IJARAH

IJARAH
Ijarah means to give something on
rent
In the Islamic jurisprudence, the term
Ijarah is used for two different
situations.
In the first place, it means to employ
services of a person on wages given to
him as a consideration for his hired
services.

Continues
The employer is called mustajir while
the employee is called ajir.
Therefore, if A has employed B in his
office as a manager or as a clerk on a
monthly salary, A is a mustajir, and B is an
ajir while the waged paid to the ajir are
called their ujrah.

IJARAH
The second type of Ijarah related to the
usufructs of assets and properties, and not
the services of human beings.
Ijarah in this sense means to transfer the
usufruct of a particular property to another
person in exchange for a rent claimed from
him.
In this case, the term Ijarah is analogous
to the English term leasing.

Continues
Here the lessor is called Mujir, the
lessee is called mustajir and the rent
payable to the lesser is called ujrah.
Lessor (Mujir) is the owner of the asset
while to whom the right of use of that
asset is given is called lessee (Mustajir)

Basic Rules
Transferring of usufruct not ownership
Subject of leasse should be valuable,
identified & quantified
All consumable things cannot be leased out
All liabilities of ownership is borne by lessor
Period of lease must be determined
Lease for specific purpose
Lessee as Ameen
Lease of jointly owned property

Determination of Rental
determined at the time of contract for
the whole period of lease.
permissible that different amounts of
rent are fixed for different phases during
the lease period
The lessor cannot increase the rent
unilaterally.
The rentals can be used on or
benchmarked with some Index as well.

 The index can be the prevailing interest rate or

KIBOR
Use of interest rate is controversial
The difference between conventional lease
and Ijarah doesnt lie in the amount being
paid by the lessor. The difference is that the
lessor assumes full risk, so if the leased asset
is destroyed without any negligence of the
lessee, the loss must be borne by the lessor
while in conventional lease the loss is borne
by the lessee what ever the reason of loss is.
(Read page 145)

Continues..
The lease period shall commence from the
date on which the leased asset has been
delivered to the lessee.
Penalty for Late Payment of Rent:
Rent after it becomes due, is a debt payable
by the lessee, and is subject to all the rules
prescribed for a debt. A monetary charge from
a debtor for his late payment is exactly the
riba prohibited by the Holy Quran.

Variable Rentals in Long Term Leases

In this case the lessor has two options:
A lease contract can have a condition that the
rent shall be increased according to a specified
proportion (e.g. 5%) after a specified period
(like one year).
He can contract lease for a shorter period
after which the parties can renew the lease at
new terms and by mutual consent

Difference between Lease and Ijarah

The commencement of lease:
In leasing, lease starts when payment is made
to the lessee or the seller while in ijarah,
agreement starts when delivery of leased
asset is made to the lessee.
Different relations of the parties
Termination of Lease
Insurance of the assets
The residual value of the leased asset

 Different relations of the parties

Initially lessee acts as an agent of the lessor
Becomes lessee once the delivery of the asset
is made to him / her
Termination of Lease
If the lessee contravenes any term of the
agreement
If the period expires
Pre mature termination should e with mutual
consent

 Insurance of the assets: Insurance cost

(Takaful) is to be borne by the lessor in Ijarah
while in conventional lease, insurance cost is
borne by the lessee.
The residual value of the leased asset:
In case of conventional lease, there is an
expressed or implied clause that at the end of
lease period, lessor will sell the leased asset to
the lessee while in Ijarah, any such clause
cannot be added as it is a well settled rule in
the Islamic legal system that one transaction
cannot be made a pre-condition for another.
(Page 150)

IJARAH WA IQTINA
In Islamic Shariah, it is allowed that
instead of sale, the lessor signs a
separate promise to gift the leased asset
to the lessee at the end of the lease
period, subject to his payment of all
amounts of rent. This arrangement is
called 'Ijarah wa iqtina.

Continues..
The validity of this arrangement is subject to
two basic conditions:
a) The agreement of Ijarah itself should not be
subjected to signing this promise of sale or gift
but the promise should be recorded in a
separate document.

Continues..

The promise should be unilateral and

binding on the promisor only. It should
not be a bilateral promise binding on
both parties because in this case it will
be a full contract effected to a future
date, which is not allowed in the case of
sale or gift.

IJARAH (LEASING)
Ijarah Examples:
Vehicles Ijarah Financing
Plant and Machinery
Consumer Durables
House Financing
Agricultural Durables
Aircrafts, etc.
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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.

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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Leasing/Ijarah Contract
Conventional Leasing
There are two types of contracts,
Financial lease and loan for car
financing. Both these contracts
contain conditions that are
contravenes with the Islamic
Sharia'h.
Financing lease contains conditions
of hire purchase, which is not
permissible by Sharia'h.
Car financing or loan agreement
contains conditions of interest.
Interest is considered Riba by
Sharia'h

Ijarah
The Ijarah contract does
not contain any condition
that makes the contract
void
under
Sharia'h
perspective.

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Rights & Liabilities of Lessor and Lessee

Conventional Leasing
In

Conventional
Leasing
Products, the Customer is
responsible for all kinds of
losses or damages to the
Leased asset, irrespective of
the circumstances.
If the insurance company
does not compensate the
entire outstanding amount in
case of total loss, the
customer is liable to pay the
balance.

Ijarah
All

risks pertaining to
ownership are borne by
Lessor. Customer only bears
usage-related risks.

Lessor

bears the risk of

Insurance claim settlement.

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Rentals recovery in case of theft and loss

Conventional Leasing

Ijarah

If the Leased Asset is stolen

or completely destroyed, the
conventional
leasing
company or Bank would
continue charging the lease
rent till the settlement of the
Insurance claim

Under the Islamic Ijarah, rent

is consideration for usage of
the leased asset, and if the
asset has been stolen,
destroyed or temporarily out
of order and not in 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
In

most contemporary
financial leases, an extra
monetary
amount
is
charged if rent is not paid on
time. This extra amount is
the considered Riba and is
Haram.
This amount is taken by the
leasing institution into their
income.

Ijarah
Under

Ijarah, the Lessee

may be asked to undertake
that if he fails to pay rent on
its due date, he will pay a
certain amount to a charity
Fund,
which
will
be
administered through the
Islamic Bank.
For this purpose the bank
maintains a charity fund
where such amounts may be
credited and disbursed for
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charitable purposes.

Insurance premium
Conventional Leasing

Ijarah

Insurance is independent of
the lease contract. The
insurance expense of the
asset is directly borne by the
lessee

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

Ijarah

Lessee is responsible for the

Registration of Leased
Vehicle.

The Leased Asset(vehicle) is

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.

Ijarah

There is not 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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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.

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.

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 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 .

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 documents shall be signed
Delivery of asset to the Lessee.

after

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 Contact.

PROMISSORY NOTE
After signing of Ijarah Agreement, the
amount of rentals become Debt (Dyan)
to the Lessee.
Promissory
Note
is
Lessees
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/she 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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