ISLAMIC BANK & FINANCE "Ijaarah"

2. In Islamic finance, al Ijarah does lead to
purchase (Ijarah wa-Iqtina, or "rent and
purchase") and usually refers to a hire
contract of property (such as land,
plant, office mechanization, a motor
vehicle), which is leased to a client for
stream of rental and purchase
payments, ending with a transfer of
ownership to the renter, and otherwise
follows Islamic regulations
Abdulahi Abukar “ ABAJEY”
Introduction

3. ● AL IJARAH is an arabic term with origin
in Islamic, meaning to give something on
a rental basis or wages. It is Islamic
alternative to conventional leasing.
In fiqh means a contract for hire of persons
or services of a property.
● In islamic banking point of view, denotes to
an islamic leasing contract of land,
property or equipment which is leased to a
client for a flow of rental payment.
Abdulahi Abukar “ ABAJEY”

4. 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
gatekeeper 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.
Abdulahi Abukar “ ABAJEY”

5. Ijarah is an Islamic option 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..
Abdulahi Abukar “ ABAJEY”

6. There are two types of Ijarah
contacts:
1.Ijarah - operating Ijarah
2.Ijarah Muntahia Bittamleek –
Ijarah with option to transfer
ownership of asset to lessee.
Abdulahi Abukar “ ABAJEY”

7. This diagram shows a normal Ijarah
transaction.
The bank pays (1) the manufacturer or
vendor the price of the product (in
this case, a car) to be leased. The
vendor usually delivers the car
(2 and 3) to the bank’s customer. The
customer then makes a series of rental
payments over the term of the Ijarah
contract (4).
If it is Operating Ijarah, the car is returned
to the bank to be released or disposed.
Abdulahi Abukar “ ABAJEY”

9. In Ijarah Muntahia Bittamleek, the ownership of the asset is transferred
to the customer at the end of the Ijarah term. These can be done in
a number of ways:
1. Gift at the end of the period of the Ijarah. This means the
ownership of the asset is transferred to the lessee for no
consideration by entering into a gift contract in fulfilment of a
prior required promise (made at the inception of the Ijarah
contract),
2. Sale for a token consideration at the end of the Ijarah
contract. The token consideration must be agreed between the
parties.
Abdulahi Abukar “ ABAJEY”
Note:
In cases (i) and (ii), the Ijarah rentals would include a
piece of the capital cost of the asset. If the asset is not
transferred at the end of the Ijarah period, and the asset is
not reduced, and the lessee has fulfilled his other
responsibilities, then the rent should be adjusted to a fair
amount and the balance refunded to the lessee.

10. 3. Sale at the end of the lease for an amount specified in
the rent. This is done through an Ijarah contract together
with a promise to enter into a sale contract.
The sale contract will include the amount to be paid after the
expiry of the Ijarah period.
4. Sale of the asset at any time during the period of the
lease for an amount equal to the remaining installments.
5. Sale through slow transfer of title. This is executed through
an Ijarah contract with a promise to slowly transfer the title of
the asset to the lessee until the asset is fully transferred.
If it is Ijarah Muntahia Bittamleek, the bank sells the car to the
customer at the end of the Ijarah term.
Abdulahi Abukar “ ABAJEY”

11.  Subject of lease (Islamic) (Should be valuable, identified and
quantified)
 All consumable things cannot be leased out. (For example
money, wheat etc.)
 All liabilities of ownership is borne by lessor
 Period of lease known to both parties
 Lease for specific purpose (The lessee cannot use the leased
asset for any purpose other than the purpose specified in the
lease agreement.)
 Ijarah payments cannot be assigned to third party.
 In case late payment Self Forced Penalty Charity Account
Abdulahi Abukar “ ABAJEY”

12.  Lessee as Ameen
(The lessee is liable to compensate the lessor for
every harm to the leased asset caused by any abuse
or negligence)
 Determination of Rental
• Mustbe determined
• FlexibleRentalsinLongTermContracts
Lessorhasrightto change
• Bothpartiesknowntherent
 Ijarah payments would be stopped
if asset is out of order.
 Customer as an agent can not appointed
 No hidden registration / tax related
expenses and fees
 No hidden takaful (Insurance) payment
Abdulahi Abukar “ ABAJEY”

13. a. The customer approaches the Bank with
the request for financing and enters
into a promise to lease agreement.
b. The Bank purchases the item required
for leasing and receives title of
ownership from the vendor.
c. The Bank makes payment to the vendor
Abdulahi Abukar “ ABAJEY”

14.  If the Lessee contravenes any term of the
Lease agreement the Lessor may
individually terminate the agreement
 If there is no breaking, the agreement can
only be terminated by mutual permission
 Conventional Financial Lease agreements
give termination right to Lessor in all
cases.
This is opposing to Shariah laws
Abdulahi Abukar “ ABAJEY”

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16. 1. The Islamic Bank has entered into a
Ijarah contract with SAHAL Petroleum
Ltd. to supply fuel worth SSH 5M for
five years. The rent has been fixed to
be SSH10K /per month.
Is this Ijarah contract valid?
 The contract is invalid because fuel
cannot be rented out because it cannot
maintain its corpus when it is used.
Abdulahi Abukar “ ABAJEY”

17. 2. The Islamic Bank has rented out a building to
Raaqiya’s Sons on January 01, 2017.
The building is under renovation which would
finish within three months.
The Ijarah Agreement has been signed and bank
is charging the rent from the date of signing the
Ijarah Agreement.
 Since the subject matter is not in usable form,
therefore, the rental may start after it is in usable
form i.e. after 31st March 2017
Abdulahi Abukar “ ABAJEY”

18. 4. Ijarah contract contains a section that
the asset would be sold to the lessee
after the lease period if he makes the
rental payments on time.
This clause is making selling of the
leased asset contingent upon the
Ijarah agreement; therefore,
the contract would be invalid.
Abdulahi Abukar “ ABAJEY”

19. 3. The bank leases a machinery to Mr.
Mohamed for 5 years.
The rent for the first year is fixed as
SSH20,000/- per month and it is agreed
that the rent of every subsequent year
shall be 10% more than the previous one.
 The lease is valid since the rents have
been fixed at the beginning of the Ijarah
period.
Abdulahi Abukar “ ABAJEY”

20. Abdulahi Abukar “ ABAJEY”