Definition of Ijarah

Transferring of usufruct not the ownership to

another person for an agreed price, at an agreed
consideration.

Types of Ijarah
1) Hiring/ Employment : To employ/hire the
service of a person on wages.

2) Leasing : To transfer the usufruct of a

particular asset to another person in exchange of
a rent payment.
Types of Leasing
1) Operating lease
Simple rental agreement in which the leased
asset remains in the ownership of Lessor and
comes back to him after the lease period.
2) Hire- purchase
Where the intention of lessee is to acquire the
ownership of asset, but due to certain reasons
and in particular due to some tax concessions
they show Ijarah and after the lease period
corpus of the leased asset transfers to the
lessee without any new contract and paid
rental becomes price. It is not permissible.
3) Financial lease. Conventional
Lease and Islamic Lease)
•conventional Lease
The intention is same, only difference is that the
corpus of leased asset is transferred to the lessee
by execution of sale agreement or by gift, lease
agreement has an express clause to this effect. it
is also impermissible for two reasons:
1)One transaction is tied up with another
transaction.
2)Lessor does not bear the responsibility of
Lessor.
•Islamic Lease (Ijarah muntahiah
bet-tam leek)

Intention is same, but the Ijarah agreement

does not contain a condition of sale or gift
at the end of lease period and Lessor
bears the responsibility being a Lessor and
assumes the full risk of the corpus of the
leased asset.
Ijarah Muntahia Bittamleek

• This is a lease that ends with the ownership of the

asset.
• There are several types of Ijarah Muntahia
Bittamleek. These are the characteristics based on
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)

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 Ijarah-Key Difference

• Risk and rewards of ownership lies with the owner i.e. any loss to
the asset beyond the control of the lessee should be borne by the
Lessor.

• Late payment penalty cannot be charged to the income of the

Lessor.

• Lease and Sale agreement should be separate and non

contingent.
Process of Ijarah
 Ijarah

MECHANICS

. .
VENDOR ISLAMIC BANK Agreement-1 CUSTOMER

 The customer approaches the Bank with the request for financing
and enters into a promise to lease agreement.

 The Bank purchases the item required for leasing and receives
title of ownership from the vendor

 The Bank makes payment to the vendor

 Ijarah as a mode of financing

MECHANICS

. .
VENDOR ISLAMIC BANK Agreement-2 CUSTOMER

 The Bank leases the asset to the customer after execution of

lease agreement.

 The customer makes periodic rental payments as per the

contract

 At the end of the tenure customer can purchase the asset from
the bank with the help of separate Sale agreement.
BASIC RULES OF IJARA

Subject of lease
• Valuable,
• Identified and Quantified
• Consumable things cannot be leased out
Anything which cannot be used without
consuming cannot be leased out; e.g.,
money, wheat etc.
BASIC RULES OF IJARA
Rental of Lease
• The rental must be determined at the time of
contract.
• It is permissible that different amount of rent
are fixed for different phases of rental period.
• It is permissible to tie up the rental amount with
a variable bench mark, the ceiling and floor
should be determined.
• Rental will be charged when the Leased asset
is handed over to the lessee and not from the
day the price has been paid.
• The lessor cannot increase the rent unilaterally,
and any agreement to this effect is void.
BASIC RULES OF IJARA

Period of lease
period of lease must be determined in
clear terms at the time of contract

Lease for specific purpose only

If no specific purpose is identified in the
agreement, then it can be used for any
purpose for which it is used in normal
course
BASIC RULES OF IJARA

Responsibility of lessor
• As the owner of the leased asset lessor bears
and assumes the full risk of the corpus of the
leased asset. If the asset is destroyed during
the lease period, the lessor will suffer the loss.

• Similarly, if the leased asset looses its usufruct

without any misuse or negligence on the part of
the lessee, the lessor can not claim the rent.

• Lessor is liable to pay all the expenses incurred

in the process of its purchase and its import to
the country of the lessor i.e. freight, custom duty
and clearing charges
BASIC RULES OF IJARA

Responsibility of lessor

• Taxes related to ownership and

registration charges of car will be borne
by the lessor,including agent fee if any.

• Insurance of leased asset is

responsibility of lessor. but he can
appoint the lessee as an agent to
arrange insurance on behalf of him.
BASIC RULES OF IJARA

Responsibility of Lessee
• The lessee is liable to compensate the
lessor for every harm to the leased
asset caused by any misuse or
negligence.

• Taxes related to use of asset will be

borne by the lessee.

• He is liable to the wear and tear which

normally occurs during its use
 Comparison Between
Conventional Lease & Islamic Lease
 Rights & Liabilities of Lessor and Lessee

Conventional Leasing Car Ijarah

In Conventional Leasing Products, All risks pertaining to ownership

the Customer is responsible for all are borne by Lessor. Customer only
kinds of losses or damages to the bears usage-related risks
Leased asset, irrespective of the
circumstances.

If the insurance company does not Lessor bears the risk of Insurance
compensate the entire outstanding claim settlement.
amount in case of total loss, the
customer is liable to pay the balance.

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Rentals recovery in case of theft and loss

Conventional Leasing Car Ijarah

If the Leased Asset is stolen or Under the Islamic Ijarah, rent is

completely destroyed, the consideration for usage of the
conventional leasing company or leased asset, and if the asset has
Bank would continue charging the been stolen, destroyed or
lease rent till the settlement of the temporarily out of order and not in
Insurance claim use of Customer, the concept of
rental becomes void. In such
situations rental is not charged
from the lessee.

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Penalty for late payment

Conventional Leasing Car Ijarah

In most contemporary financial Under Ijarah, the Lessee may be

leases, an extra monetary amount asked to undertake that if he fails
is charged if rent is not paid on to pay rent on its due date, he will
time. This extra amount is the pay a certain amount to a charity
considered Riba and is Haram. Fund, which will be administered
through the Islamic Bank.
This amount is taken by the
leasing institution into their For this purpose the bank
income. maintains a charity fund where
such amounts may be credited and
disbursed for charitable purposes.

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Insurance premium
Conventional Leasing
Insurance is independent of the
lease contract. The insurance
expense of the asset is directly
borne by the lessee
Car Ijarah
Takaful / Insurance should be at
the expense of the Lessor and not
at the expense of the lessee. The
Lessor may increase the lease rent
to recover any costs incurred by
him in connection with the asset.
However, as a matter of principal,
the cost should be paid for by the
Lessor.
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Registration Charges

Conventional Leasing Car Ijarah

Lessee is responsible for the The Leased Asset(vehicle) is

Registration of Leased Vehicle. registered in the name of the Bank
and registration charges are paid
by the Bank (Lessor).

The Lessor may increase the lease

rent to recover any costs incurred
by him in connection with the asset

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 Purchase of asset
Conventional Leasing
Under conventional leasing
contracts, the vehicle is
automatically transferred in the name
of the customer upon completion of
the lease period, whether or not he
wants to purchase it.
Car Ijarah
There is no such clause in the Ijarah
Agreement that Leased Asset will
automatically transfer to Lessee.
Separate sale agreement is required
to execute sale transaction at the end
of lease term.
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 Commencement of Rentals
Conventional Leasing
In case of Booking of Leased
Asset, recovery of Lease
installment commence after the
payment of cost of Asset to
manufacturer/dealer.
Car Ijarah
In case of Car Ijarah, the recovery
of rentals is associated with
delivery of Leased Asset.
Rental recovery should not be
commenced before the delivery of
Asset.
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 Signing of Lease Contract
Conventional Leasing
Lease Agreement can be signed by
the Lessor and Lessee any time even
if the Leased Asset is not owned by
the Customer.
Car Ijarah
In case of Ijarah, the Ijarah
Agreement can not be signed by the
Lessor and Lessee unless:
Asset has come in to existence
Assets is in the ownership of the
Lessor
Lessor has taken possession of the
Asset
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 Termination before delivery
Conventional Leasing
The customer will suffer loss of
interest paid during the booking
period because installment commence
immediately after payment of cost of
asset to the Manufacturer/Dealer.
Car Ijarah
The loss of customer is only limited
to actual loss, if any, suffered by the
Lessor on sale of asset in the open
market.
Since the customer has not paid any
rental during the booking period, no
other cash loss is expected under
Ijarah.
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DOCUMENTATION OF
IJARAH

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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 of 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 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 document shall be 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 Contract.

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PROMISSORY NOTE

After signing of Ijarah Agreement, the amount

of rentals become Debt (Dyan) to the Lessee.

Promissory Note is Lessee’s 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 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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Some Practical Issues
Termination of Lease
• If the lessee contravenes any term of the agreement, the
Lessor has a right to terminate the lease contract
unilaterally.

• If not then it can be terminated through mutual consent

only.

• However, in such a case he cannot charge rentals of

remaining period. Further more,

• the destruction of the asset also terminates the lease.

• In the event of lessee’s death the lease will also be

terminated
Sub-Lease
If the leased asset is used differently by different users, the
lessee cannot sub-lease the leased asset except with the
express permission of the lessor.

According to the Shariah principles, Bank can allow its

customer for sub-lease. In case of Sub-lease the bank will
not have any agreement or relationship with the Sub-
lessee. Bank will receive the rental from its customer not
from the sub-lessee. Similarly at the time of maturity, bank
will return the security deposit to its customer (lessee) and
if the bank wants to sell the vehicle against the security
deposit Bank will sell it to its customer (Lessee) only.
Sub-Lease
The leased asset will remain in the
ownership of the bank even after the
sub-lease agreement, so if there is an
incurrence of loss which is not covered
by insurance claim it will be borne by the
Bank.
In order to mitigate the risks, it must be
mentioned clearly in the permission
letter to whom the customer may sub-
lease the vehicle. It should also be
confirmed from the Insurance company
whether they permit for sub-lease or not.
Undertaking to sale
The Lessor may sign a separate promise
to gift/Sale the leased asset to the
lessee at the end of the lease period,
subject to his payment of all amounts of
rent. The validity of this arrangement is
subject to two basic conditions:
Firstly, the agreement of Ijarah itself
should not be subjected to signing this
promise of sale or gift.
Secondly, the promise should be
unilateral and binding on the promisor
only.