2. Diminishing Musharakah
• Diminishing Musharakah (DM) is a partnership transaction
in which the partners agree to terminate Shirkat (partnership)
gradually by means of purchase of one partner's share by
other partner.
• A DM based Auto financing transaction comprises of mainly
following three steps:
• Participation in the ownership of an asset by Bank and Client
(i.e. creation of Musharakah) and dividing Islamic Bank's
ownership share into a number of Musharakah units;
• Bank rents out its share of ownership in the asset to the Client
(i.e. Ijarah transaction between Islamic Bank and Client); and
3. Diminishing Musharakah
• Gradual sale of Musharakah units by Bank to the client
on periodic basis and at the end of the financing tenure
client becomes the sole owner of the asset.
• A DM Financing is a combination of Musharakah, Ijarah
and Sale transaction. Therefore, all rules pertaining to
Musharakah, Ijarah and Sale transactions are applicable
to a DM transaction.
4. IJARAH
• Definition of ijarah
• Literally means:
To give something on rent
It is defines as :
to transfer the usage of a non consumable
asset by the owner (the lessor )to another person (the
lessee) for an agreed period , at an agreed price(price)
5. IJARAH
1. To employ the services of a person on wages
Another type of Ijarah relates
2. To paying rent for use of an asset or property
This Ijarah is analogous to the English term
“Leasing”
6. Pillars Of Ijarah
Muajjir: A person who give something for hire – lessor
Musta’jir: A person who takes on hire – lessee, tenant,
renter etc.
Ma’jur: A thing given for rent
Al- manfaah: The benefit from a thing – usufruct,
services etc.
Ujrah: Price or fee given for the payment of rent or lease
Sighah: Offer (Ijab) and Acceptance (Qabul)
7. Types Of Lease
• There are two types of lease:
OPERATING LEASE; Operating lease is a contract
that Lessor allows the use of its asset for a specific
period but does not convey rights of ownership of the
asset to lessee;
FINANCE LEASE; It constitutes a form of Ijarah in
which ownership is transferred to the lessee at the
end of a specific period. According to the method of
ownership transfer to lessee.
8. Difference b/w operating
and finance lease
Finance lease Operating lease
Who owns the asset? Leasing company Leasing company
Who is responsible for
Maintenance ?
Lessee Leasing company
Length of lease? Most of economic life Part of economic life
Balance sheet treatment? On balance sheet Off balance sheet
9. Rules Of Ijarah
• Rules governing Ijarah are similar to the rules
governing sale.
• Because in both cases something is transferred from
one person to another
The 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
10. Rules of Ijarah
1. Transferring of usufruct not ownership.
2. Subject of lease must have a valuable use (Mal-e-
Muttaqawwam)
3. All consumable things cannot be leased out
4. All liabilities of ownership is borne by lessor
5. Period of lease
6. Lease for specific purpose
7 Liability in case of damage
8 Lease asset should be in risk of lessor
11. Rules of ijarah
9. Lease of jointly owned property
10. Leased assets must be fully identified by the parties.
11. Use benchmark rate for rentals.
12. Determination of Rental
13. The lessor cannot increase the rent unilaterally
14. Rent should be charged after the delivery of the leased asset
15. lease period shall commence from the date of delivery
13. Process Flow
Ijarah Transaction
CUSTOMERISLAMIC 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
14. Process Flow
Ijarah Transaction``
CUSTOMERISLAMIC BANK
• The customer makes periodic 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
15. Takaful instead of Insurance
Legally (in accordance to Pakistan’s Law and Regulations), it is
required for all leasing entities to insure the leased assets. As such,
Islamic Banks insures its leased assets. Islamic Bank insures its
assets through Takaful only, which is the Islamic product for
insurance.
16. Leasing/Ijarah Contract
Conventional Leasing Car Ijarah
• Car financing or loan
agreement contains
conditions of interest. Interest
is considered Riba by Sharia'h
• The Ijarah contract does not
contain any condition that
makes the contract void under
Sharia'h perspective.
17. Rights & Liabilities of Lessor and Lessee
Conventional Leasing Car Ijarah
• 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.
• All risks pertaining to
ownership are borne by Lessor.
Customer only bears usage-
related risks
• Lessor bears the risk of
Insurance claim settlement.
18. Rentals recovery in case of theft and loss
Conventional Leasing Car 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.
19. COMPARISION
BANK NAME MEEZAN BANK BANK ISLAMI DUBAI ISLAMIC BANK
PRODUCT
NAME Ijarah Islami Auto Finance Auto Finance
EXPOSURE 10 M No Limit 15 M
CAN RENT BE
CHANGE
No Work On Fixed Rental
Basis Variable Rate,kibor +4 Variable ,Kibor +5
REQUIRED
DOCUMENTS
CNIC, photos ,Salary Slip,
bank Statement
CNIC,3 Years Job Tenure, bank
Statement CNIC, Bank Statement
NET TAKE
HOME INCOME
2 Times Per Month Rental
Amount 2 Times 2 Times
SECURITY
DEPOSIT 15% To 70% Min 15%
20 % For New And Used And 30 %
For Imported
20. CASE:
• The Islamic bank has entered into A ijarah contract with
A/B petroleum ltd to supply fuel worth Rs. 5 million for
five years. The rent has been fixed to be 10,000/=per
month .Is this ijarah contract valid?
21. Explanation:
The contract is invalid because fuel cannot be rented
out because it cannot maintain its corpus when it is used.
22. Case:
• Ijarah contract contains a clause that the asset would be
sold to the lessee after the lease period if he makes the
rental payments on time.
23. Explanation
This clause is making selling of the leased asset contingent
upon the Ijarah agreement; therefore, the contract would be
invalid
