ESSENTIALS OF ISLAMIC FINANCE 1

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IJARAH Finance lease is mostly used to raise long term capital to pay for assets. It enables the lessor to earn reasonable profit along with full recovery of the cost of the asset. operational lease it is also called as a “non-full payout” leases, because the amount of the rental does not cover the lessor full cost of asset and the period of lease is always less than the useful life of the asset. 3

 Ijarah is also validated by the Quran, Sunnah, and ijmah. QURAN Several verses are found in the Quran (al-Kahf, 77: al- Qasas, 26: al-Talaq, 65-6) on the worker’s entitlement to a wage SUNNAH References also occur in hadith to ijarah and the employer-employee relations“pay the employee his wages before the sweat of his brow dries up”. 4

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The arrangement of Ijarah has a good potential of securitization which may help create a secondary market for the financiers on the basis of Ijarah. The lessor in Ijarah owns the leased assets, he can sell the asset, in whole or in part, to a third party who may purchase it and may replace the seller in the rights and obligations of the lessor with regard to the purchased part of the asset. In the case of total destruction of the asset, he will suffer the loss to the extent of his ownership. 11

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It is necessary for a valid Ijarah that the Ijarah asset is fully identified by the parties A joint owner of an Asset can given on Ijarah basis his proportionate share to his co- sharer only, and not to any other person. The lessee is liable to compensate the lessor for every harm to the Ijarah asset caused by any misuse or negligence on the part of the lessee. Lessees cannot use the Ijarah asset for any purpose other than the purpose specified in the Ijarah agreement. The period of Ijarah must be determined in clear terms. The subject of Ijarah must have a valuable use. Therefore, things having no usufruct at all cannot be given on Ijarah. 15

 contract of ijarah can only be revoked where the asset lost its utility or function 16

Generally, the financial institutions calculate the rental amounts as follows: The financial institution determines that it wants to have a profit rate (PR) of 10 percent. The purchase price (PP), including all costs, is $1,000,000 (cost borne by the financial institution). The term (T) of the lease is 5 years. 17

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