Q2. Bank Islamiah Malaysia Berhad has entered into an ijarah contract with Amal Sdn. Bhd.

to lease
equipment for a period of 3 years. The Bank purchased a specialised equipment from a local trader
on the 1st of January 2004 for BND1,500,000 and incurred transportation cost of BND 50,000. The
Bank also incurred legal fee of BND 15,000 relating to the ijarah contract, which the bank considered
to be material.

Both parties have agreed that the instalments should be paid every quarter. The rental payment was
agreed BND 60,000 per month. The fair value of the equipment in 3 years time is expected to be
BND 100,000 based on the estimate of certified value. At the beginning of the year 2004, Amal Sdn.
Bhd. Incurred repair cost of BND 50,000 to enable the equipment to be used properly. In the same
year, Amal also found technical default in the equipment and incurred BND 30,000 to repair the
equipment necessary to retain its full working order. Every year, Amal Sdn. Bhd. incurred routine
maintenance costs due to wear and tear amounting to BND 1,500 per year.

Required:

(a) Prepare journal entries to record the above ijarah contract in the books of Bank Shari’ah as Ijarah
Muntahia Bitamleek through equivalent value method as prescribed by AAOIFI FAS 8 for the
following periods:

At the beginning of ijarah

On receipt of first rental

At the end of first year,

At the end of second year, and,

At the end of ijarah term.

(b) Determine the profit on ijarah financing from year 1 to year 3.

(c) Prepare journal entries to record the above ijarah information as required in part (a) according to
Al- Ijarah Thumma Al-Bay’ (AITAB) financing as practiced by most financial institutions.

Q1. Bank Shari’ah Berhad entered into an ijarah contract with Takaful Berhad to lease equipment for

a period of 3 years. Bank Shari’ah Berhad purchased an equipment from a local trader on 1st of
January 2000 for RM60,000. The Bank also incurred legal fees of RM500 relating to
the ijarah contract, which the bank considered to be material. 

Other details about the ijarah are as follows: 

Fair value of equipment: 

At the beginning of 2000 RM60,000 

At the end of the lease 

i.e. 31 December 2002 RM2,000 

Number of installments on quarterly basis 12 

Rentals at the end of each quarter RM6,000 

Estimated useful life 3 years 

Estimated residual value at the 

end of useful life RM4,000 

Estimated expenditure incurred 

in the second year RM1,200 

Required: 

(a) Prepare journal entries to record the above ijarah contract in the books of

Bank Shari’ah Berhad assuming the lease was treated as Ijarah Muntahia Bitamleek through sale for
a token consideration (agreed to be equivalent to 50% of the estimated residual value at the end of
useful life) for the following periods: 

 At the beginning of ijarah; 

 On receipt of first rental; 

 At the end of first year; and, 

 At the end of ijarah term. 

(b) Explain the differences between Ijarah Muntahia Biltamleek (as defined by the AAOIFI FAS 8) and
Al- Ijarah Thumma Al-Bay’ (AITAB) as practiced by Malaysian financial institutions; 

(c) Outline the contractual conditions of ijarah financing as prescribed by the shari’ah. 

b) (i) Ijarah Muntahia Biltamleek is the Ijarah contracts that end up with the transfer of ownership of
leased asset to lessee while in AITAB the transfer of ownership is not necessary however lessor gives
the lessee option to purchase at the end of the installment

(ii) In Ijarah Muntahia Biltamleek, the title of assets is transferred to the lessee by the way of gift,
token, predetermined price, equivalent price and gradual transfer of share whereas in AITAB two
different contracts are undertaken, Ijarah and sale contract.

(iii) In Ijarah Muntahia Biltamleek, maintenance cost is born by the lessor while in AITAB
Maintenance cost are born by the Lessee

c) Conditions for Ijarah contract as outlined by Shariah

i) The property rented or leased must be in a useable condition (i.e., the lessee should be able to use
the property for its intended purpose).

ii) The lessee is not permitted to use the subject in a manner contrary to what is permitted by the
contract

iii) The period of lease must be determined clearly in the ijarah agreement. So, there would be no
conflict and dispute among the parties.
iv) The lease period shall commence effectively when lessee gets the access to the usufruct of the
asset. No matter whether the lessee has actually utilized the asset or not.

v) The rental amount must be known and determined at the time of contract. If the rental amount is
unknown and leads to dispute among the parties, the contract become void.

1. Elements: Offer and acceptance, there must be offer from the lessor and accepted by the
lessee
2. Asset specifications: the asset to be leased must be in existence or the description must be
specified
3. Prepayment and accrual are acceptable with conditions
4. The period of lease must be determined clearly in the ijarah agreement. So, there would be
no conflict and dispute among the parties.
5. The property rented or leased must be in a useable condition (i.e., the lessee should be able
to use the property for its intended purpose).