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LECTURE 21 By Dr. Syed Zulfiqar Ali Shah IJARAH 2

Summary of Last Lecture Islamic Banks’Ijarah Muntahia-Bi-Tamleek Procedure for Ijarah Muntahia-bi-Tamleek Issues Concerning Modern Use of Ijarah Assignment of the Leased Assets and Securitization of Leases Potential of Ijarah IJARAH 3

Layout Summary of Guidelines For Islamic Bankers on Ijarah Risk mitigation in case of Ijarah Auto Ijarah compared with conventional leasing products A hypothetical case study on Ijarah Accounting treatment of Ijarah IJARAH 4

SUMMARY OF GUIDELINES FOR ISLAMIC BANKERS ON IJARAH IJARAH5

Summary of Guidelines for Islamic Bankers on Ijarah 1.According to Islamic principles of finance, there is no difference between operating and finance leases; if all of the four essential elements relating to contracting parties, subject matter, consideration and the period in Ijarah are taken care of, Ijarah can be used as the mode of modern business by the financial institutions in the form of Ijarah Muntahia-bi-Tamleek. The deciding factor in this regard is the risk relating to ownership that must remain with the lessor and sale should be separate from the lease. 2.The lease of an identified asset cannot commence before the bank takes the possession of the asset to be leased. If the time of possession of the asset to be leased is unknown, the whole arrangement will be provisional. 3.Any arrangement of two contracts into one contract is not permissible in Shar¯ı´ah. Therefore, IFIs cannot have the agreement of hire and purchase built into a single agreement. IJARAH 6

Summary of Guidelines for Islamic Bankers on Ijarah(Cont’d) 4.When the period of lease comes to an end, the bank can transfer the ownership to the client or dispose of it in the open market. If the bank transfers the ownership to the lessee, the proper sale agreement or gift deed should be executed. The promise to transfer the ownership is binding on the promisor only; the other party must have the option not to proceed. The AAOIFI Standard provides for promise by the lessor, while many Islamic banks, as in the case of Pakistan and other jurisdictions, take undertaking from the lessee and deem it binding on him. Abiding by the AAOIFI’s Standard in this regard seems to be justifiable and nearer to the spirit of the Shar¯ı´ah. 5.The lessor bears expenses relating to the corpus of the asset, i.e. Takaful, accidental repairs, etc., while operating expenses related to running the asset have to be borne by the lessee. Takaful and other costs incurred by the bank can be recovered in the lease rental, IJARAH 7

subject to transparency and mutual understanding. If the customer pays the Takaful cost as agent of the bank, it will be reimbursed to the client by the bank. 6.A bank can jointly acquire an asset with a customer who wishes to get the asset on lease; the bank can then lease its share of the asset as per the undertaking of the customer. The rental to be received by the bank should be in proportion to its share in the ownership of the asset. IJARAH Summary of Guidelines for Islamic Bankers on Ijarah(Cont’d) 8

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Summary of Today's Lecture Summary of Guidelines For Islamic Bankers on Ijarah Risk mitigation in case of Ijarah Auto Ijarah compared with conventional leasing products A hypothetical case study on Ijarah Accounting treatment of Ijarah IJARAH 22

Thank You…. IJARAH 23