Ijarah RGB

8/13/2019 Ijarah RGB

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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 aperson on wages e.g. A hires a porter atthe airport to carry his luggage

2. Another type of Ijarah relates to payingrent for use of an asset or property definedas LAND in Islamic Economics

Ijarah


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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 transactionof leasing is Shariah compliant depends on the

terms and conditions of the contract.

Several characteristics of conventionalagreements may not conform to Shariah thus

making the transaction un-Islamic and thereby

invoking a prohibition.

Ijarah as a mode of financing


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Risk and rewards of ownership lies with theowner i.e. any loss to the asset beyond thecontrol of the lessee should be borne by theLessor.

Late payment penalty cannot be charged to theincome of the Lessor.

Lease and Sale agreement should be separateand non contingent.

Ijarah-Key Difference


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Lease of Usufruct

Ijarah: Transfer of Ownership to Lessee

Standard Ijarah Ijarah Wa iqtina

Lessee benefits fromasset but no transfer ofownership. Only usufructs aretransferred.

Ijarah is conducted

solely for the purposeof transfer of ownership Independent/separatecontract of sale isformed at the end oflease agreement.


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Process of Ijarah


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CUSTOMER

MECH NICS

ISL MIC B NK

The Bank makes payment to the vendor

The Bank purchases the item required forleasing and receives title of ownership from thevendor

The customer approaches the Bank with therequest for financing and enters into a promiseto lease agreement.

VENDOR

. .

Agreement-1

Ijarah


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CUSTOMER

MECHANICS

ISLAMIC BANK

The customer makes periodic rental paymentsas per the contract

The Bank leases the asset to the customer afterexecution of lease agreement.

VENDOR

At the end of the tenure customer can purchasethe asset from the bank with the help of

separate Sale agreement.

. .

Agreement-2

Ijarah as a mode of financing


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Rules governing Ijarah


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Rules governing Ijarah are similar to the

rules governing sale.

Because in both cases something istransferred from one person to another

The only difference is:

In case of sale, title of property is

transferred to Buyer

In case of Ijarah, title remain with the Lessor

Only the use of the property is transferred to

Lessee

Ijarah


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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


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3. Since ownership of the leased asset remainswith 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


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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


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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


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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


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If the Lessee contravenes any term of the Lease

agreement the Lessor may unilaterally terminate

the agreement

If there is no contravention, the agreement canonly be terminated by mutual consent

Conventional Financial Lease agreements give

termination right to Lessor in all cases. This iscontrary to Shariah laws

Termination of Ijarah


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Description Conventional Lease(Non-Islamic)

Islamic Concept(Ijara)

1. Penalty on delay rental Income of the lessor Penalty shall be usedas a charitablepurpose.

2. Rental due Before possession After possession

2. Pre rental before the deliveryof leased asset

Can be possible Prohibited and Haram

3. Even if no contravention onthe part of the lessee, lessorcan terminate the contractunilaterally

Yes( in some cases lessorhas been givenunrestricted power)

No

DIFFERENCE BETWEEN CONVENTIONALLEASE & IJARA


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Explanation:

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

Case:

The Islamic Bank has entered into a Ijarah contract with M/sPak Petroleum Ltd. to supply fuel worth Rs. 5 Million for fiveyears. The rent has been fixed to be Rs. 10,000 /= per month. Isthis Ijarah contract valid?


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Explanation:

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

Case:

The Islamic Bank has rented out a building to M/s Basheer Sonson January 01, 2008. The building is under renovation whichwould finish within three months. The Ijarah Agreement has

been signed and bank is charging the rent from the date ofsigning the Ijarah Agreement.


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Explanation:

This clause is making selling of the leased asset contingent upon the Ijarahagreement; therefore, the contract would be invalid.

Case:

Ijarah contract contains a clause that the asset would be sold tothe lessee after the lease period if he makes the rental paymentson time.


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Explanation:

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

Case:

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


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Basic Rules of Ijarah

17. If the leased asset has totally lost thefunction for which it was leased, and norepair is possible, the lease shall terminateon the day in which such loss has beencaused. However, if the loss is caused bythe misuse or by the negligence of thelessee, he will be liable to compensate thelessor for the depreciated value of the assetas, it was immediately before the loss.

Documents

Ijarah RGB