The document discusses the key differences and rules regarding lease (ijarah) contracts in Islamic finance. It outlines 12 basic rules for ijarah, including that ownership remains with the lessor, the rental amount and period must be clearly specified upfront, expenses related to ownership fall to the lessor, and the lessee is responsible for any damage caused by misuse or negligence. Ijarah can be used as a financing mode if certain additional conditions are met, such as rent only being charged after asset delivery and the lessor bearing purchase expenses. The document contrasts ijarah with conventional interest-based loans.

1. Difference Between Lease & Ijarah
By:
Shamail Shahid
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2. Basic Rules of Ijarah
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.
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3. 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
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4. 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.
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5. BASIC RULES 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.
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6. BASIC RULES OF IJARA
Determination of Rental- Lease & Ijarah
In conventional lease agreement the lease commences on
the very next day on which the price is paid by the lessor
whether the lessee has taken the delivery of the assets or
not.
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.
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7. IJARAAS 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:
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8. IJARAAS 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.
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9. A MODE OF FINANCING
4. 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.
5. 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.
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10. IJARAAS A MODE OF FINANCING
6. 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
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11. IJARAAS A MODE OF FINANCING
7. 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
8. 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
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12. IJARAAS A MODE OF FINANCING
9. 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
10. 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.
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13. IJARAAS A MODE OF FINANCING
11. 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.
12. 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.
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