method of transferring the title to the lessee can be one of
the following:

a) A promise to sell for a token money or other
consideration, or by accelerating the payment of the
remaining amount of rental, or by paying the market value
of the leased property.
b) A promise to give it as a gift (for no consideration).
c) A promise to give it as a gift, contingent upon the payment
of the remaining installments.

The transfer of title must be evidenced in a separate
document independent of the contract of Ijarah.



Transfer of Ownership

Difference b/w Conventional Lease & Ijarah
1. In Ijarah , the Lessor cannot increase the rent unilaterally
2. In Ijarah, expenses to be borne by the parties:
Lessor- expenses relating to the corpus of the asset
i.e. insurance, accidental repairs etc. will be borne by
the lessor
Lessee- actual operating/overhead expenses related
to running the asset will be borne by the lessee

Conventional Lease Vs. Ijarah
Difference b/w Conventional Lease & Ijarah
3. Under conventional Lease, the Lease rental starts from the
date of payment by Lessor. In Ijarah, the correct way to
charge rent is after delivery of the asset to the Lessee.
Because rent is charged for use of the asset


Conventional Lease Vs. Ijarah
For long and medium term fixed asset financing like plant,
equipment, generators etc.

Retail products like Car financing, Durable financing,
Home Financing

Application
THANK YOU