Ijarah

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Ijarahاإلجارة

Khairuddin Zakaria

[email protected]

Concept of Ijarah

Ijara or leasing is a form of contract allowed by Islambased on the textual evidences of al-Qur’an and Sunnah.

Not everyone has the means to purchase or own certainassets which he needs so as to utilise and benefit fromthem.

Therefore, Islam has permitted the contract of leasing inorder to facilitate public needs and to provide facilities inlife.

Islamic law permits the leasing of certain assets whosebenefit can be obtained by the lessee against thepayment of some agreed rental.

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Concept of Ijarah

Ijara literally means ‘to give something on rent’. In its technical sense term ‘ijara’ is used with two

different connotations. 1: It means ‘to employ the services of a person on

wages given to him as a consideration for his hiredservices.

The employer in this case is called ‘musta’jir’whileمستأجر the employee is called ‘ajir’. أجیر

This type of ijara includes every transaction wherethe services of a person are hired by someone else.(doctor, lawyer, teacher or any person who canrender some valuable services.

Concept of Ijarah

2: ijara relates to the usufruct of assets andproperties and not to the services of human beings.

Ijara in this sense means ‘to transfer the usufruct ofa particular property to another person in exchangefor a rent claimed from him..

In this case, the term ‘ijara’ has إجارة the samemeaning with the term ‘leasing’.

In this instance, the lessor is called ‘mu’jir’, مؤجر thelessee is called ‘musta’jir’ and the rentpayable to the lessor is called ‘ujrah’. أجرة

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Elements of Ijarah and theconditions for its validity

The elements of the Ijarah and the conditions for its validity asfollows:

There are three elements of the ijara contract which are asfollows:

A. The contracting parties which are the lessor or the owner ofthe asset, and a lessee or the party who benefits from the useof the asset.

B. Offer and acceptance. (Statement)

C. Subject matter of the contract which includes theconsideration (rent) and the benefits (manfa’ah )the use of the assets.

Each and every pillar has to fulfil certain conditions in orderfor it to be valid.

Basic Rules of Leasing The subject of lease must have a valuable use.

Therefore, things having no usufruct at all cannot beleased

It is necessary for a valid contract of lease that thecorpus of the leased property remains in the ownershipof the seller, and only its usufruct is transferred to thelessee.

Thus, anything which cannot be used without consumingcannot be leased out. Therefore, the lease cannot beaffect in respect of money, eatables, fuel andammunition etc. because their use is not possible unlessthey are consumed.

If anything of this nature is leased out, it will be deemedto be a loan and all the rules concerning the transactionof loan shall accordingly apply. Any rent charged on thisinvalid lease shall be interest charged on a loan

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Basic Rules of Leasing

As the corpus of the leased property remains in the ownership ofthe lessor, all the liabilities emerging from the ownership of thelessor, all the liabilities emerging from the ownership shall beborne by the lessor, but the liabilities referable to the use ofproperty shall be borne by the lessee; tax, takaful/insurace,maintenance, etc.

The period of lease must be determined in clear terms

The lessee cannot use the leased asset for any purpose otherthan the purpose specified in the lease agreement. If no suchpurpose is specified in the agreement, the lessee can use it forwhatever purpose it is used in the normal course. However, if hewishes to use it for an abnormal purpose, he cannot do unlessthe lessor allows him in express terms

Basic Rules of Leasing

The lessee is liable to compensate the lessor forevery harm to the leased asset caused by anymisuse or negligence on the part of the lessee

The leased asset shall be remained in the risk ofthe lessor throughout the lease period in the sensethat any harm or loss caused by the factorsbeyond the control of the lessee shall be borne bythe lessor

It is necessary for a valid lease that the leasedasset is fully identified by the parties.

Example: A said to B: “I lease you one of my two shops.”The lease is void, unless the leased shop is clearlydetermined and identified

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When ijarah can be effected?

The contract of ijara can be effected at a future date on the condition thatthe rent will be payable only after the leased asset is delivered to thelessee.

In some lease agreements, the lease commences on the very day on whichthe price is paid by the lessor, irrespective of whether the lessee haseffected payment to the supplier and taken delivery of the asset or not.

This might lead to the assumption that the lessee’s liability for the rent startsbefore the lessee takes delivery of the asset.

If such an instance occurs, this is not allowed by the Shariah, because itamounts to charging rent on the financing given to the customer whichtantamounts to riba.

The correct way, according to the Shariah, is that the rent be charged afterthe lessee has taken delivery of the asset, and not from the day the pricehas been paid.

If the supplier has delayed the delivery after receiving the full price, thelessee should not be liable for the rent of the period of delay

Revocation of ijarah

ijara contract shall be intact as long as all theterms of agreement are honored by both parties.

In this respect, if the lessee contravenes anyterms of the agreement, the lessor has a right toterminate the lease contract unilaterally.

if there is no contravention on the part of thelessee, the lease cannot be terminated withoutmutual consent.

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some have stated that in the case of terminationof lease, even at the option of the lessor, therent of the remaining lease period shall be paidby the lessee.

This condition is obviously against Shariah andthe principles of equity and justice.

The logical consequence of the termination oflease is that the asset should be taken back bythe lessor.


The lessee should be asked to pay the rent asdue up to the date of the termination.

If the termination has been effected due to themisuse or negligence on the part of the lessee,he can also be asked to compensate the lessorfor the loss caused by such misuse ornegligence. But he cannot be compelled to paythe rent for the remaining period.

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Mechanism of ijarah and itsapplication

1: Operating Lease According to this mode of leasing, the Islamic bank maintains a number of

various assets to respond to the needs of different customers. These assets usually have a high degree of marketability. The bank leases out these assets A. Practical Steps in Operating Lease 1. The first step would require the bank to purchase the equipment. 2. After purchasing the equipment, the bank looks for a lessee and leases

out the equipment in exchange for compensation and the lessee pays theagreed rental on the specified period.

3: When the contract period comes to an end, the lessee either returns theequipment to the bank or renews the lease contract for another agreedperiod of time.

4. If the bank recovers the asset at the end of the lease period, it will lookfor a new lessee to let the equipment and this process will continue until thebank chooses to scrap or dispose of the assets.


B. Areas of Application

The operating lease transactions are suitable for highcost expensive assets, that demand large amounts ofmoney in order to possess and a long duration for itsproduction.

For example, aircrafts and ships for which the demandfor operating lease is increasing because of high costand long period of production.

The bank benefits from this mode by retaining the assetsin its possession and at the same time receives returnsfrom leasing.

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2: financing lease:

Ijara Muntahiah Bittamlik (Leasing Ending WithOwnership)

The mode of financing using different types of ijara muntahiahbittamlik is becoming a popular financing tool in many productsoffered by Islamic banks nowadays.

The following are the various forms of the contract of ijaramuntahia bittamlik.

1. Ijara Muntahia Bittamlik through Gift (Transfer of Legal Titlefor No Consideration).

2. Ijara Muntahia Bittamlik through Transfer of Legal Title (Saleat the End of Lease Period for a Token Consideration).


3. Ijara Muntahia Bittamlik through Transfer of LegalTitle (Sale at the End of Lease Period for anAmount Specified in the Lease).

4. Ijara Muntahia Bittamlik through Transfer ofLegal Title (Sale) Prior to End of Lease Term for aPrice Equivalent to Remaining Ijara Installments.

5. Ijara Muntahia Bittamlik through Gradual Transferof Legal Title of Leased Asset.

All agreements for the exchange/transfer ofownership at the end of leasing period should not bemade conditional in the contract

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The End

Thank You

Documents

Ijarah