The alternate to Conventional System of Banking in Islam

2. Ijarah: “To give something on rent”
Presented by:
Asif Razzaq-MBA
Riphah International
University

3. Ijarah is transferring of rights of use (usufruct/benefit) of
something non consumable to a person against
compensation and the ownership remained with the
owner.Consumable goods cannot be leased out
Ijarah: “To give something on rent”

4. How Does Ijarah Works
Supplier
Vendor
Islamic Bank
Lessor
Customer
Lessee
Bank Purchases
Asset.
1
3
2
4
“The Purchase Price”
Bank Transfer
Usufruct to customer
Rentals Potential transfer
of rights over
assets at end of
agreement.
Ijarah: “To give something on rent”

5. Ijarah: “To give something on rent”

6. Hanafi’sShafi’s
Hanbali’s
Maliki’s
Ijarah: “To give something on rent”

7. Al Ijarah ’ain (Operating Lease) Ijarah
Muntahina Bittamleek
musta’jir
ajir
Ijarah tul Ashkhas
Ijarah tul
Aayan
Al-Ijarah
‘ain
IjarahMuntahina
Bittamleek
Ijarah: “To give something on rent”

8. 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.
Al-Ijarah ‘ain Financial Lease
Ijarah Muntahina Bittamleek Financial Lease
Ijarah: “To give something on rent”
Traditionally, the only kind of Ijarah that was only operating lease, whereby one owns an asset or equipment and leases it to others for rental for a specified
period. This form of Ijarah is known in Islamic banking and finance as operating lease. In this form of lease, the ownership of the leased assets will remain with
the bank at the end of the lease period.
In operating lease, the bank may already own a property which it wants to lease it out. In other words, operating lease is not preceded by a promise to lease or
the concept is not based on prior promise.
The evolution of modern Islamic banking and finance has created another form of Ijarah known as Ijarah Muntahina Bittamleek (IMB) or financial lease. The
IMB is defined as a form of transfer of ownership of usufructs of some assets, such as buildings or equipment, for a particular period in consideration for a
defined rent which is usually higher than the normal rental to encourage the lessor to transfer the leased assets to the lessee at the end of the lease period
after the lessee has paid all instalments without delay.
In a financial lease, it is necessary to clearly state the method of transfer of ownership in the agreement. The final transfer will occur at the end of the lease
period. The manner of transfer must be put separately in a different document attached to the lease agreement. The transfer of ownership could take place in
one of the following manners.
 Promise to transfer the ownership on the basis of ordinary or conditional gift
 Promise to transfer the property through sale

9. Ijarah: “To give something on rent”
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
Security Deposit
 The Security deposit obtained from the client should not be treated in a way conventional bank treats.
 This amount of security deposits will be treated as Amanah (Hamesh Jaddiya) before the execution of Lease
Agreement

10. Subject Matter of Ijarah
The Asset Should be valuable, identified and quantified
Anything which can be consumed cannot be leased out like money, wheat, rice, vegetables, fruits etc
Subject matter should be used for Shariah permissible purpose
Ijarah Contract can also be executed with non Muslim's
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.
Periods of Lease



Transfer of Usufruct

Ijarah: “To give something on rent”

11.  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.
 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.
Determination of Rent
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
Variable Rentals in Long Term Leases
Ijarah: “To give something on rent”

12. Penalty for Late Payment
 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
 It may be provided in the contract of Ijarah or Ijarah Muntahina Bittamleek that a lessee who delays
payment for no good reason undertakes to donate a certain amount or percentage of the rental due
in case of late payment. Such donation should be paid to charitable causes under the co- ordination
of the institutions shari'ah supervisory board.
Guarantee for Ijarah
 Permissible security of all kinds may be taken to secure the rental payments or as a security
against misuse or negligence on the part of the lessee such as a charge over assets
guarantee or an assignment of rights over assets of the lessee held by third parties, even if
such rights are a permissible life or property insurance indemnity in favor of the lessee.
Ijarah: “To give something on rent”

13. Expenses
 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.
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.
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.
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.
Ijarah: “To give something on rent”

14. A lease of a nonexistent asset fro which description cannot be determined precisely is not allowed, because such
ambiguity about the description and the time may lead to disputes. However if description is specified and the lessor
have the ownership of the asset then it can be leased out. E.g. house for rent after a month.
Lease of nonexistence of Asset
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
Lease for specific purpose only
Asset can be leased to different lessees in different period of time. How ever same asset can not be leased to
different lessees at the same time period
if the lessor signs an Ijarah contract for a specific period of time he cannot sign another Ijarah contract.
Multiple Leases
Ijarah: “To give something on rent”

15. 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.
The residual value of the leased asset
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. An Ijarah contract does not terminate with the death of either party thereto.
However, the heirs of the lessee may terminate the Ijarah contract if they can prove that the contract has
become, as a result of the death of their legato, too onerous for their resources and in excess of their needs.
Termination of Lease
Ijarah: “To give something on rent”

16. Ijarah: “To give something on rent”
Thanks for not
asking any question