Ijarah

Presented by: Atiq Ul Haq

What is Ijarah ???

Ijarah" is a term of Islamic fiqh. Literally, it means 'to give
something on rent
Ijarah also relates to paying rent for use of an asset or property

Situations for Ijarah

It means To employ the services of a person on wages
Hires a porter at the airport to carry luggage.

e.g.

In this case, the employer is called Mustajir' while the employee is

called Ajir', while the wages paid to the ajir are called their 'ujrah'.
To pay rent for the use of an asset or property define as Land in
Islamic Economics
In this case, the lessor is called 'Mujir', the lessee is called
Mustajir' and the rent payable to the lessor is called Ujrah'.

Rules of Ijarah:
Transferring the usufruct, not the ownership, for an agreed
period, at an agreed price.
The non-consumable asset should have identifiable value and
quantity.
The lessor bears all liabilities of ownership, while the lessee is
responsible for those of the use of property
Throughout the leasing period, the lessee bears the risk of
ownership.

Types of Ijarah:
Ijarah Thumma al bai' (hire purchase):
Parties enter into contracts that come into effect serially, to form
a complete lease/ buyback transaction.
The first contract is anIjarahthat outlines the terms for leasing
or renting over a fixed period.
The second contract is aBaithat triggers a sale or purchase once
the term of the Ijarah is complete.

Types of Ijarah:
Ijarah-wal-Iqtina:
A contract under which anIslamic bankprovides equipment,
building, or other assets to the client against an agreed rental
together with a unilateral undertaking by the bank or the client
that at the end of the lease period, the ownership in the asset
would be transferred to the lessee.

Differences between Ijarah and

Conventional Leasing:

Conventional
Leasing

Ijarah

Leasing such as, Murabaha, is not

In Ijarah, the lessees liability for the

originally

an

Islamic

mode

of

delivery of the asset and not from

financing.
instead

of

rent starts, when the lessee takes

offering

an

interest-

the day the price has been paid.

banks and leasing

In Ijarah, there is no hire purchase

companies provide to the lessee an

arrangement at the start of the

asset

leasing contract.

bearing

loan,
along

ownership.

with

the

risk

of

How Ijarah is practiced:

An asset, usually a car, machine, equipment or household
durables, is leased to the lessee on an agreed fixed rental
payments for a maximum of 5 years.
In Pakistan, Ijarah form of financing is provided by Islamic Banks,
Islamic windows of Commercial Banks and Modarabas.

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sukuk

Takaful

Musharakah

Mudarabah

An example of car financing:

in Ijara, bank & you purchase a car together in which bank has
80% share (investment).
Now you are supposed to pay 2 types of amounts:
since you are the owner of only 20%, you have to acquire bank's
80% share so that you could become the owner of car. For that,
you pay a certain mutually decided amount.
you have to pay RENT for using 80% of bank's investment. This
rent will be decreasing because every month you will be
acquiring bank's share & rent is paid according to bank's share.

Used car financing:

The second hand car selected should not be more

then twice registered.
The vehicle should not be older than 5 years.
The minimum security deposit for a vehicle up to 2
years of age is 20%, while minimum security deposit
for a vehicle over 2 years of age is 30%.
At the time of maturity of Ijarah agreement, the
vehicle should not be more than 8 years old.
Second hand vehicles selected should not be worth
more than Rs. 1.5 million and less than Rs. 250,000/-.

Used car financing:

Continuation of lease rentals in case of total loss or theft of

vehicle

Takafulinstead of Insurance

Permissibility for Penalty of Late Payment of Rent under Islamic Shariah

What is Residual value (Ijara):

The value of an asset at the conclusion of the lease term or the

price at which a fixed asset is expected to be sold at the end of
its useful life is commonly referred asResidual Value (RV).
The average car buyer should take some effort to determine the
estimated value of their new car in the future it would be best to
know how much your car is worth in the future.
Islamic Bank Car Ijarah is introducing Residual Value Financing,
enabling customer to afford luxury with economy.

What is Residual value (Ijara):

Features:
Down Payment: Minimum 50% of the purchase price
Financing Period: Up to 10 years
Mode of Payment: Quarterly, Semi-annual or Annual terms are
available
Source of Payment: Rentals of the building in question
Profit Rate: Fixed throughout the financing period
Security: Post dated cheques covering installments
Qualified Assets: Residential, Office Buildings and Villa Complexes.

What is Residual value (Ijara):

Documentation:
Primary documents comprise:
Individuals:
Copy of valid passport
Completed finance application form
Copy of site plan
Copy of title deed
Copy of lease contracts (covering purchase of existing rental
property)

What is Residual value (Ijara):

Documentation:
Companies:
Copy of valid Trade License
Copy of Commercial Registry
Copy of Partnership agreement (in case of partnerships)
Copy of valid passport of partners (in case of partnerships)
Copy of valid passport of authorized personnel and copy of Articles of Association
defining their powers
Copy of site plan
Copy of title deed
Last 3 years financials
Copy of lease contracts (covering purchase of existing rented property)

What is Residual value (Ijara):

Lease of jointly owned property:

A joint owner of a property can lease his proportionate share only
to his co-sharer, and not to any other person.
Determination of Rental:
The rental must be determined at the time of contract for the
whole period of lease. It is permissible that different amounts of
rent are fixed for different phases during the lease period.
The determination of rental on the basis of the aggregate cost
incurred in the purchase of the asset by the lessor.

What is Residual value (Ijara):

Lease as a mode of financing:

It is simply a transaction meant to transfer the usufruct of a

property from one person to another for an agreed period
against an agreed consideration.

It is not sufficient for this purpose to substitute the name of

'interest' by the name of 'rent' and replace the name of
'mortgage' by the name of 'leased asset'.
Unlike the contract of sale, the agreement ofljarahcan be
effected for a future date. Hence, it is different fromMurabaha.

What is Residual value (Ijara):

It is simply a transaction meant to transfer the usufruct of a

property from one person to another for an agreed period
against an agreed consideration.

It is not sufficient for this purpose to substitute the name of

'interest' by the name of 'rent' and replace the name of
'mortgage' by the name of 'leased asset'.
Unlike the contract of sale, the agreement ofljarahcan be
effected for a future date. Hence, it is different fromMurabaha.

What is Residual value (Ijara):

Lease as a mode of financing:

there are two separate relations between the institution and the
client.

In the first instance, the client is an agent of the institution to

purchase the asset on latter's behalf.
The second stage begins from the date when the client takes
delivery from the supplier.
Penalty of late payment is given to charity

What is Residual value (Ijara):

Lease as a mode of financing:

The agreement of the lease may contain the following clause for
this purpose:
"The Lessee hereby undertakes that, if he fails to pay rent at its
due date, he shall pay an amount calculated at ....% p.a. to the
charity Fund maintained by the Lessor which will be used by the
Lessor exclusively for charitable purposes approved by the
Sharjah and shall in no case form part of the income of the
Lessor."

What is Residual value (Ijara):

Termination of Lease:
If the lessee contravenes any term of the agreement, the lessor
has a right to terminate the lease contract unilaterally.
In some agreements of the 'financial lease' a condition has been
found to the effect that in case of the termination of lease.
The logical consequence of the termination of lease is that the
lessor should take the asset back.
If the leased property is insured under the Islamic mode
ofTakaful,it should be at the expense of the lessor and not at
the expense of the lessee.

What is Residual value (Ijara):

Termination of Lease:
If the lessee contravenes any term of the agreement, the lessor
has a right to terminate the lease contract unilaterally.
In some agreements of the 'financial lease' a condition has been
found to the effect that in case of the termination of lease.
The logical consequence of the termination of lease is that the
lessor should take the asset back.
If the leased property is insured under the Islamic mode
ofTakaful,it should be at the expense of the lessor and not at
the expense of the lessee.

Acquiring of rental and its timing:

Rental is acquired only by three ways:

Speeding up in the same contract as said by the prophet peace
and blessings be upon him: "Muslims are committed to their
terms and conditions"(31), the condition of speeding up is not
fruitful if rental is added as per the opinion of Hanafie jurists and
same like the use of usufruct.
Speeding up without any condition: analogical to sale as the case
of permissibility of advancing price before delivery of the sold
item.
Use of contracted object, because as the compensated things
owned, the lessor shall own the compensation in return.

IJara according to four scholars:

According to the jurists, Ijarah is the sale of usufruct of any

commodity in the exchange of Ujrah, and covers houses, ships,
riding/ work animals, jewelry, clothes and others.
Four schools of Islamic jurisprudence (Shafiie, Maliki, Hanbali
and Hanafi) have cited various definitions of the contract of
Ijarah.
The permissibility of Ijarah is given in the Holy Quran, Sunnah of
the holy prophet (PBUH) and consensus (Ijmaa) of the Islamic
jurists.

Prohibited Elements of an Ijarah Contract:

Gharar-Ghararis a word used to denote elements of

a contract which are unknown, uncertain or
ambiguous.
Batil - Batildenotes that the contract was entered into
without consent, or with consent acquired through
illegal means.
Maisir-Maisiris a word with connotations of chance,
usually equated with gambling.
Riba-Ribais usually translated as usury.