Ijara by ch. hamad rasool bhullar

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  • Ijara (Leasing) is another popular form of financing tools. It accounts for about 15% of all Islamic transactions. The financier (Lessor) purchases the asset from the vendors and leases its beneficial use to the lessee in return for payment of a periodic rental. Different forms of leasing are permissible, including leases where a portion of the installment payment goes toward the final purchase (with the transfer of ownership to the lessee). Features of Ijara Wa Iqtina lease are close to conventional financial lease. Leasing is designed for financing vehicles, machinery, equipment, and aircraft. “ CLICK TO GO THE NEXT SLIDE”
  • Ijara by ch. hamad rasool bhullar

    1. 1. IJARAHRental System in Agriculture November 28- 29, 2011Ch. Hamad Rasool Bhullar FCMA, FCIS, FPA, DCMA, PGD(Islamic Banking) 1
    2. 2. Overview Ijarah – Introduction Ijarah Muntahia Bittamleek Essentials of Ijarah AAOIFI Shari’a Standard Guidlines Mechanism and Applications Risks and Practical Issues Documentation and special Cares in Implementation of the system Vote of Thanks and Q & As….! 2
    3. 3. IJARAH (LEASING) - INTRODUCTION Ijarah is to offer for a consideration the usufruct of a thing of value from which benefit can be derived without consumption, while retaining the ownership of the leased assets and assuming risks pertaining thereto IJARAH AL ASHKAAS Vs IJARAH AL AI’YAN Conventional Lease Vs Islamic Ijarah Ijarah (Operating Lease) Ijarah Muntahia Bittamleek 3
    4. 4. IJARAH MUNTAHIA BITTAMLEEK It is an Ijarah that ends with the ownership of the asset. There are several types of Ijarah Muntahia Bittamleek. These are characterized based on the method by which the ownership transfers to the user:  For no consideration (through a gift)  For token consideration  For price specified in the lease  For remaining amount (if lease is terminated before period)  Gradual transfer 4
    5. 5. ESSENTIALS OF IJARAH 5
    6. 6. IJARAH (LEASING) The corpus of leased commodity remains in the ownership of the lessor and only its usufruct is transferred to the lessee. Any thing which cannot be used without consuming the same cannot be leased out like money, edibles, fuel, etc. Only such assets which are owned by the lessor can be leased out except that a sub-lease is effected by the lessee with the express permission of the lessor. Until such time that assets to be leased are delivered to the lessee, lease rentals do not become due and payable 6
    7. 7. IJARAH (LEASING) During the entire term of the lease, the lessor must retain title to the assets, and bear all risks and rewards pertaining to ownership. If any damage or loss is caused to the leased assets due to the fault or negligence of the lessee, the consequences thereof shall be borne by the lessee. The consequences arising from non-customary use of the asset without mutual agreement will also be borne by the lessee. 7
    8. 8. IJARAH (LEASING) The lessee is also responsible for all risks and consequences in relation to third party liability, arising from or incidental to operation or use of the leased assets. The insurance (Takaful) of the leased asset should be in the name of lessor and the cost of such Takaful also borne by him. A lease can be terminated before expiry of the term of the lease but only with the mutual consent of the parties. 8
    9. 9. IJARAH (LEASING) Either party can make a unilateral promise to buy/sell the assets upon expiry of the term of lease, or earlier at a price and at such terms and conditions as are agreed, provided that the lease agreement shall not be conditional upon such sale. Alternatively, the lessor may make a promise to gift the asset to the lessee upon termination of the lease, provided the lessee has fulfilled all his obligations. However, there shall not be any stipulation in the lease agreement purporting to transfer of ownership of the leased assets at a future date. 9
    10. 10. IJARAH (LEASING) The amount of rental must be agreed in advance in an unambiguous manner either for the full term of the lease or for a specific period in absolute terms. Assignment of only the lease rentals is not permissible except at par value. Contract of lease will be considered terminated if the leased asset ceases to give the service for which it was rented. However, if the leased asset is damaged during the period of the contract but is capable of being repaired, the contract will remain valid. 10
    11. 11. IJARAH (LEASING) A penalty can be agreed ab initio in the lease agreement for delay in payment of rental by the lessee. In that case, lessee shall be liable to pay penalty calculated at the agreed rate in percent per day/annum. However, that penalty shall be used for the purposes of charity. However, The Islamic banks can also approach competent courts for award of damages, at discretion of the courts, which shall be determined on the basis of direct and indirect costs incurred, other than opportunity cost. Also, security or collateral can be sold by the bank (purchaser) without intervention of the court. 11
    12. 12. AAOIFI SHARIAH STANDARD # 9 GUIDLINES 12
    13. 13. Ijarah and Ijarah Muntahia BittamleekSHARIAH GUIDLINESScope of the standard. This standard is applicable to operating leases of properties or to Ijarah Muntahia Bittamleek. Whether the institution is the lessor or the lessee. This standard is not applicable to the employment of persons (labor contract).Promise to lease (an asset). It is permissible for the institution to require the lease promisor (customer) to pay a sum of money to the institution to guarantee the customer’s commitment to accepting a lease on the asset and the subsequent obligations, provided no amount is to be deducted from this sum except in proportion to the actual damage suffered by the institution. 13
    14. 14. Ijarah and Ijarah Muntahia BittamleekSHARIAH GUIDLINES Acquisition of the asset to be leased. For the validity of an Ijarah contract concerning a specified asset, the lease contract should be preceded by acquisition of either the asset to be leased or the usufruct of that asset. (a) If the asset or the usufruct thereof is owned by the institution, which should in principle be the case, an Ijarah contract may be executed as soon as agreement is reached by the two parties. (b) however, if the asset is to be acquired from the customer, or from a third party, the Ijarah contract shall not be executed unless and until the institution has acquired that asset. 14
    15. 15. Ijarah and Ijarah Muntahia BittamleekSHARIAH GUIDLINES Concluding an Ijarah contract. The lease contract is a binding contract which neither may terminate or alter without the other’s consent. The duration of an Ijarah contract must be specified in the contract. The period of Ijarah should commence on the date of execution of the contract, unless the two parties agree on a specified future commencement date, resulting in a future Ijarah, that is, an Ijarah contract to be executed at a future date. 15
    16. 16. Ijarah and Ijarah Muntahia BittamleekSHARIAH GUIDLINES Subject Matter of Ijarah The leased asset must be capable of being used while preserving the asset, and the benefit from an Ijarah must be lawful in Sharia. The lessor may not stipulate that the lessee will undertake the major maintenance of the asset that is required to keep it in the condition necessary to provide the contractual benefits under the lease. The lessor may delegate to the lessee the task of carrying out such maintenance at the lessor’s cost. The lessee should carry out operating or periodical (ordinary) maintenance. 16
    17. 17. Ijarah and Ijarah Muntahia BittamleekSHARIAH GUIDLINES Rules governing lease rentals. In case the rentals is subject to changes (floating rentals), it is necessary that the amount of the rentals of the first period of the Ijarah contract be specified. It is then permissible that the rentals for subsequent periods be determined according to a certain benchmark. 17
    18. 18. Ijarah and Ijarah Muntahia BittamleekSHARIAH GUIDLINES Guarantees and treatment of Ijarah receivables. Permissible security, of all kinds, may be taken to secure the rental payments or as security against misuse or negligence on the part of lessee. It may be provided in the contract of Ijarah or Ijarah Muntahia Bittamleek that a lessee who delays payment for no good reason undertakes to donate a certain amount or percentage of the rentals due in case of late payment. Such donation should be paid to charitable causes under the co-ordination of the institutions Sharia supervisory board. 18
    19. 19. Ijarah and Ijarah Muntahia Bittamleek SHARIAH GUIDLINES Termination of the Ijarah Contract. The two parties may terminate the Ijarah contract before it begins to run. It is permissible to terminate the lease contract by mutual consent but it is not permissible for one party to terminate it except in case of force majeure or there is a defect in the leased asset that materially impairs its use. Termination is also possible when one party secures an option to terminate the contract in which case the party who holds the option may exercise it during the specified period. 19
    20. 20. Ijarah and Ijarah Muntahia Bittamleek SHARIAH GUIDLINES Transfer of the ownership in the leased property in Ijarah Muntahia Bittamleek. In Ijarah Muntahia Bittamleek, the method of transferring the title in the leased asset to the lessee must be evidenced in a document separate from the Ijarah contract document, using one of the following methods.  By means of a promise to sell for a token or other consideration, or by accelerating the payment of the remaining amount of rental, or by paying the market value of the leased property.  A promise to give it as gift (for no consideration).  A promise to give it as a gift, contingent upon the payment of the remaining installments. 20
    21. 21. IJARAH (LEASING)FOR AGRO-BASED BUSINESSES DAIRY FARMING Milk processing plants, Allied Sheds and machineries etc. Packaging plant Tankers for transportation IRRIGATION (AAB-PASHI) FINANCING:  Installation of Tube wells / Turbine,  Water Sprinkle / drip system for effective water management,  Solar energy plants,  Pumps for irrigation system. 21
    22. 22. IJARAH (LEASING)FOR AGRO-BASED BUSINESSESTransport and Vehicles Financing• Purchase of tractors• Refrigeration vans• Farm cooling tanks• Motorcycles for milk distribution• Small pickups for distributions• Mini trucks and chiller carriers for 22
    23. 23. MECHANISM OF IJARAH Transfer of asset Beneficial use of asset Financier FarmerVendor (Lessor) (Lessee) Payment of Lease rentals purchase price Another popular instrument – 15% of the transactions Easier to understand and implement Right available to the lessee for purchase 23
    24. 24. Risks and Practical Issues Credit Risk (Default in rental payments) Rate of Return Risk Customer may decline to enter into Ijarah. Damage to the Asset Overdue Rentals Non-Compliance/Violation of contract. Early Termination Asset Price Risk Repair and Maintenance Running Expenses (depending upon contract) 24
    25. 25. Risks and Practical Issues Proper documentation Sequence of Documentation in Sale and lease Back. Time of Transferring asset in Sale and Lease back Islamic Lease covers the conditions of Finance Lease as described in IAS 17. Accounting & Tax Depreciation Issues. 25
    26. 26. DOCUMENTATION SPECIAL CARESIN IMPLEMENTATION OF THE IJARAH SYSTEM 26
    27. 27. IJARAH AGREEMENTIjarah Agreement is the basic document whichcontains all terms and conditions pertinent of Ijarahof particular Asset(s).Ijarah Agreement shall be signed after the Lessor hastaken the possession the Asset and not earlier. 27
    28. 28. ADDENDUMS TO IJARAH AGREEMENT Description of the Ijarah Asset Schedule of of Ijarah Rentals Receipt of Asset Demand Promissory Note 28
    29. 29. 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 etc. This documents shall be signed signed after Delivery of asset to the Lessee and not earlier. 29
    30. 30. SCHEDULE OF IJARAH RENTALSThis schedule contains a table which shows: Amount of rental (Monthly/Quarterly/Half Yearly) Date of Payment of each rentalThis schedule will also contain the date onwhich first rental is due.This documents shall be signed signed after Deliveryof asset to the Lessee. 30
    31. 31. RECEIPT OF ASSETSThis document confirms that customer has takenthe possession of Leased Asset as described inthe earlier document “Description of IjarahAsset”.This document is only signed by the Lessee onreceipt of Asset, as an acknowledgement ofreceipt of described asset under Ijarah Contact. 31
    32. 32. PROMISSORY NOTE After signing of Ijarah Agreement, the amount of rentals become Debt (Dyan) to the Lessee. Promissory Note is Lessee’s acknowledgement to Debt amount and its promise to pay. 32
    33. 33. UNDERTAKING TO PURCHASE LEASED ASSETThis documents contains undertaking from theLessee that he/it will purchase the Leasedasset on the purchase Price corresponding tothe Purchase Date.This document contains a schedule whichshows Purchase Price(s) during the Ijarah termon which the Lessee can purchase the asset bymaking lump sum payment. 33
    34. 34. OTHER DOCUMENTSUndertaking for Personal use ofIjarah AssetTrust ReceiptAuthorization to Take possession ofLeased AssetSale Deed 34
    35. 35. THANK YOU for listening with Patience .Any further Questions….? Ch. Hamad Rasool Bhullar 35

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