Ijarah Or Lease

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Difference between Aa’riyah & Ijarah

Ijarah: Transferring of usufruct of an asset to another

person for an agreed period, at an agreed
consideration.
Aa’riyah: Transferring of usufruct of an asset to another
person for an agreed period, without consideration

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 AAOIFI Standards

 AAOIFI Shariah Standard # 09 deals with ‘Ijarah

& Ijarah Muntahia Bittamleek’ which was
adopted & issued on 16th May 2002.
 SBP formally adopted it on Januray 12, 2010
through IBD circular # 01.
 IFAS-2 deals with its accounting treatment. SBP
vide its IBD circular no. 01 dated 27 January
2009, has allowed the implementation of IFAS–2
with effect from 01 January 2009

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 Basic Rules of Ijarah

  Anything, which cannot be used without

consuming, cannot be leased out. e.g. Money,
wheat etc.
  Leasing is not originally a mode of financing
but it is a sale transaction. So all basic elements of
lawful sale transaction must be present.
  It is necessary for valid lease that the leased
asset is fully identified by the parties.

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 Basic Rules of Ijarah

  It is necessary for valid lease that the corpus of the

leases property remains in the ownership of the
lessor.
  The period of lease must be determined in clear
terms.
  The lease period shall start from the date on
which the leased asset has been delivered.

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 Liabilities of Parties

 Lessor Responsibilities:
  Since corpus of leased property remains in
the ownership of the lessor therefore all major
liabilities of ownership are borne by lessor.
 Expenses:
  As the lessor is the owner of the asset he is
liable to pay all the expenses incurred in the
process of its purchase and its import to the
country of the lessor example expenses of
shipment and customs duty etc.

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 Lessee Responsibilities:

  Being user of the leased asset lessee can be made

liable to any normally occurring wear and tear.
  The lessee cannot use the leased asset for any
purpose other than the purpose specified in the lease
agreement.
  If no such purpose is not specified in the
agreement, the lessee can use it for whatever purpose
it is use in normal course.

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 Lessee as Ameen:

  The lessee is liable to compensate the lessor for

every harm caused to the leased asset by his
misuse/misconduct or negligence.

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 Rental

 The rental must be determined at the time of

contract for the whole period of lease.
 The lease period shall commence from the date on
which the leased asset has been delivered to the
lessee.
 It is permissible that different amount of rent are
fixed for different phases provided that the amount
of rent for each phase is specifically agreed upon at
the time of affecting a lease.
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 Rental

 The lessor cannot increase the rent unilaterally.

 A lease contract can have a condition that the rent shall
be increased according to a specified proportion (e.g.
5%) after a specified period (like one year).
  The rent or any part thereof may be payable in
advance before the delivery of the asset to the lessee,
but that amount so collected by the lessor shall remain
with him as Amana and shall be adjusted towards the
rent after its being due.
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 In Case of Late Payment

  The lessor cannot charge an additional amount in

case the lessee delays payment of the rent.
  Late payment is given to charity by lessee.

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 Termination: contractual

  Lease is binding contract.

  It cane be terminated by mutual consent.
  The lessor may terminate it when the lessee doesn’t
pay the rent or fails to pay it on time or because of
violation of any other term and condition of the
agreement.

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 Termination: contractual

  With total destruction of the leased asset

  Upon the expiry of term.
  Two parties may terminate it before it begins to
run.

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 Ijarah AS A MODE OF FINANCING

Through a mutual agreement of Lease, after the expiry of the

lease period, the corpus of the leased asset cannot be
transferred to the lessee, otherwise it becomes hire
purchase.

It is a well-settled rule of Islamic jurisprudence that one

transaction cannot be tied up with another transaction so as
to make the former a pre-condition for the other.

However, the lessor may enter into a unilateral undertaking

to sell the leased asset to the lessee at the end of the lease
period. This undertaking will be binding on the lessor only.
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Ijarah and Ijarah Muntahia Bittamleek

GENERAL DEFINITION
 Ijarah is the transfer of ownership of a service for an
agreed upon consideration.
 Operating Ijarah do not end up with the transfer of
ownership of leased assets to the lessee.
 Ijarah Muntahia Bittamleek ends up with the transfer
of ownership of leased assets to the lessee.

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 Ijarah and Ijarah Muntahia Bittamleek

DEFINITION – Ijarah MUNTAHIA BITTAMLEEK

 This is a lease that ends with the ownership of the asset.
 There are several types of Ijarah Muntahia Bittamleek.
These are characterized based on the method by which
the ownership transfers to the user:
 For no consideration (through a gift)
 For token consideration
 For price specified in the lease
 For remaining amount (if lease is terminated before period)
 Gradual transfer

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 Ijarah and Ijarah Muntahia Bittamleek
GENERAL MECHANICS

. .
VENDOR ISLAMIC BANK Agreement CUSTOMER

 The customer approaches the Bank with the request

for financing
 The Bank purchases the item required for leasing and
receives title of ownership from the vendor
 The Bank makes payment to the vendor

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 Ijarah and Ijarah Muntahia Bittamleek
GENERAL MECHANICS

. .
VENDOR ISLAMIC BANK Agreement CUSTOMER

 The Bank leases the asset to the customer

 The customer makes periodic payments as per the contract
 The asset title transfers to the customer based on the method
disclosed in the agreement

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Difference Between Murabaha and
Ijarah

1. Murabaha is permissible for consumable and non-

consumable assets while Ijarah is permissible in non-
consumable assets only.
2. Murabaha attributed to future date is invalid in
Shariah. But leasing can be attributed to a future
date.

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 Difference Between Murabaha and
Ijarah

1. In Murabaha once the sale is completed the

entire risk is shifted to the purchaser while in
lessee only usufruct is transferred to the lessee
and risks remain with the lessor.

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Difference Between Murabaha and
Ijarah

 A Murabaha cannot be transacted on a future date, as

the sale would be executed simultaneously after
taking delivery from the supplier. But in leasing it is
permissible, because in leasing the assets remain
under the risk and ownership of the lessor throughout
the leasing period.

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 Difference Between Ijarah and
Conventional lease

1. There are two types of contracts. Financial lease

or loan for a car financing. Both these contract
contain conditions, which are unlawful.
 Financing lease contain conditions of hire and
purchase, which in not permissible in Shariah.
 Car financing or loan agreement contains
condition of interest.
 Ijarah contract doesn’t contain any condition
that makes the transaction void in Shariah

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 Difference Between Ijarah and
Conventional lease

1. In Conventional Car Loan the costumer is

responsible for all kind of loss or damage in the
vehicle, irrespective of the circumstances being
in his control.
 In Ijarah all risk pertaining to ownership are
borne by lessor.
2. If the insurance company doesn’t compensate
the entire outstanding amount in case of total
loss, the customer is liable to pay the balance.
 In Ijarah lessor bears the risk of insurance claim
settlement.
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 Difference Between Ijarah and
Conventional lease

1. If the leased vehicle is stolen or completely

destroyed the conventional leasing company
would continue charging the lease rent till
the settlement of the total loan.
 Under Islamic system rent is consideration
for usage of the leased asset and if the asset
has been stolen or destroyed the concept of
rental become void.
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 Difference Between Ijarah and
Conventional lease

1. In most contemporary lease an extra amount is

charged if rent is not paid on time. This extra
amount is the considered Riba and is Haram.
This amount is taken by the leasing institution
into their income.
 Under Ijarah the lessee may be asked to
undertake that if he fails to pay rent on its due
date, he will pay a certain amount to charity.
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 Difference Between Ijarah and
Conventional lease

1. The Insurance expense of the asset is directly borne by the

lessee.
 Takaful / insurance should be at the expense of the lessor
and not at the expense of the lessee.
2. Under conventional leasing contract the vehicle is
automatically transferred in the name of the customer
upon the completion of the lease period whether or not
he want to purchase it.
 Under Ijarah at the end of Ijarah agreement the customer
is not obliged to purchase the vehicle.
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 Ijarah Documentations

There are a number of documents involved

in a Ijarah transaction. The most
essential of these documents are:

 Undertaking to Ijarah
 Agency Agreement
 Ijarah Agreement
 Rental Schedule
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Steps Of Banking Murabaha

Undertaking to Ijarah

Agency Agreement

Purchase

Payment of Purchase Price

Lease Agreement

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 Expenses Related To Ownership
Issue
In certain transaction of
Ijarah, all expenses related
to the ownership is born by
the customer.
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Solution
All expenses other than
expense related to normal
wear and tear of the Ijarah
asset should be born by the
bank and may be included
into the list price of Ijarah
assets.
 Recovery of Rental
Issue
The banks start recovering
the rental as soon as he
disburses the amount to the
supplier and before actually
receiving the Ijarah asset by
the customer.
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Solution
The banks should recover
rentals only after the delivery
of vehicle. It is an unanimous
opinion of all the Sharaih
Scholars that it is not allowed
to recover rentals before
delivery.
 Recovery of Rental
Issue Solution
Repayment schedule not As per Shariah rules and SBP
signed by the customer instructions the amount of
rental must be agreed in
advance by both parties in an
unambiguous manner either
for the full term of the lease
or for a specific period in
absolute terms and rental
schedule shall be signed by
both parties.
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 Recovery of Rental
Issue Solution
Delivery letter of the supplier for handing In Ijarah rental can be charged only after
over vehicle to the customer was not delivery of the assets to client. Therefore
found it is very important to know the delivery
date of the assets in Ijarah. Appendix D of
the approved documents is specifically
designed which contain date of delivery
of Ijarah assets to the client which needs
to be supported by documentary
evidences and should be linked with
rental schedule as it cannot be recovered
from the client before delivery date.

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Increase in Price of Ijarah Asset

Issue Solution
When the price increases In all such cases, bank
before Ijarah Agreement, should give the
customer pays the short proportionate owner in
fall without getting joint the Ijarah asset.
ownership

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 Sale and Lease Back

Issue Solution
The sale and lease back The bank should execute
transaction without the proper sale agreement
signing proper sale with the customer before
agreement with the entering into lease
customer before the agreement. Otherwise the
execution of Ijarah transaction becomes
agreement. questionable in the eyes
of Shariah.
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 Sale and Lease Back

Issue Solution
The bank executes the The Islamic bank should
sale agreement with the make a payment to the
customer and makes party with whom it
payment to other executes sale agreement.
conventional bank which
makes Islamic banks
doubtful in the eyes of
public.

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 PAYMENT OF TAKAFUL COST

Issue Solution
In cases of combined Takaful cost should be
ownership model, borne by the partners in
customer only pay the proportionate to their
cost of Takaful. interest in the asset and
not be solely borne by the
customer.

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 TAKAFUL

Issue Solution
In Ijarah cases, risks of As an Islamic financial
the leased assed should institution, the bank
be covered under Takaful should obtain Takaful for
arrangement rather than its leased assets under
under conventional Ijarah.
insurance polices.

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Questions?

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