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IJARAH
Rental System used by IFIs
November 28- 29, 2013

Ch. Hamad Rasool Bhullar
FCMA, FCIS, FPFA, M.com, DCMA, PGD(Islamic Banking)
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IJARAH (LEASING) - INTRODUCTION
Ijarah is to offer for a consideration the usufruct of
a thing of value from which benefit can be derived
without consumption, while retaining the
ownership of the leased assets and assuming
risks pertaining thereto
IJARAH AL ASHKAAS Vs IJARAH AL AIYAN
Conventional Lease Vs Islamic Ijarah
Ijarah (Operating Lease)
Ijarah Muntahia Bittamleek
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It is an Ijarah that ends with the ownership of the asset.

There are several types of Ijarah Muntahia Bittamleek.
These are characterized based on the method by which
the ownership transfers to the user:
For no consideration (through a gift)
For token consideration
For price specified in the lease
For remaining amount (if lease is terminated before period)
Gradual transfer

IJARAH MUNTAHIA BITTAMLEEK
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ESSENTIALS OF IJARAH
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IJARAH (LEASING)
The corpus of leased commodity remains in the
ownership of the lessor and only its usufruct is
transferred to the lessee.

Any thing which cannot be used without consuming,
cannot be leased out like money, edibles, fuel, etc.

Only such assets which are owned by the lessor can
be leased out except that a sub-lease is effected by the
lessee with the express permission of the lessor.

Until such time that assets to be leased are delivered
to the lessee, lease rentals do not become due and
payable
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IJARAH (LEASING)
During the entire term of the lease, the lessor must
retain title to the assets, and bear all risks and rewards
pertaining to ownership.

If any damage or loss is caused to the leased assets
due to the fault or negligence of the lessee, the
consequences thereof shall be borne by the lessee.

The consequences arising from non-customary use of
the asset without mutual agreement will also be borne
by the lessee.
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IJARAH (LEASING)
The lessee is also responsible for all risks and
consequences in relation to third party liability, arising
from or incidental to operation or use of the leased
assets.

The insurance (Takaful) of the leased asset should be
in the name of lessor and the cost of such Takaful also
borne by him.

A lease can be terminated before expiry of the term
of the lease but only with the mutual consent of the
parties.
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IJARAH (LEASING)
Either party can make a unilateral promise to buy/sell
the assets upon expiry of the term of lease, or earlier at
a price and at such terms and conditions as are
agreed, provided that the lease agreement shall not be
conditional upon such sale.

Alternatively, the lessor may make a promise to gift the
asset to the lessee upon termination of the lease,
provided the lessee has fulfilled all his obligations.

However, there shall not be any stipulation in the lease
agreement purporting to transfer of ownership of the
leased assets at a future date.
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IJARAH (LEASING)
The amount of rental must be agreed in advance in an
unambiguous manner either for the full term of the
lease or for a specific period in absolute terms.

Assignment of only the lease rentals is not permissible
except at par value.

Contract of lease will be considered terminated if the
leased asset ceases to give the service for which it
was rented. However, if the leased asset is damaged
during the period of the contract but is capable of being
repaired, the contract will remain valid.
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IJARAH (LEASING)
A penalty can be agreed ab initio in the lease agreement
for delay in payment of rental by the lessee. In that case,
lessee shall be liable to pay penalty calculated at the
agreed rate in percent per day/annum. However, that
penalty shall be used for the purposes of charity.

However, The Islamic banks can also approach
competent courts for award of damages, at discretion of
the courts, which shall be determined on the basis of
direct and indirect costs incurred, other than opportunity
cost.

Also, security or collateral can be sold by the bank
(purchaser) without intervention of the court.
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AAOIFI SHARIAH
STANDARD # 9
GUIDLINES
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Ijarah and Ijarah Muntahia Bittamleek
SHARIAH GUIDLINES
Scope of the standard.
This standard is applicable to operating leases of
properties or to Ijarah Muntahia Bittamleek. Whether
the institution is the lessor or the lessee. This standard
is not applicable to the employment of persons (labor
contract).

Promise to lease (an asset).
It is permissible for the institution to require the lease
promisor (customer) to pay a sum of money to the
institution to guarantee the customers commitment to
accepting a lease on the asset and the subsequent
obligations, provided no amount is to be deducted from
this sum except in proportion to the actual damage
suffered by the institution.


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Ijarah and Ijarah Muntahia Bittamleek
SHARIAH GUIDLINES
Acquisition of the asset to be leased.
For the validity of an Ijarah contract concerning a
specified asset, the lease contract should be preceded
by acquisition of either the asset to be leased or the
usufruct of that asset.
(a) If the asset or the usufruct thereof is owned by the
institution, which should in principle be the case, an
Ijarah contract may be executed as soon as
agreement is reached by the two parties.
(b) however, if the asset is to be acquired from the
customer, or from a third party, the Ijarah contract
shall not be executed unless and until the institution
has acquired that asset.
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Ijarah and Ijarah Muntahia Bittamleek
SHARIAH GUIDLINES
Concluding an Ijarah contract.
The lease contract is a binding contract which neither
may terminate or alter without the others consent.

The duration of an Ijarah contract must be specified in
the contract. The period of Ijarah should commence on
the date of execution of the contract, unless the two
parties agree on a specified future commencement
date, resulting in a future Ijarah, that is, an Ijarah
contract to be executed at a future date.

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Ijarah and Ijarah Muntahia Bittamleek
SHARIAH GUIDLINES
Subject Matter of Ijarah
The leased asset must be capable of being used while
preserving the asset, and the benefit from an Ijarah
must be lawful in Sharia.

The lessor may not stipulate that the lessee will
undertake the major maintenance of the asset that is
required to keep it in the condition necessary to
provide the contractual benefits under the lease. The
lessor may delegate to the lessee the task of carrying
out such maintenance at the lessors cost. The lessee
should carry out operating or periodical (ordinary)
maintenance.
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Ijarah and Ijarah Muntahia Bittamleek
SHARIAH GUIDLINES
Rules governing lease rentals.
In case the rentals is subject to changes (floating
rentals), it is necessary that the amount of the rentals
of the first period of the Ijarah contract be specified. It
is then permissible that the rentals for subsequent
periods be determined according to a certain
benchmark.

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Ijarah and Ijarah Muntahia Bittamleek
SHARIAH GUIDLINES
Guarantees and treatment of Ijarah receivables.
Permissible security, of all kinds, may be taken to
secure the rental payments or as security against
misuse or negligence on the part of lessee.
It may be provided in the contract of Ijarah or Ijarah
Muntahia Bittamleek that a lessee who delays payment
for no good reason undertakes to donate a certain
amount or percentage of the rentals due in case of late
payment. Such donation should be paid to charitable
causes under the co-ordination of the institution's
Sharia supervisory board.
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Ijarah and Ijarah Muntahia Bittamleek
SHARIAH GUIDLINES
Termination of the Ijarah Contract.
The two parties may terminate the Ijarah contract
before it begins to run.
It is permissible to terminate the lease contract by
mutual consent but it is not permissible for one party to
terminate it except in case of force majeure or there is
a defect in the leased asset that materially impairs its
use. Termination is also possible when one party
secures an option to terminate the contract in which
case the party who holds the option may exercise it
during the specified period.
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Ijarah and Ijarah Muntahia Bittamleek
SHARIAH GUIDLINES
Transfer of the ownership in the leased property in
Ijarah Muntahia Bittamleek.
In Ijarah Muntahia Bittamleek, the method of transferring
the title in the leased asset to the lessee must be
evidenced in a document separate from the Ijarah
contract document, using one of the following methods.
By means of a promise to sell for a token or other
consideration, or by accelerating the payment of the
remaining amount of rental, or by paying the market
value of the leased property.
A promise to give it as gift (for no consideration).
A promise to give it as a gift, contingent upon the
payment of the remaining installments.
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MECHANISM OF IJARAH
Another popular instrument 15% of the transactions
Easier to understand and implement
Right available to the lessee for purchase
Financier
(Lessor)
Client
(Lessee)
Vendor
Transfer of asset
Beneficial use
of asset
Payment of
purchase price
Lease rentals
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Risks and Practical I ssues
Credit Risk (Default in rental payments)
Rate of Return Risk
Customer may decline to enter into Ijarah.
Damage to the Asset
Overdue Rentals
Non-Compliance/Violation of contract.
Early Termination
Asset Price Risk
Repair and Maintenance
Running Expenses (depending upon contract)

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Risks and Practical I ssues
Proper documentation
Sequence of Documentation in Sale and
lease Back.
Time of Transferring asset in Sale and Lease
back
Islamic Lease covers the conditions of
Finance Lease as described in IAS 17.
Accounting & Tax Depreciation Issues.
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DOCUMENTATION
SPECIAL CARES
IN IMPLEMENTATION OF THE
IJARAH SYSTEM
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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.
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ADDENDUMS TO IJARAH AGREEMENT

Description of the Ijarah Asset
Schedule of of Ijarah Rentals
Receipt of Asset
Demand Promissory Note
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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 etc.

This documents shall be signed signed after
Delivery of asset to the Lessee and not earlier.
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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 signed after Delivery
of asset to the Lessee.
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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.
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PROMISSORY NOTE
After signing of Ijarah Agreement, the amount
of rentals become Debt (Dyan) to the Lessee.

Promissory Note is Lessees acknowledgement
to Debt amount and its promise to pay.
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UNDERTAKING TO PURCHASE
LEASED ASSET
This documents contains undertaking from the
Lessee that he/it 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.



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OTHER DOCUMENTS

Undertaking for Personal use of
Ijarah Asset
Trust Receipt
Authorization to Take possession of
Leased Asset
Sale Deed
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THANK YOU
for
listening with Patience
.

Any further Questions.?
Ch. Hamad Rasool Bhullar