Ijarah is an Islamic financing method where a lessor leases an asset to a lessee for an agreed upon rental payment. There are three key points: 1) Ijarah allows the use of an asset but ownership remains with the lessor, who bears risks related to ownership. The lessee bears risks related to use of the asset. 2) Rental payments and sale of the asset must be structured separately to avoid making the lease contingent on sale. 3) Rules governing ijarah require the asset to be identified and the lease period determined. Rent can be set ahead of time but not increased unilaterally. The lessee bears costs of use while the lessor

1. Introduction to Ijarah

2. Ijarah
•
•
•
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

3. Ijarah as a mode of financing
• 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.

4. Ijarah-Key Difference
• 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.

5. Lease of Usufruct
Ijarah: Transfer of Ownership to Lessee
Standard Ijarah
•Lessee benefits from
asset but no transfer of
ownership.
•Only usufructs are
transferred.
Ijarah Wa iqtina
•Ijarah is conducted
solely for the purpose
of transfer of ownership
•Independent/separate
contract of sale is
formed at the end of
lease agreement.

6. Process of Ijarah

7. Ijarah
MECHANICS
.
VENDOR
ISLAMIC
.
BANK
Agreement-1
CUSTOMER
 The customer approaches the Bank with the
request for financing and enters into a promise
to lease agreement.
 The Bank purchases the item required for
leasing and receives title of ownership from the
vendor
 The Bank makes payment to the vendor

8. Ijarah as a mode of financing
MECHANICS
.
VENDOR
ISLAMIC
BANK
Agreement-2
.
CUSTOMER
 The Bank leases the asset to the customer after
execution of lease agreement.
 The customer makes periodic rental payments
as per the contract
 At the end of the tenure customer can purchase
the asset from the bank with the help of
separate Sale agreement.

9. Rules governing Ijarah

10. Ijarah
• Rules governing Ijarah are similar to the
rules governing sale.
• Because in both cases something
transferred from one person to another
is
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

11. Rules of Ijarah
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

12. Rules of Ijarah
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

13. Rules of Ijarah
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.

14. Rules of Ijarah
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.

15. Rules of Ijarah
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.

16. Rules of Ijarah
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
13.If the leased asset is destroyed, the lease will
terminate.
14.If the Lessee is at fault, he is liable to
compensate the Lessor for the loss

17. Termination of Ijarah
• 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

18. DIFFERENCE BETWEEN CONVENTIONAL
LEASE & IJARA
Description
Conventional Lease
(Non-Islamic)
Islamic Concept
(Ijara)
1. Penalty on delay rental
Income of the lessor
Penalty shall be used
as a charitable
purpose.
2. Rental due
Before possession
After possession
2. Pre rental before the delivery Can be possible
of leased asset
Prohibited and Haram
3. Even if no contravention on
the part of the lessee, lessor
can terminate the contract
unilaterally
No
Yes
( in some cases lessor
has been given
unrestricted power)

19. Case:
The Islamic Bank has entered into a Ijarah contract with M/s
Pak Petroleum Ltd. to supply fuel worth Rs. 5 Million for five
years. The rent has been fixed to be Rs. 10,000 /= per month. Is
this Ijarah contract valid?
Explanation:
The contract is invalid because fuel cannot be rented out because it cannot
maintain its corpus when it is used.
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20. Case:
The Islamic Bank has rented out a building to M/s Basheer Sons
on January 01, 2008. The building is under renovation which
would finish within three months. The Ijarah Agreement has
been signed and bank is charging the rent from the date of
signing the Ijarah Agreement.
Explanation:
Since the subject matter is not in usable form, therefore, the rental may start
after it is in usable form i.e. after 31st March 2008
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21. 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.
Explanation:
This clause is making selling of the leased asset contingent upon the Ijarah
agreement; therefore, the contract would be invalid.
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22. Case:
The banks leases a machinery to Mr. B for 5 years. The rent for
the first year is fixed as Rs. 20,000/- per month and it is agreed
that the rent of every subsequent year shall be 10% more than
the previous one.
Explanation:
The lease is valid since the rents have been fixed at the beginning of the Ijarah
period.
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23. Basic Rules of Ijarah
17.
If the leased asset has totally lost the
function for which it was leased, and no
repair is possible, the lease shall terminate
on the day in which such loss has been
caused. However, if the loss is caused by
the misuse or by the negligence of the
lessee, he will be liable to compensate the
lessor for the depreciated value of the asset
as, it was immediately before the loss.
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