IJARAH

IJARAH “Ijarah” means ‘to give something on rent’ In the Islamic jurisprudence, the term ‘Ijarah’ is used for two different situations. In the first place, it means ‘to employ services of a person on wages given to him as a consideration for his hired services’.

Continues The employer is called ‘mustajir’ while the employee is called ‘ajir’. Therefore, if A has employed B in his office as a manager or as a clerk on a monthly salary, A is a mustajir, and B is an ajir while the waged paid to the ‘ajir’ are called their ‘ujrah’.

IJARAH The second type of Ijarah related to the usufructs of assets and properties, and not the services of human beings. ‘Ijarah’ in this sense means ‘to transfer the usufruct of a particular property to another person in exchange for a rent claimed from him.’ In this case, the term ‘Ijarah’ is analogous to the English term ‘leasing’.

Continues Here the lessor is called ‘Mu’jir’, the lessee is called ‘musta’jir’ and the rent payable to the lesser is called ‘ujrah’. Lessor (Mujir) is the owner of the asset while to whom the right of use of that asset is given is called lessee (Mustajir)

Basic Rules Transferring of usufruct not ownership Subject of leasse should be valuable, identified & quantified All consumable things cannot be leased out All liabilities of ownership is borne by lessor Period of lease must be determined Lease for specific purpose Lessee as Ameen Lease of jointly owned property

Determination of Rental determined at the time of contract for the whole period of lease. permissible that different amounts of rent are fixed for different phases during the lease period The lessor cannot increase the rent unilaterally. The rentals can be used on or benchmarked with some Index as well.

The index can be the prevailing interest rate or KIBOR Use of interest rate is controversial The difference between conventional lease and Ijarah doesn’t lie in the amount being paid by the lessor. The difference is that the lessor assumes full risk, so if the leased asset is destroyed without any negligence of the lessee, the loss must be borne by the lessor while in conventional lease the loss is borne by the lessee what ever the reason of loss is. (Read page 145)

Continues.. The lease period shall commence from the date on which the leased asset has been delivered to the lessee. Penalty for Late Payment of Rent: Rent after it becomes due, is a debt payable by the lessee, and is subject to all the rules prescribed for a debt. A monetary charge from a debtor for his late payment is exactly the riba prohibited by the Holy Quran.

Variable Rentals in Long Term Leases In this case the lessor has two options: A lease contract can have a condition that the rent shall be increased according to a specified proportion (e.g. 5%) after a specified period (like one year). He can contract lease for a shorter period after which the parties can renew the lease at new terms and by mutual consent

Difference between Lease and Ijarah The commencement of lease: In leasing, lease starts when payment is made to the lessee or the seller while in ijarah, agreement starts when delivery of leased asset is made to the lessee. Different relations of the parties Termination of Lease Insurance of the assets The residual value of the leased asset

Different relations of the parties Initially lessee acts as an agent of the lessor Becomes lessee once the delivery of the asset is made to him / her Termination of Lease If the lessee contravenes any term of the agreement If the period expires Pre mature termination should e with mutual consent

Insurance of the assets: Insurance cost (Takaful) is to be borne by the lessor in Ijarah while in conventional lease, insurance cost is borne by the lessee. The residual value of the leased asset: In case of conventional lease, there is an expressed or implied clause that at the end of lease period, lessor will sell the leased asset to the lessee while in Ijarah, any such clause cannot be added as it is a well settled rule in the Islamic legal system that one transaction cannot be made a pre-condition for another. (Page 150)

IJARAH WA IQTINA In Islamic Shariah, it is allowed that instead of sale, the lessor signs a separate promise to gift the leased asset to the lessee at the end of the lease period, subject to his payment of all amounts of rent. This arrangement is called 'Ijarah wa iqtina.

Continues.. The validity of this arrangement is subject to two basic conditions: a) The agreement of Ijarah itself should not be subjected to signing this promise of sale or gift but the promise should be recorded in a separate document.

Continues.. The promise should be unilateral and binding on the promisor only. It should not be a bilateral promise binding on both parties because in this case it will be a full contract effected to a future date, which is not allowed in the case of sale or gift.

IJARAH (LEASING) Ijarah Examples: Vehicles Ijarah Financing Plant and Machinery Consumer Durables House Financing Agricultural Durables Aircrafts, etc.

Commencement of Rentals Conventional Leasing Ijarah In case of Booking of Leased Asset, recovery of Lease installment commence after the payment of cost of Asset to manufacturer/dealer. In case of Car Ijarah, the recovery of rentals is associated with delivery of Leased Asset. Rental recovery should not be commenced before the delivery of Asset.

Leasing/Ijarah Contract Conventional Leasing Ijarah There are two types of contracts, Financial lease and loan for car financing. Both these contracts contain conditions that are contravenes with the Islamic Sharia'h. Financing lease contains conditions of hire purchase, which is not permissible by Sharia'h. Car financing or loan agreement contains conditions of interest. Interest is considered Riba by Sharia'h The Ijarah contract does not contain any condition that makes the contract void under Sharia'h perspective.

Rights & Liabilities of Lessor and Lessee Conventional Leasing Ijarah In Conventional Leasing Products, the Customer is responsible for all kinds of losses or damages to the Leased asset, irrespective of the circumstances. If the insurance company does not compensate the entire outstanding amount in case of total loss, the customer is liable to pay the balance. All risks pertaining to ownership are borne by Lessor. Customer only bears usage-related risks. Lessor bears the risk of Insurance claim settlement.

Rentals recovery in case of theft and loss Conventional Leasing Ijarah If the Leased Asset is stolen or completely destroyed, the conventional leasing company or Bank would continue charging the lease rent till the settlement of the Insurance claim Under the Islamic Ijarah, rent is consideration for usage of the leased asset, and if the asset has been stolen, destroyed or temporarily out of order and not in use of Customer, the concept of rental becomes void. In such situations rental is not charged from the lessee.

Penalty for late payment Conventional Leasing Ijarah In most contemporary financial leases, an extra monetary amount is charged if rent is not paid on time. This extra amount is the considered Riba and is Haram. This amount is taken by the leasing institution into their income. Under Ijarah, the Lessee may be asked to undertake that if he fails to pay rent on its due date, he will pay a certain amount to a charity Fund, which will be administered through the Islamic Bank. For this purpose the bank maintains a charity fund where such amounts may be credited and disbursed for charitable purposes.

Insurance premium Conventional Leasing Ijarah Insurance is independent of the lease contract. The insurance expense of the asset is directly borne by the lessee Takaful / Insurance should be at the expense of the Lessor and not at the expense of the lessee. The Lessor may increase the lease rent to recover any costs incurred by him in connection with the asset. However, as a matter of principal, the cost should be paid for by the Lessor.

Registration Charges Conventional Leasing Ijarah Lessee is responsible for the Registration of Leased Vehicle. The Leased Asset(vehicle) is registered in the name of the Bank and registration charges are paid by the Bank (Lessor). The Lessor may increase the lease rent to recover any costs incurred by him in connection with the asset

Purchase of asset Conventional Leasing Ijarah Under conventional leasing contracts, the vehicle is automatically transferred in the name of the customer upon completion of the lease period, whether or not he wants to purchase it. There is not such clause in the Ijarah Agreement that Leased Asset will automatically transfer to Lessee. Separate sale agreement is required to execute sale transaction at the end of lease term.

Signing of Lease Contract Conventional Leasing Ijarah Lease Agreement can be signed by the Lessor and Lessee any time even if the Leased Asset is not owned by the Customer. In case of Ijarah, the Ijarah Agreement can not be signed by the Lessor and Lessee unless: Asset has come in to existence Assets is in the ownership of the Lessor Lessor has taken possession of the Asset

Termination before delivery Conventional Leasing Ijarah The customer will suffer loss of interest paid during the booking period because installment commence immediately after payment of cost of asset to the Manufacturer/Dealer. The loss of customer is only limited to actual loss, if any, suffered by the Lessor on sale of asset in the open market. Since the customer has not paid any rental during the booking period, no other cash loss is expected under Ijarah.

DOCUMENTATION OF IJARAH

IJARAH AGREEMENT Ijarah Agreement is the basic document which contains all terms and conditions pertinent of Ijarah of particular Asset(s). Ijarah Agreement shall be signed after the Lessor has taken the possession the Asset and not earlier.

ADDENDUMS TO IJARAH AGREEMENT Description of the Ijarah Asset Schedule of of Ijarah Rentals Receipt of Asset Demand Promissory Note

DESCRIPTION OF IJARAH ASSET This document contains the detailed description about the Leased Asset agreed between the parties e.g. Name, Make ,Model, Engine No., Chassis No., Registration No. etc . This documents shall be signed after Delivery of asset to the Lessee and not earlier.

SCHEDULE OF IJARAH RENTALS This schedule contains a table which shows: Amount of rental (Monthly/Quarterly/Half Yearly) Date of Payment of each rental This schedule will also contain the date on which first rental is due. This documents shall be signed after Delivery of asset to the Lessee.

RECEIPT OF ASSETS This document confirms that customer has taken the possession of Leased Asset as described in the earlier document “Description of Ijarah Asset”. This document is only signed by the Lessee on receipt of Asset, as an acknowledgement of receipt of described asset under Ijarah Contact.

PROMISSORY NOTE After signing of Ijarah Agreement, the amount of rentals become Debt (Dyan) to the Lessee. Promissory Note is Lessee’s acknowledgement to Debt amount and its promise to pay.

UNDERTAKING TO PURCHASE LEASED ASSET This documents contains undertaking from the Lessee that he/she will purchase the Leased asset on the purchase Price corresponding to the Purchase Date. This document contains a schedule which shows Purchase Price(s) during the Ijarah term on which the Lessee can purchase the asset by making lump sum payment.

Undertaking for Personal use of Ijarah Asset Trust Receipt OTHER DOCUMENTS Undertaking for Personal use of Ijarah Asset Trust Receipt Authorization to Take possession of Leased Asset Sale Deed