The concept of ijara
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THE CONCEPT OF IJARA. Dr. Muhammad Zubair Usmani Sharia Advisor Muslim Commercial Bank Ltd. Jamia Darul Uloom Karachi at AlHuda CIBE – NIBAF Islamabad. BASIC RULES OF IJARA. Transferring of usufruct not ownership To another person for an agreed price, at an agreed consideration.

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THE CONCEPT OF IJARA

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The concept of ijara

THE CONCEPT OF IJARA

Dr. Muhammad Zubair Usmani

Sharia Advisor

Muslim Commercial Bank Ltd.

Jamia Darul Uloom Karachi

at AlHuda CIBE – NIBAF Islamabad.


Basic rules of ijara

BASIC RULES OF IJARA

  • Transferring of usufruct not ownership

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

  • 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 ijara1

BASIC RULES OF IJARA

  • All Liabilities of ownership are borne by lessor

    Corpus of leased property remains in the ownership of the seller.

  • 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 ijara2

BASIC RULES OF IJARA

  • Lessee as Ameen

    The lessee is liable to compensate the lessor for every harm to the leased asset caused by any misuse or negligence. The leased asset shall remain in the risk of the lessor throughout the lease period.

  • Lease of jointly owned property

    Is permitted and rentals shall be distributed between all the joint owners according to the proportion of their respective shares in the property.


Basic rules of ijara3

BASICRULES OF IJARA

  • Determination of Rental

    The rental must be determined at the time of contract for the whole period of lease.

    It is permissible that different amounts of rent are fixed for different phases during the lease period, provided that the amount of rent for each phase is specifically agreed upon at the time of effecting a lease.

    The determination of rental on the basis of the aggregate cost incurred in the purchase of the asset by the lessor, as normally done in financial leases, is not against the rules of Shariah.


Basic rules of ijara4

BASICRULES OF IJARA

  • Determination of Rental

    The lessor cannot increase the rent unilaterally, and any agreement to this effect is void.

    The lease period shall commence from the date on which the leased asset has been delivered to the lessee.

    Rental will be charged when the Leased asset is handed over to the lessee.


Ijara as a mode of financing

IJARA AS A MODE OF FINANCING

  • Leasing should not be interest-based loan or replacing interest with rent, rather it should comply with all of the following conditions of Islamic leasing:


Ijara as a mode of financing1

IJARA AS A MODE OF FINANCING

1. The commencement of lease

Unlike the contract of sale, the agreement of Ijarah can be effected for a future date. Hence, it is different from Murabaha.

2. Rent should be charged after the delivery of the leased asset to the lessee

and not from the day the price has been paid. If the supplier has delayed the delivery after receiving the full price, the lessee should not be liable for the rent of the period of delay.

3. Different relations of the parties

There are two separate relations between the institution and the client: one of an agent and the other of a lessee.


Ijara as a mode of financing2

IJARA AS A MODE OF FINANCING

4. Difference between Murabahah and leasing

  • A Murabahah attributed to a future date is invalid in Shariah. But leasing can be attributed to a future date.

  • A Murabaha can not be transacted on a future date as the sale would be executed simultaneously after taking delivery from the supplier and seller would never bear its risk which Shariah does not permit . But in leasing it is permissible, because in leasing the asset remains under the risk and ownership of the lessor throughout the leasing period.


Ijara as a mode of financing3

IJARA AS A MODE OF FINANCING

5. Expenses consequent to ownership to the lessor

As the lessor is the owner of the asset, he is liable to pay all the expenses incurred in the process of its purchase and its import to the country of the lessor for example expenses of freight and customs duty etc.

6. Lessee as Ameen

The lessee is responsible for any loss caused to the asset by his misuse or negligence. He can also be made liable to any normally occurring wear and tear.


Ijara as a mode of financing4

IJARA AS A MODE OF FINANCING

7. 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


Ijara as a mode of financing5

IJARA AS A MODE OF FINANCING

8. Penalty for late payment of Rent

The lessor cannot charge an additional amount in case the lessee delays payment of the rent.Penalty of late payment is given to charity by lessee

9. 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


Ijara as a mode of financing6

IJARA AS A MODE OF FINANCING

10. Insurance of the assets

If the leased property is insured under the Islamic mode of Takaful, it should be at the expense of the lessor and not at the expense of the lessee

11. The residual value of the leased asset

Through a mutual agreement of Lease, after the expiry of the lease period, the corpus of the leased asset cannot be transferred to the lessee, otherwise it becomes hire purchase.

It is a well-settled rule of Islamic jurisprudence that one transaction cannot be tied up with another transaction so as to make the former a pre-condition for the other.

However, the lessor may enter into a unilateral undertaking to sell the leased asset to the lessee at the end of the lease period. This undertaking will be binding on the lessor only.


Ijara as a mode of financing7

IJARA AS A MODE OF FINANCING

12. Ijarah Wa Iqtina

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.

13. 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.


The concept of ijara

SALE AND LEASE BACK

  • When the client sells the asset to the bank the entire risk and rewards are transferred to the bank who is then is responsible for the ownership related expenses

  • In this case the bank is allowed to lease the asset to the client but there are conditions which have to be followed to make the entire transaction Sharia compliant.

  • There should be at least one year lease period

  • There should be separate contracts for sale and lease

  • The agreement to sell at the end of the lease must be separate

  • The intention of the client is to avoid interest related transactions


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