UIB 2612
Gan Yu Lin
LECTURE 7 IJARAH
RECAP: Mudarabah, Musharakah, Murabahah,
Bay’Bithaman Ajil
DEFINITION
Literally:
Ijarah means compensation or ‫ضوع‬. It also
means the sale of usufruct. (the right to the use,
profit and benefit of something belonging to
another).
Technically:
It means 'to give something on rent'.
It is a contract where the financier (bank)
buys and leases equipment or other assets to
the business owner (customer) for a fee or
more often called rental income.
The duration of the lease as well as the fee
must be set in advance and mutually agreed.
The term 'Ijarah' is used for two different
situations
 relates to the usufructs of assets and
properties
 Services of human beings
NATURE OF AL-IJARAH
Lease is a contract by which the owner of land, a
building allows another person to use it for a
specific time, usually in return for a rent.
Al-Ijarah means a lease contract as well as a
hire contract.
Al-Ijarah, is also known as al-Kira’. It is like
someone who is selling to someone else a right
to benefit or as a payment for services with a
certain price to be paid for it.
In the context of Islamic banking it is a lease
contract under which the bank or financial
institution leases equipment or a building to one
of its clients against a fixed charge.
DIFFERENCES OF OPINION
Some jurist including Hassan al-Basri, al-
Nahrawani and others forbids contract of Ijarah.
Reasons:
 Ijarah is the sale of usufruct or services, and
services is something intangible and does not
exist at the time of contract.
 It only can be achieve gradually over certain
period and something that not exist cannot be
sold.
 It is not permissible to associate bay’ (trade)
with something that could only be realized
and achieved in the future
Majority of jurist including Ibn Rushd allowed
contracts of Ijarah.
Reasons:
 Even though usufruct does not exist at the
time of contract, normally it could be realized
or achieved
 This type of usufruct or benefit could
ordinarily be accomplished, or its
accomplishment or non-accomplishment is
rather similar
EVIDENCE
Al-Quran
(28:26) Said one of the (damsels): "O my (dear)
father! engage him on wages: truly the best of
men for thee to employ is the (man) who is strong
and trusty"....
(28:27) He said: "I intend to wed one of these my
daughters to thee, on condition that thou serve
me for eight years; but if thou complete ten years,
it will be (grace) from thee. But I intend not to
place thee under a difficulty: thou wilt find me,
indeed, if Allah wills, one of the righteous."
Hadith
“Give a servant his fee before his sweat dries
up”(Al-Baihaqi)
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Ijma Ijarah based on Subject Matter

The ummah had came to a consensus during the
time of companion on permissibility of Ujrah
since the need of people for usufruct is similar to
their need to physical good.
PILLARS OF AL-IJARAH
Muajjir: A person who give something for hire
– Lessor, landlord, owner etc.
Musta’jir: A person who takes on hire – Lessee,
tenant, renter etc.
Ma’jur: A thing given for rent
Al-Manfaah: The benefit from a thing –
usufruct, services etc.
Ujrah: Price or fee given for the payment of rent
or lease
Sighah: Offer (Ijab) and Acceptance (Qabul)
FLOWS OF AL-IJARAH
1. Ijarah ‘Ain
 To lease the usufruct from the specific goods
or asset
 Comprises all tangible assets.
 Comprises all tangible assets.
2. Ijarah ‘Amal
 To lease out the works or self skills
 To employ the services of a person on wages
given to him as a consideration for his hired
services.
 Two type of workers:
Employee: person/entity that work only for
the interest of a particular employer or
independent contractor; does not have right
to work for any other lessee during contract.
Independent contractor: offer services to the
general public
 E.g: consultant, lawyer, contractor
3. Ijarah Mawsufah fi al-Zimmah
 Form of ijarah where asset need to be
described in advance
 The leased item/asset is not available
during contract
 The asset must be delivered on a future
agreed date

Ijarah based on Contractual Relationship

1. Operating Lease
 Originated form of ijarah ‘ain
 Features of operating lease:
a. Asset acqusition is in full ownership of
the lessor – legal and beneficial
TYPES OF IJARAH ownership
b. Responsibility to maintain bear by the
Based on Subject Based on the lessor in administrative affairs and
Matter contractual relationship maintenance of asset; lessee only
responsible in the maintenance due to
Tangible asset Operating Lease the usage and has to pay rent per agreed.
c. Risk on the asset is under liability and
Labour Financial lease responsibility of the lessor
d. High risk in nature.
2. Financial Lease
Description of asset
 Normally used and offered by Islamic
bank as financial intermediaries in:
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 Obtaining desired asset
 Obtaining cash money for various
purposes
 Normally used and offered by Islamic
bank as financial intermediaries in:
 Obtaining desired asset
 Obtaining cash money for various
purposes
SUBJECT MATTER OF AL-IJARAH
Since Ijarah is the sale of usufruct, majority of
jurist forbid Ijarah on trees and grapevines, since
fruit are physical goods and Ijarah is the sale of
usufruct and not physical goods.
It is also not permissible to conduct Ijarah on
animal for its milk; ghee, wool or offspring;
water in the river or well or canal since all these
are goods, and not eligible to be under contract
of Ijarah.
Basic principle of Ijarah: every item that could
be utilized with its original substance and part
consistently being conserved or preserved is
allowed for Ijarah, and if not is illegal.
CONDITIONS OF AL-IJARAH
The conditions for Property
1. The property must be belong to the lessor.
2. The property is known to both parties and is
specified.
3. The property can be acquired by the lessee
for his use until the end of tenancy or lease.
4. The property should be in a good condition
possible for leasing.
5. It is the liability of the lessor to repair
damages of the property in order to make it
possible for leasing.
6. It is the liability of the lessee to ensure the
cleanliness and safety of the property.
7. The liability of the lessee over the property
is under the concept of trust (wadiah yadd
amanah). However, in the case of damages
due to his negligence, the lessee is liable to
pay the compensation (dhaman).
8. The lessee cannot lease the property to
another tenant and the second contract is
considered as illegitimate.
9. The sale of a lease property is legitimate.
However, the lessee has a right to use the
property until the lease contract has expired,
where the property will then be submitted to
the buyer.
CONDITIONS OF AL-IJARAH
The conditions for Usufruct
1. The use of the service (usufruct) can be
valued with money.
2. The usufruct must be valid according to
Islamic commercial law.
3. The lessee should be able to make use of the
property on lease.
4. The usage of the property should be made
clear in order to avoid any argument.
5. The usufruct does not entitled the lessee to
own the property.
6. The lessee is not obliged to inform the lessor
his intention for using the property, except
in the case of possible destruction.
7. The usufruct of property beyond its normal
usage is considered as an act of intention.
The conditions for Payment
1. The amount of payment of rent must be
known. If the payment is not in form of cash
money, the goods in return must be specified
its quantity, types and its characteristics.
2. The payment of rent can be made in advance.
3. If the condition for payment does not
prescribed to be paid in advance, the
payment begins when usufruct started.
4. If the payment is made on daily, weekly or
monthly basis, the payment should be made
at the end of period unless otherwise stated
on the agreement.
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5. If the property cannot be used the payment rental, with an agreement that the owner will
is not obliged upon the user. transfer the rented asset to the hirer at the end of
The conditions for Sighah the agreed period or during the period, provided
1. The contract of offer and acceptance should all rental payments or installments have been
follow all the conditions of the contract of made in entirety
sale in Islam; i.e. it should be on mutual In theory, the contract of AITAB shall consist
consent. of two different contracts, namely:
The contract of lease (al-ijarah ‘ain)
DIFFERENCES BETWEEN IJARAH & The contract of sale (al-bay’)
NORMAL SALES AITAB is a contract of leasing with a promise to
1. Duration
sell the asset.
 Ijarah: based solely on a predetermined
FLOWS OF AITAB
time frame as part of the requirement of
In AITAB, the contract of al-ijarah runs
the contract
separately from the contract of al-bay’. These
 Normal sales: does not permit any time
stages are:
frame
Stage 1: Executing the contract of true leasing
2. Nature
(al-ijarah ‘ain)
 Ijarah: a temporary contract with a
Stage 2: Executing the contract of sale (al-bay’)
specified time frame for its expiry and due
at a nominal value agreed upon by both parties.
time
 Normal sales: a permanent contract
FLOWS OF AITAB
without any specified period of expiration
3. Ownership
 Ijarah: no transfer of ownership
 Normal sales: transfer of ownership
occurs
4. Subject
 Ijarah: Usufruct and services
 Normal sales: physical goods and
property

MODERN APPLICATION
Eg: Simple ijarah, AITAB, Musharakah
mutanaqisah
Differences between AITAB & Hire Purchase
AL-IJARAH THUMMA AL-BAY’ (AITAB)
Number of contract
AITAB also known as ijarah wa iqtina’ (‫ةراجإ‬
 Hire purchase – using single contract
‫ )ءانتقاو‬or al-ijarah muntahiya bi-tamlik (‫ارراجإ‬
covering both rental and sale aspects
‫)كايتهللب ايهقتملا‬
 AITAB – comprises two separate contract
Definition:
‘ijarah’ and al’bai
Owning the benefit of certain assets for a specific
period of time, by paying an agreed sums of
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Contract terms
 Hire purchase - Considered as a loan to
customer, the bank charge interest on loan
 AITAB – considered as a financing to the
customer and the bank charge fixed profit on
the cost of financing
Source of funds
 Hire purchase- no restriction on sources of
fund
 AITAB – sourced from halal funds
Acceptance letter
 Hire purchase – no such agreement
 AITAB – customer has to sign the Aqad
letter to denote the offer and acceptance of
transaction
Insurance
 Hire purchase – using conventional
insurance
 AITAB – using Takaful

AITAB PROCESS IN CAR FINANCING

1. Bank (lessor) purchase the car from dealer
2. Bank hire the car to the customer
3. Dealer deliver car to hirer
4. Customer (as lessee) pay monthly payment
as agreed