CHAPTER 17

IJARAH
(LEASING)
INTRODUCTION
IJARAH is term of Islamic fiqh, which means “to give
something on rent”. In Islamic jurisprudence, the term
“Ijarah is used for two different situations.
1. Employ the services of a person on wages. In this
case, “employer is called mustajir’ while the
employee is called ajir and wages are called as
ujrah.
2. Usufruct of assets not the services of human being.
In this case , “ term Ijarah here is very similar to
English word leasing but not exactly”. Lessor is
called Mujir, the lessee is called mustajir, while rent
payable is called Ujrah.
BASIC RULES OF IJARAH
 Transferring of usufruct not ownership
 Subject matter of lease
 All consumable things can not be leased out
 All liabilities of ownership is borne by lessor
 Period of lease
 Lease for specific purpose
 Lessee as ameen
 Lease of jointly owned property
BASIC RULES OF IJARAH
 Determination of rental
 Rent must be decided at the time of contract.
 Amount can be fixed for a period and vice versa
with mutual consent, and if rent is not determined
on contract, then lease is not valid.
 Rent determination with Aggregate cost incurred
in purchasing of asset is not against the rules, until
other shariah rules are followed.
 Unilateral increase in rent is not allowed.
 Advance rent before delivery of an asset.
BASIC RULES OF IJARAH
 Lease period shall commence on the date of
delivery of asset to lessee.
 In case of the loss of function of asset, the contract
will be terminated.
 Rentals can be benchmarked with some index as
well. In this case, ceiling and flooring concept will
be used to identify the rent.
 BASIC RULES OF IJARAH
Conventional leasing Ijarah

Difference
1.The between
asset to be leased Conventional
is not owned leasing
by The asset to be leasedand Ijarah.
is owned by the
the bank. bank.

2.The bank is not responsible for any The bank bears all the risk of loss to
loss to the asset. asset, only if it is not due to negligence
of the customer.

3.Rent is demanded and charge prior to No rent can be charged and demanded
the delivery of the asset. prior to the delivery of the asset.

4.Unilateral right of bank to terminate No unilateral right to terminate the

the lease agreement without any reason. agreement on both side, it can only be a
mutual consent decision or unless there
is breach of contract
5.Penalty on late payment is charged. Penalty on late payment can not be
charged by bank, but the penalty is for
the charity causes.
BASIC RULES OF IJARAH

 The Commencement of lease

 Rent should be charged after delivery of the asset.
 Relationship between contracting parties.
1. Principal and agent( purchasing on banks behalf).
2. Lessor and lessee( after delivery of asset to client)
BASIC RULES OF IJARAH

 Expenses consequent to ownership

1. Owner is liable to pay all the expenses incurred in
the process of purchasing an asset, such as duty,
customs and freight charges etc.
2. Lessor can include all these expenses in his cost
and take them in consideration when fixing rentals.
 Liability of the parties in case of loss.
1. Lessee is responsible for any loss in case of misuse
or negligence.
2. Lessee is not responsible factors beyond misuse or
negligence.
BASIC RULES OF IJARAH
 Variable rentals in long term
1. Increase according to specified proportion(5% per
year)
2. Shorter contract and renew after some time with
revised rentals.
3. Rate of inflation
4. Rate of interest(KIBOR) Benchmark only If
increased unexpectedly them flooring will be used.
BASIC RULES OF IJARAH
 Penalty for late payment (Accumulated payments
with out additional amount)
 Penalty for late payment is given to
charity(Undertaking)
 Termination of lease
1. Contravention by lessee.
2. Termination due to misuse, lessee will compensate
lessor for damages.
BASIC RULES OF IJARAH
 Insurance of leased assets (Insured at the expense
of lessor not lessee)
 Residual value of leased asset ( sell or gift it to
lessee after the lease period expires)
1. Lessor will give undertaking that he will sell it to
lessee no matter what but there is no obligation on
the lessee to purchase it.
 Leasing for permissible(halal) use.
1. Lessor does not know the purpose.
2. If purpose is known and it is haram then lessor will
also be a sinner.
Accounting treatment of IJARAH
 Leased asset must be recorded in balance sheet of
bank.
 IJARAH Income can not be recognized by the bank
before the execution of IJARAH agreement with
customer.
 IJARAH income will be recognized over the term of
Ijarah on straight line basis.
 Costs, including depreciation, incurred in earning the
Ijarah income are recognized as an expense.