Copy of Ijarah_MBL

Introduction to Ijarah

Version 2.0

Release Date: Jamad ul Thani 31, 1430 H June 25, 2009

Prepared By:Product Development and Shariah Compliance Department

• Ijarah is a term of Islamic Fiqh

• Literally, it means “To give something on rent”

• The term “Ijarah” is used in two situations:

1. It means ‘To employ the services of a person on wages’ e.g. “A” hires a porter at the airport to carry his luggage

2. Another type of Ijarah relates to paying rent for use of an asset or property defined as “LAND” in Islamic Economics

Ijarah

• Ijarah is an Islamic alternative of Leasing.

• Leasing backed by an acceptable contract is an

acceptable transaction under Shariah.

• The question of whether or not the transaction

of leasing is Shariah compliant depends on the

terms and conditions of the contract.

• Several characteristics of conventional

agreements may not conform to Shariah thus

making the transaction un-Islamic and thereby

invoking a prohibition.

Ijarah as a mode of financing

• 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.

Ijarah-Key Difference

Process of Ijarah

CUSTOMER

MECHANICS

ISLAMIC BANK

The Bank makes payment to the vendor

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

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

VENDOR. .

Agreement-1

Ijarah

CUSTOMER

MECHANICS

ISLAMIC BANK

The customer makes periodic rental payments as per the contract

The Bank leases the asset to the customer after execution of lease agreement.

VENDOR

At the end of the tenure customer can purchase the asset from the bank with the help of separate Sale agreement.

. .Agreement-2

Ijarah as a mode of financing

Rules governing Ijarah

• Rules governing Ijarah are similar to the

rules governing sale.

• Because in both cases something is transferred from one person to another

The only difference is:

• In case of sale, title of property is transferred

to Buyer

• In case of Ijarah, title remain with the Lessor

• Only the use of the property is transferred to

Lessee

Ijarah

1. Leasing is a contract where the owner of an

asset transfers its use to another person against

an agreed price.

2. However, ownership of the leased asset remains

with the Lessor

Rules of Ijarah

3. Since ownership of the leased asset remains

with the Lessor, all rights and liabilities relating

to ownership are borne by the Lessor.

All rights and liabilities relating to use are borne

by the Lessee e.g. “A” gives his house to

“B” on rent.Property taxes are to be borne by

the owner. Water tax, electricity bill etc are to

be borne by the Lessee

Rules of Ijarah

4. Subject matter of Lease should be Valuable,

Identified and Quantified.

5. The period of Lease must be determined in

clear terms.

6. The Lessee is responsible for damage to the

asset caused by fraud or negligence.

7. Any damage to the asset not caused by the

Lessee’s neglect, is to be borne by the Lessor.

Rules of Ijarah

8. Normal maintenance is Lessee’s responsibility

9. Lease rentals for the entire lease period must

be fixed at the time of Lease Agreement;

a) Different amounts of rents can be fixed for

different periods, but they must be known.

b) The rent may be tied to a known benchmark,

acceptable to both the parties.

Rules of Ijarah

10.The Lessor cannot increase the rent unilaterally

11.The Lessor may receive the rent in advance, but

such payment should be recorded as an Advance

rental. Balance Sheet should reflect this payment

as Liability, since rent can be received only for

use of an asset.

Rules of Ijarah

12.The Lease period will start when the asset has

been delivered to the Lessee

- in a usable condition

- whether or not the Lessee has started using it

13.If the leased asset is destroyed, the lease will

terminate.

14.If the Lessee is at fault, he is liable to

compensate the Lessor for the loss

Rules of Ijarah

• If the Lessee contravenes any term of the Lease

agreement the Lessor may unilaterally terminate

the agreement

• If there is no contravention, the agreement can

only be terminated by mutual consent

• Conventional Financial Lease agreements give

termination right to Lessor in all cases. This is

contrary to Shariah laws

Termination of Ijarah

Difference b/w Conventional Lease & Ijarah

1. In conventional lease the Lessor has the unilateral right to rescind the lease contract at his sole discretion, which is against the laws of Shariah,

2. Expenses under Ijarah are as follows:

• Lessor-- expenses relating to the corpus of the asset i.e. insurance, accidental repairs etc. will be borne by the lessor

• Lessee- - actual operating/overhead expenses related to running the asset will be borne by the lessee

Ijarah

Difference b/w Conventional Lease & Ijarah

3. Two contracts into one contract is not permissible in Shariah therefore, we cannot have the agreement of hire and purchase into one agreement, only we can undertake/promise to purchase the leased asset.

4. In conventional lease the lease starts even before the existence of assets, which is also not permissible in Shariah.

5. Penalty income is charged for late payments in Conventional lease.

Ijarah

APPLICATION

Unique Selling Proposition

• Pakistan’s first truly Shariah-

compliant Car Financing Scheme.

• Available in tenures of 3, 4 and 5

years.

• Available for locally assembled as

well as Imported cars.

• Also available for Used Cars

• No application Fee

Car Ijarah

Application of Ijarah

• For long and medium term fixed asset financing

• BMR

• Retail products (Car Ijarah)

Applications of Ijarah