IJARAH

Ijarah Transferring of usufruct Not of the ownership to another person at an agreed consideration.

Types of Ijarah Hiring/ Employment: To employ/hire the service of a person on wages. Leasing : To transfer the usufruct of a particular asset to another person in exchange of consideration. Operating lease Financial lease. Conventional Lease Islamic Lease

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.

Types of Leasing 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.

Types of Leasing 3) Financial 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: One transaction is tied up with another transaction. Lessor does not bear the responsibility of Lessee.

Types of Leasing 3) Financial lease 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 i.e. being a Lessor assumes the full risk of the corpus of the leased asset.

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.

Rental of Lease BASIC RULES OF IJARA 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 of Lease BASIC RULES OF IJARA 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.

Lease for specific purpose only 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

Responsibility of Lessor 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 cannot claim the rent.

Responsibility of Lessor BASIC RULES OF IJARAH Responsibility of Lessor Lessor is liable to bear all the expenses incurred in the process of purchase of leased asset and its import E.g: freight custom duty clearing charges

Responsibility of Lessor 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.

Responsibility of Lessee 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

Conventional Lease & Islamic Lease Comparison Between Conventional Lease & Islamic Lease

DIFFERENCES BETWEEN Ijarah & Conventional Lease 1 Ijarah Conventional Lease If the asset goes under Total Loss and Insurance Company pays off the claim less than the cost, loss will be suffered by the bank. Bank has to return total security deposit to the customer. While in conventional Lease Bank deducts such loss from the security deposit of the customer.

Ijarah 2 Conventional Lease DIFFERENCES BETWEEN Ijarah & Conventional Lease 2 Ijarah Conventional Lease Bank is eligible for the surplus claim received from the insurance company. Customer has no right on it. While in Conventional Lease surplus claim received from the insurance company is considered as the right of the customer.

Ijarah 3 Conventional Lease DIFFERENCES BETWEEN Ijarah & Conventional Lease 3 Ijarah Conventional Lease Bank cannot charge any rent against the asset, if it is not in a workable condition with out any negligence of customer. While in Conventional Lease rental remains continue despite of the asset is unworkable situation.

Ijarah 4 Conventional Lease DIFFERENCES BETWEEN Ijarah & Conventional Lease 4 Ijarah Conventional Lease In case, if the asset is on booking, after arrival customer refuses to take the asset on Ijarah, then bank cannot charge profit of the booking period. While in Conventional Lease Bank has already charged profit of the booking period in rentals of booking period.

Islamic Bank’s income does not increase. DIFFERENCES BETWEEN Ijarah & Conventional Lease 5 Ijarah In case of Late Payment Islamic Bank’s income does not increase.

5 Conventional Lease DIFFERENCES BETWEEN Ijarah & Conventional Lease While in the Conventional Lease Bank’s income increases due to late payments from the customers.

Penalty for late payment In case of late payment, we can not charge additional amount as penalty. In order to solve this problem, client will undertake in Ijarah agreement that in case of late payment, he shall pay to the charity account maintained by the bank a sum calculated on the basis of….% per annum for each day of default, bank will spend this amount in charity purpose on behalf of the client. This undertaking, in fact, is a sort of Yameen / Nazar which is a self-imposed penalty to keep oneself away from default.

Termination of Lease If the lessee breaches any term of the agreement, lessor has a right to terminate the lease contract unilaterally. If not then it can be terminated through mutual consent only.

Termination of Lease However, in such a case he cannot charge rentals of remaining period. Further more, the destruction of the asset also terminates the lease.

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.

Sub-Lease 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.

JAZA-K-ALLAH