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Ijarah mbl
1. Introduction to Ijarah
Version 2.0
Release Date:
Jamad ul Thani 31, 1430 H
June 25, 2009
Prepared By:
Product Development and Shariah
Compliance Department
2. • Ijarah is a term of Islamic Fiqh
• Literally, it means “To give something on
rent”
• 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 porter 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
Ijarah
3. • Ijarah is an Islamic alternative 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.
Ijarah as a mode of financing
4. • Risk and rewards of ownership lies with the
owner i.e. any loss to the asset beyond the
control of the lessee should be borne by the
Lessor.
• Late payment penalty cannot be charged to the
income of the Lessor.
• Lease and Sale agreement should be separate
and non contingent.
Ijarah-Key Difference
6. CUSTOMER
MECHANIC
S
ISLAMIC 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
Ijarah
7. CUSTOMER
MECHANIC
S
ISLAMIC BANK
The customer makes periodic rental 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
Ijarah as a mode of financing
9. • Rules governing Ijarah are similar to the
rules governing sale.
• Because in both cases something is
transferred from one person to another
The only 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
Ijarah
10. 1. Leasing is a contract where the owner of an
asset transfers its use to another person
against an agreed price.
2. However, ownership of the leased asset
remains with the Lessor
Rules of Ijarah
11. 3. Since ownership of the leased asset remains
with the Lessor, all rights and liabilities relating
to ownership are borne by the Lessor.
All rights and liabilities relating to use are borne
by the Lessee e.g. “A” gives his house to “B”
on rent.Property taxes are to be borne by the
owner. Water tax, electricity bill etc are to be
borne by the Lessee
Rules of Ijarah
12. 4. Subject matter of Lease should be Valuable,
Identified and Quantified.
5. The period of Lease must be determined in
clear terms.
6. The Lessee is responsible for damage to the
asset caused by fraud or negligence.
7. Any damage to the asset not caused by the
Lessee’s neglect, is to be borne by the Lessor.
Rules of Ijarah
13. 8. Normal maintenance is Lessee’s responsibility
9. Lease rentals for the entire lease period must
be fixed at the time of Lease Agreement;
a) Different amounts of rents can be fixed for
different periods, but they must be known.
b) The rent may be tied to a known benchmark,
acceptable to both the parties.
Rules of Ijarah
14. 10.The Lessor cannot increase the rent unilaterally
11.The Lessor may receive the rent in advance, but
such payment should be recorded as an Advance
rental. Balance Sheet should reflect this payment
as Liability, since rent can be received only for
use of an asset.
Rules of Ijarah
15. 12.The Lease period will start when the asset has
been delivered to the Lessee
- in a usable condition
- whether or not the Lessee has started using it
12.If the leased asset is destroyed, the lease will
terminate.
13.If the Lessee is at fault, he is liable to
compensate the Lessor for the loss
Rules of Ijarah
16. • If the Lessee contravenes any term of the Lease
agreement the Lessor may unilaterally terminate
the agreement
• If there is no contravention, the agreement can
only be terminated by mutual consent
• Conventional Financial Lease agreements give
termination right to Lessor in all cases. This is
contrary to Shariah laws
Termination of Ijarah
17. Difference b/w Conventional Lease & Ijarah
1. In conventional lease the Lessor has the
unilateral right to rescind the lease contract
at his sole discretion, which is against the
laws of Shariah,
2. Expenses under Ijarah are as follows:
• Lessor-- expenses relating to the corpus of
the asset i.e. insurance, accidental
repairs etc. will be borne by the lessor
• Lessee-- actual operating/overhead
expenses related to running the asset will
be borne by the lessee
Ijarah
18. Difference b/w Conventional Lease & Ijarah
3. Two contracts into one contract is not
permissible in Shariah therefore, we cannot
have the agreement of hire and purchase
into one agreement, only we can
undertake/promise to purchase the leased
asset.
4. In conventional lease the lease starts even
before the existence of assets, which is also
not permissible in Shariah.
5. Penalty income is charged for late payments
in Conventional lease.
Ijarah
20. Unique Selling Proposition
• Pakistan’s first truly Shariah-
compliant Car Financing Scheme.
• Available in tenures of 3, 4 and 5
years.
• Available for locally assembled as
well as Imported cars.
• Also available for Used Cars
• No application Fee
Car Ijarah
Application of Ijarah
21. • For long and medium term fixed asset
financing
• BMR
• Retail products (Car Ijarah)
Applications of Ijarah
