Introduction to Ijarah

Ijarah
Ijarah is a term of Islamic Fiqh Literally, it means To give something on rent The term Ijarah is used in two situations: 1. It means To employ the services of a person on wages e.g. A hires a porter at the airport to carry his luggage 2. Another type of Ijarah relates to paying rent for use of an asset or property defined as LAND in Islamic Economics

Ijarah as a mode of financing

Ijarah is an Islamic alternative of Leasing. Leasing backed by an acceptable contract is an acceptable transaction under Shariah. The question of whether or not the transaction

of leasing is Shariah compliant depends on the

terms and conditions of the contract. Several characteristics of conventional agreements may not conform to Shariah thus making the transaction un-Islamic and thereby invoking a prohibition.

Ijarah-Key Difference
Risk and rewards of ownership lies with the owner i.e. any loss to the asset beyond the control of the lessee should be borne by the Lessor. Late payment penalty cannot be charged to the income of the Lessor. Lease and Sale agreement should be separate and non contingent.

Lease of Usufruct
Ijarah: Transfer of Ownership to Lessee

Standard Ijarah

Ijarah Wa iqtina

Lessee benefits from asset but no transfer of ownership. Only usufructs are transferred.

Ijarah is conducted solely for the purpose of transfer of ownership Independent/separate contract of sale is formed at the end of lease agreement.

Process of Ijarah

Ijarah
MECHANICS

.
VENDOR ISLAMIC

.
BANK
Agreement-1

CUSTOMER

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

Ijarah as a mode of financing

MECHANICS

.
VENDOR ISLAMIC BANK
Agreement-2

CUSTOMER

The Bank leases the asset to the customer after execution of lease agreement. The customer makes periodic rental payments as per the contract At the end of the tenure customer can purchase the asset from the bank with the help of separate Sale agreement.

Rules governing Ijarah

Ijarah
Rules governing Ijarah are similar to the rules governing sale.

Because in both cases something transferred from one person to another

The only difference is: In case of sale, title of property

is

is

transferred to Buyer In case of Ijarah, title remain with the Lessor Only the use of the property is transferred to Lessee

Rules of Ijarah
1. Leasing is a contract where the owner of an

asset transfers its use to another person

against an agreed price. 2. However, ownership of the leased asset remains with the Lessor

Rules of Ijarah
3. Since ownership of the leased asset remains with the Lessor, all rights and liabilities relating to ownership are borne by the Lessor. All rights and liabilities relating to use are borne

by the Lessee e.g. A gives his house to B

on rent.Property taxes are to be borne by the owner. Water tax, electricity bill etc are to be borne by the Lessee

Rules of Ijarah
4. Subject matter of Lease should be Valuable,
Identified and Quantified. 5. The period of Lease must be determined in clear terms. 6. The Lessee is responsible for damage to the

asset caused by fraud or negligence.

7. Any damage to the asset not caused by the Lessees neglect, is to be borne by the Lessor.

Rules of Ijarah
8. Normal maintenance is Lessees responsibility 9. Lease rentals for the entire lease period must be fixed at the time of Lease Agreement; a) Different amounts of rents can be fixed for different periods, but they must be known. b) The rent may be tied to a known benchmark,

acceptable to both the parties.

Rules of Ijarah
10.The Lessor cannot increase the rent unilaterally

11.The Lessor may receive the rent in advance, but

such payment should be recorded as an Advance rental. Balance Sheet should reflect this payment as Liability, since rent can be received only for use of an asset.

Rules of Ijarah
12.The Lease period will start when the asset has been delivered to the Lessee - in a usable condition - whether or not the Lessee has started using it

13.If the leased asset is destroyed, the lease will

terminate. 14.If the Lessee is at fault, he is liable to compensate the Lessor for the loss

Termination of Ijarah
If the Lessee contravenes any term of the Lease agreement the Lessor may unilaterally terminate the agreement If there is no contravention, the agreement can

only be terminated by mutual consent

Conventional Financial Lease agreements give termination right to Lessor in all cases. This is contrary to Shariah laws

DIFFERENCE BETWEEN CONVENTIONAL LEASE & IJARA

Description 1. Penalty on delay rental Conventional Lease (Non-Islamic) Income of the lessor Islamic Concept (Ijara) Penalty shall be used as a charitable purpose. After possession Prohibited and Haram

2. Rental due

Before possession

2. Pre rental before the delivery Can be possible of leased asset 3. Even if no contravention on the part of the lessee, lessor can terminate the contract unilaterally Yes ( in some cases lessor has been given unrestricted power)

No

Case:
The Islamic Bank has entered into a Ijarah contract with M/s Pak Petroleum Ltd. to supply fuel worth Rs. 5 Million for five years. The rent has been fixed to be Rs. 10,000 /= per month. Is this Ijarah contract valid?

Explanation:
The contract is invalid because fuel cannot be rented out because it cannot maintain its corpus when it is used.

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Case:
The Islamic Bank has rented out a building to M/s Basheer Sons on January 01, 2008. The building is under renovation which would finish within three months. The Ijarah Agreement has been signed and bank is charging the rent from the date of signing the Ijarah Agreement.

Explanation:
Since the subject matter is not in usable form, therefore, the rental may start after it is in usable form i.e. after 31st March 2008

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Case:
Ijarah contract contains a clause that the asset would be sold to the lessee after the lease period if he makes the rental payments on time.

Explanation:
This clause is making selling of the leased asset contingent upon the Ijarah agreement; therefore, the contract would be invalid.

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Case:
The banks leases a machinery to Mr. B for 5 years. The rent for the first year is fixed as Rs. 20,000/- per month and it is agreed that the rent of every subsequent year shall be 10% more than the previous one.

Explanation:
The lease is valid since the rents have been fixed at the beginning of the Ijarah period.

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Basic Rules of Ijarah

17.

If the leased asset has totally lost the function for which it was leased, and no repair is possible, the lease shall terminate on the day in which such loss has been caused. However, if the loss is caused by the misuse or by the negligence of the lessee, he will be liable to compensate the lessor for the depreciated value of the asset as, it was immediately before the loss.
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