IJARAH
IJARAH
• “Ijarah” means ‘to give something on
rent’
• In the Islamic jurisprudence, the term
‘Ijarah’ is used for two different
situations.
• In the first place, it means ‘to employ
services of a person on wages given to
him as a consideration for his hired
services’.
Continues
• The employer is called ‘mustajir’ while
the employee is called ‘ajir’.
• Therefore, if A has employed B in his
office as a manager or as a clerk on a
monthly salary, A is a mustajir, and B is an
ajir while the waged paid to the ‘ajir’ are
called their ‘ujrah’.
IJARAH
• The second type of Ijarah related to the
usufructs of assets and properties, and not
the services of human beings.
• ‘Ijarah’ in this sense means ‘to transfer the
usufruct of a particular property to another
person in exchange for a rent claimed from
him.’
• In this case, the term ‘Ijarah’ is analogous
to the English term ‘leasing’.
Continues
• Here the lessor is called ‘Mu’jir’, the
lessee is called ‘musta’jir’ and the rent
payable to the lesser is called ‘ujrah’.
• Lessor (Mujir) is the owner of the asset
while to whom the right of use of that
asset is given is called lessee (Mustajir)
Basic Rules
• Transferring of usufruct not ownership
• Subject of leasse should be valuable,
identified & quantified
• All consumable things cannot be leased out
• All liabilities of ownership is borne by lessor
• Period of lease must be determined
• Lease for specific purpose
• Lessee as Ameen
• Lease of jointly owned property
Determination of Rental
• determined at the time of contract for
the whole period of lease.
• permissible that different amounts of
rent are fixed for different phases during
the lease period
• The lessor cannot increase the rent
unilaterally.
• The rentals can be used on or
benchmarked with some Index as well.
• The index can be the prevailing interest rate or
KIBOR
• Use of interest rate is controversial
• The difference between conventional lease
and Ijarah doesn’t lie in the amount being
paid by the lessor. The difference is that the
lessor assumes full risk, so if the leased asset
is destroyed without any negligence of the
lessee, the loss must be borne by the lessor
while in conventional lease the loss is borne
by the lessee what ever the reason of loss is.
(Read page 145)
Continues..
• The lease period shall commence from the
date on which the leased asset has been
delivered to the lessee.
• Penalty for Late Payment of Rent:
• Rent after it becomes due, is a debt payable
by the lessee, and is subject to all the rules
prescribed for a debt. A monetary charge from
a debtor for his late payment is exactly the
riba prohibited by the Holy Quran.
Variable Rentals in Long Term Leases
In this case the lessor has two options:
• 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).
• He can contract lease for a shorter period
after which the parties can renew the lease at
new terms and by mutual consent
Difference between Lease and Ijarah
• The commencement of lease:
• In leasing, lease starts when payment is made
to the lessee or the seller while in ijarah,
agreement starts when delivery of leased
asset is made to the lessee.
• Different relations of the parties
• Termination of Lease
• Insurance of the assets
• The residual value of the leased asset
• Different relations of the parties
• Initially lessee acts as an agent of the lessor
• Becomes lessee once the delivery of the asset
is made to him / her
• Termination of Lease
• If the lessee contravenes any term of the
agreement
• If the period expires
• Pre mature termination should e with mutual
consent
• Insurance of the assets: Insurance cost
(Takaful) is to be borne by the lessor in Ijarah
while in conventional lease, insurance cost is
borne by the lessee.
• The residual value of the leased asset:
• In case of conventional lease, there is an
expressed or implied clause that at the end of
lease period, lessor will sell the leased asset to
the lessee while in Ijarah, any such clause
cannot be added as it is a well settled rule in
the Islamic legal system that one transaction
cannot be made a pre-condition for another.
(Page 150)
IJARAH WA IQTINA
In Islamic Shariah, it is allowed that
instead of sale, the lessor signs a
separate promise to gift the leased asset
to the lessee at the end of the lease
period, subject to his payment of all
amounts of rent. This arrangement is
called 'Ijarah wa iqtina.
Continues..
• The validity of this arrangement is subject to
two basic conditions:
• a) The agreement of Ijarah itself should not be
subjected to signing this promise of sale or gift
but the promise should be recorded in a
separate document.
Continues..
•
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 case it will
be a full contract effected to a future
date, which is not allowed in the case of
sale or gift.
IJARAH (LEASING)
Ijarah Examples:
Vehicles Ijarah Financing
Plant and Machinery
Consumer Durables
House Financing
Agricultural Durables
Aircrafts, etc.
17
Commencement of Rentals
Conventional Leasing
In case of Booking of Leased
Asset, recovery of Lease
installment commence after
the payment of cost of Asset
to manufacturer/dealer.
Ijarah
In case of Car Ijarah, the
recovery of rentals is
associated with delivery of
Leased Asset.
Rental recovery should not
be commenced before the
delivery of Asset.
18
Leasing/Ijarah Contract
Conventional Leasing
•There are two types of contracts,
Financial lease and loan for car
financing. Both these contracts
contain conditions that are
contravenes with the Islamic
Sharia'h.
•Financing lease contains conditions
of hire purchase, which is not
permissible by Sharia'h.
•Car financing or loan agreement
contains conditions of interest.
Interest is considered Riba by
Sharia'h
Ijarah
•The Ijarah contract does
not contain any condition
that makes the contract
void
under
Sharia'h
perspective.
19
Rights & Liabilities of Lessor and Lessee
Conventional Leasing
•In
Conventional
Leasing
Products, the Customer is
responsible for all kinds of
losses or damages to the
Leased asset, irrespective of
the circumstances.
•If the insurance company
does not compensate the
entire outstanding amount in
case of total loss, the
customer is liable to pay the
balance.
Ijarah
•All
risks pertaining to
ownership are borne by
Lessor. Customer only bears
usage-related risks.
•Lessor
bears the risk of
Insurance claim settlement.
20
Rentals recovery in case of theft and loss
Conventional Leasing
Ijarah
If the Leased Asset is stolen
or completely destroyed, the
conventional
leasing
company or Bank would
continue charging the lease
rent till the settlement of the
Insurance claim
Under the Islamic Ijarah, rent
is consideration for usage of
the leased asset, and if the
asset has been stolen,
destroyed or temporarily out
of order and not in use of
Customer, the concept of
rental becomes void. In such
situations rental is not
charged from the lessee.
21
Penalty for late payment
Conventional Leasing
•In
most contemporary
financial leases, an extra
monetary
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.
Ijarah
•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 a charity
Fund,
which
will
be
administered through the
Islamic Bank.
•For this purpose the bank
maintains a charity fund
where such amounts may be
credited and disbursed for
22
charitable purposes.
Insurance premium
Conventional Leasing
Ijarah
Insurance is independent of
the lease contract. 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. The Lessor may
increase the lease rent to
recover any costs incurred by
him in connection with the
asset. However, as a matter
of principal, the cost should
be paid for by the Lessor.
23
Registration Charges
Conventional Leasing
Ijarah
Lessee is responsible for the
Registration of Leased
Vehicle.
The Leased Asset(vehicle) is
registered in the name of the
Bank and registration
charges are paid by the Bank
(Lessor).
The Lessor may increase the
lease rent to recover any
costs incurred by him in
connection with the asset
24
Purchase of asset
Conventional Leasing
Under conventional leasing
contracts, the vehicle is
automatically transferred in
the name of the customer
upon completion of the lease
period, whether or not he
wants to purchase it.
Ijarah
There is not such clause in the
Ijarah Agreement that Leased
Asset will automatically
transfer to Lessee.
Separate sale agreement is
required to execute sale
transaction at the end of lease
term.
25
Signing of Lease Contract
Conventional Leasing
Lease Agreement can be
signed by the Lessor and
Lessee any time even if the
Leased Asset is not owned by
the Customer.
Ijarah
In case of Ijarah, the Ijarah
Agreement can not be signed
by the Lessor and Lessee
unless:
Asset has come in to
existence
Assets is in the ownership of
the Lessor
Lessor has taken possession
of the Asset
26
Termination before delivery
Conventional Leasing
The customer will suffer loss of
interest paid during the
booking
period
because
installment
commence
immediately after payment of
cost
of
asset to the
Manufacturer/Dealer.
Ijarah
The loss of customer is only
limited to actual loss, if any,
suffered by the Lessor on sale
of asset in the open market.
Since the customer has not
paid any rental during the
booking period, no other cash
loss is expected under Ijarah.
27
DOCUMENTATION OF
IJARAH
28
IJARAH AGREEMENT
• Ijarah Agreement is the basic document
which contains all terms and conditions
pertinent of Ijarah of particular Asset(s).
• Ijarah Agreement shall be signed after
the Lessor has taken the possession the
Asset and not earlier.
29
ADDENDUMS TO IJARAH AGREEMENT
• Description of the Ijarah Asset
• Schedule of of Ijarah Rentals
• Receipt of Asset
• Demand Promissory Note
30
DESCRIPTION OF IJARAH ASSET
• This document contains the detailed
description about the Leased Asset agreed
between the parties e.g. Name, Make ,Model,
Engine No., Chassis No., Registration No. etc .
• This documents shall be signed after
Delivery of asset to the Lessee and not
earlier.
31
SCHEDULE OF IJARAH RENTALS
• This schedule contains a table which shows:
• Amount of rental (Monthly/Quarterly/Half
Yearly)
• Date of Payment of each rental
• This schedule will also contain the date on
which first rental is due.
• This documents shall be signed
Delivery of asset to the Lessee.
after
RECEIPT OF ASSETS
• This document confirms that customer
has taken the possession of Leased Asset
as described in the earlier document
“Description of Ijarah Asset”.
• This document is only signed by the
Lessee on receipt of Asset, as an
acknowledgement of receipt of described
asset under Ijarah Contact.
PROMISSORY NOTE
• After signing of Ijarah Agreement, the
amount of rentals become Debt (Dyan)
to the Lessee.
• Promissory
Note
is
Lessee’s
acknowledgement to Debt amount and
its promise to pay.
34
UNDERTAKING TO PURCHASE LEASED ASSET
• This documents contains undertaking
from the Lessee that he/she will
purchase the Leased asset on the
purchase Price corresponding to the
Purchase Date.
• This document contains a schedule
which shows Purchase Price(s) during
the Ijarah term on which the Lessee can
purchase the asset by making lump sum
payment.
35
OTHER DOCUMENTS
• Undertaking for Personal use of
Ijarah Asset
• Trust Receipt
• Authorization to Take possession of
Leased Asset
• Sale Deed
36