SHARIAH AUDIT PROGRAMME FOR IJARAH

What is Ijarah?
Ijarah is a contract whereby the owner of an asset, other than consumables, transfers its usufruct to another person for an agreed period for an agreed consideration. Ijarah Muntahia Bittamleek / Ijarah wa Iqtina is an Ijarah transaction in which, the ownership of the subject asset, is expected to be transferred to the lessee after the end of the lease term.

Ijarah Summarized Flow

Sample Shariah Audit Programme for Ijarah

S. No. 1. Audit Procedures Obtain list of transactions during the period, account details and list of parties, alongwith summarized schedules from the respective department. Perform basic analysis of balances and transactions and identify and investigate any significant differences / events during the period. Significant transactions and events should judgmentally be included in the audit sample. Select _______ Ijarah transactions on a random basis, ensuring that the selection covers the whole period of the audit and locations / branches, as well as a number of customers. Working Paper Ref.

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Sample Shariah Audit Programme for Ijarah

S. No. 4. Audit Procedures Review the Ijarah contracts for the transactions selected and verify that the standard version of the contracts approved by the Shariah Advisor has been used without any change. If there are any changes, check that these have been approved by the Shariah Advisor. Check initial applications from the customers for Ijarah. Check that the leased assets are of a durable nature and do not fall in the category of consumables. Working Paper Ref.

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Sample Shariah Audit Programme for Ijarah

S. No. 7. Audit Procedures Verify that the assets subject to Ijarah do not fall in the category of the items not permissible by the Shariah. Verify that asset is not used in activities which are prohibited under Shariah. Check the objective of Ijarah and analyze the business needs and nature of business of the customer. Obtain and review the ownership documents of the leased assets (car registration, title deeds of the property, invoices for the equipment / appliances, etc.), in order to verify that the assets have existed and owned by the bank for the entire effective period of the contract. Working Paper Ref.

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Sample Shariah Audit Programme for Ijarah

S. No. 10. Audit Procedures In case of a sublease, verify that the ownership of the asset remain with the ultimate lessor for the entire period of the Ijarah. Check whether the assets have been insured under Takaful and that the cost has been borne by the bank. Check whether the rent is charged from the period when the asset is delivered to the lessee. Further verify that any advance rent received is recorded as a liability and has not been included in income. Working Paper Ref.

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Sample Shariah Audit Programme for Ijarah

S. No. Audit Procedures Working Paper Ref.

13. Verify that the rent is ceased to be charged upon the termination of the contract. 14. For any asset earmarked for a lessee on the instruction of the lessee but its possession has not been taken by the lessee, verify that the lessor has not either used the asset for his own benefit; or entered into another contract for the same asset with another lessee. 15. Check whether any charity received over violation of undertaking in case of delay in payment of rent by the lessee is directly credited to the charity fund account.

Sample Shariah Audit Programme for Ijarah

S. No. 16. Audit Procedures Working Paper Ref.

By discussions with the concerned officials and review of the any correspondence, verify that the asset is used by lessee in accordance with the terms and conditions of the contract. 17. For any sale and lease back transactions verify that there are two independent contracts for these transactions and these are approved by the Shariah Advisor. For any subleasing of the asset, check that the bank has approved the subleasing.

Sample Shariah Audit Programme for Ijarah

S. No. 18. Audit Procedures Check that these agreements are not tied to one another. Further check that in case of sale and lease back, the minimum time of lease is one year. Working Paper Ref.

19. Verify that the prevailing SBP, SECP and IFAS requirements have been complied with (including proper accounting treatment), for this purpose developing a checklist thereof, and check whether that the bank is in full compliance with these requirements.