The document discusses the concept and process of Ijarah, an Islamic financing structure where a bank purchases an asset and leases it to a customer. It defines Ijarah, outlines the basic conditions including requirements for the contract, asset, and rental. The process involves the customer requesting financing, the bank acquiring the asset from a vendor and leasing it to the customer, who makes periodic rental payments until ownership transfers at the end of the lease term. Key legal documentation for Ijarah includes letters of undertaking, agency agreements, lease agreements, and sale agreements.

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Committed to you
Ijarah

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Committed to you
Definition
• Ijarah means:
To give something on rent
• The term “Ijarah” is used in two context:
– To employ the services of a person on wages’ e.g. “A” hires a porter at the airport
to carry his luggage. This is called Ijarat ul ashkhas. (‫االشخاص‬ ‫)اجارۃ‬
– To transfer usufruct (benefit) of an asset to another person for an agreed period, at
an agreed rental. This is called Ijarat ul aayan. (‫االعیان‬ ‫)اجارۃ‬

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Committed to you
Basic Conditions of Ijarah
• Contract of Ijarah:
– All conditions for validity of contract must be satisfied.
– The Ijarah contract is a binding contract which neither party may terminate or
alter without the consent of other party.
– The duration of an Ijarah contract must be specified in the contract.
– Contract must be unconditional. Contract must not contain khiyar e shart.
– Contract must mention specific purpose for which leased asset shall be used.

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Committed to you
Basic Conditions of Ijarah
• Subject Matter/ Ijarah Asset:
– Subject matter of Ijarah may be an asset or usufruct of an asset.
– Ijarah Asset must be in ownership of lessor.
– The benefit from an Ijarah asset must be lawful in Shari’a.
– Subject matter may be a share in an undivided asset held in common with the
lessee.
– The leased asset must be capable of being used while preserving the asset.

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Committed to you
Basic Conditions of Ijarah
• Subject Matter/ Ijarah Asset:
– Ijarah asset must be free from all types of defect which impairs the use of leased
asset.
– The leased asset in the possession of the lessee is held by the lessee in a fiduciary
capacity on behalf of the lessor. The lessee will be held liable for any damage or
destruction of the leased asset due to his misconduct or negligence.

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Committed to you
Basic Conditions of Ijarah
• Subject Matter/ Ijarah Asset:
– The lessor must accept the responsibility for any defects of the leased asset which
impair the intended use of the asset, either by his own doing or as a result of
events outside his control.
– If the benefit from the leased asset is impaired wholly or partially as a result of the
lessee’s misconduct, the lessee is obliged to restore or repair the usufruct.

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Committed to you
Basic Conditions of Ijarah
• Subject Matter/ Ijarah Asset:
– The lessor is liable to undertake Major Maintenance of the asset that is required to
keep the asset in the condition necessary to provide contractual benefits under the
lease. The lessor may delegate to the lessee such task at the lessor’s cost.
– The lessee shall carry out operating or periodical (ordinary) maintenance.

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Committed to you
Basic Conditions of Ijarah
• Ijarah Rental
– Rent must be certain and specified, either as lump sump or by installments.
– Rent must not be part of leased usufruct of asset.
– The lessor’s entitlement to the rental starts from the time when the lessee starts to
benefit from the asset or once the lessor makes the usufruct of the asset available
to the lessee.

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Committed to you
Basic Conditions of Ijarah
• Ijarah Rental
– The lessor is not entitled to rent for the period during which the lessee was not
able to benefit from the asset.
– Both the lessee and the lessor may also agree to amend the rental in case of partial
destruction of the leased property.

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Committed to you
Basic Conditions of Ijarah
• Ijarah Rental
– If the lessee stops using the leased asset or returns it to the owner without the
owner’s consent, the rental will continue to be due in respect of the remaining
period of Ijarah, and the lessor shall not lease the property to another lessee for
this period.

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Committed to you
Basic Conditions of Ijarah
• Termination of Ijarah Contract
– Ijarah contract can be terminated 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.
– The lessor may stipulate that the Ijarah contract be terminated if the lessee does
not pay the rent or fails to pay it on time.
– An Ijarah contract does not terminate with the death of either party thereto.

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Committed to you
Basic Conditions of Ijarah
• Termination of Ijarah Contract
– If the lessor sells the leased asset to the lessee, the Ijarah contract is terminated due
to transfer the ownership of the asset.
– The lessor may sell the leased asset to a third party other than the lessee, and title
to the asset together with the rights and obligations of the lessor under the Ijarah
contract is thereby transferred to the new owner.

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Committed to you
Basic Conditions of Ijarah
• Termination of Ijarah Contract
– In case of total destruction of the leased asset, the Ijarah contract is terminated if it
is concluded on an identified asset. In such a case, it may not be stipulated that the
rest of the installments should be paid.
– In case of the partial destruction of the leased asset in a manner that impairs the
benefits expected from the asset, the lessee may terminate the Ijarah contract.

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Committed to you
Process Flow of Ijarah
CUSTOMERISLAMIC BANKVENDOR Agreement• Agreement

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Committed to you
Process Flow of Ijarah
1) The customer approaches the Bank with the request for financing and enters into a
promise to lease agreement.
2) The Bank purchases the item required for leasing and receives title of ownership
from the vendor.
3) The Bank makes payment to the vendor.
4) The Bank leases the asset to the customer after execution of lease agreement.
5) The customer makes periodic payments as per the contract.
6) Title transfers to the customer at the end of lease term.

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Committed to you
Process Description of Ijarah
• Promise to enter into lease agreement
– Customer may be required to furnish a promise to enter into lease agreement.
– It is permissible to require a sum of money (Security Deposit) from customer to
guarantee the customer’s commitment of accepting a lease agreement on the asset
and the subsequent obligation.
– No amount shall be deducted from security deposit.
– If the customer breaches his promise, then the actual damage/loss may be
recovered from this amount.

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Committed to you
Process Description of Ijarah
• Promise to enter into lease agreement
– Actual Loss is the difference between cost and selling price or the difference
between cost and total lease rentals if leased to third party.
– Security Deposit may be deposited in current account or saving account as per
customer’s choice.
– It is also permissible that institution and customer agree to treat the amount as
advance payment to rental installments.

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Committed to you
Process Description of Ijarah
• Acquisition of asset
– The lease contract should be preceded by acquisition of either the asset to be
leased or the usufruct of that asset.
– 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 and given to lessee.
– An asset may be acquired from a party and then leased to the same party (Sale &
Leaseback) provided the Ijarah transaction is not stipulated as a condition of the
purchase contract.
– Asset must qualify the characteristics of Ijarah asset.

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Committed to you
Process Description of Ijarah
• Acquisition of asset (Cont…)
– An institution may appoint someone to act as its agent in acquiring on its behalf an
asset that is desired by the customer. However, It is preferred that the agent is
someone other than the customer.
– A customer and institution may jointly acquire the asset and then customer get the
share of the institution on lease. The rental specified as receivable by the
institution should only be in proportion to its share in the ownership of the asset.

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Committed to you
Process Description of Ijarah
• Rental Agreement:
– Agreement shall specify responsibilities of lessor and lessee.
– Maintenance of Ijarah asset shall be borne by lessor and lessee as per their
respective responsibilities.
– The lessor/Bank may take out Takaful or permissible insurance on the leased asset
whenever possible.
– Such Takaful expenses must be borne by the lessor /Bank which may be taken into
account implicitly when the lease rental is to be fixed.
– The lessor/Bank may delegate to the lessee such task at the lessor’s expense.

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Committed to you
Process Description of Ijarah
• Rental Agreement:
– In case the rental is subject to changes (floating rental), it is necessary that the
amount of the rental of the first period of Ijarah contract must be specified.
– It is then permissible that the rentals for subsequent periods shall be determined
according to a certain benchmark.
– The benchmark must be based on a clear formula which is not subject to dispute
and should be subject to a ceiling, on both maximum and minimum levels.

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Committed to you
Process Description of Ijarah
• Rental Agreement:
– An Ijarah may be renewed for another term, and such renewal may be made:
• before the expiry of the original term or
• automatically by adding a provision in the new contract for such renewal
when the new term starts.

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Committed to you
Process Description of Ijarah
• Delay in Payment:
– No increase in the rental due may be stipulated by the lessor in case of delay in
payment by the lessee.
– It may be provided in the contract of Ijarah that a lessee who delays payment for
no good reason undertakes to donate to charitable causes a certain amount or
percentage of the rental due.
– The lessor may stipulate that the Ijarah contract be terminated if the lessee does
not pay the rent or fails to pay it on time.

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Committed to you
Process Description of Ijarah
• Transfer of ownership:
– In Ijarah Muntahia Bittamleek (‫بالتمليك‬ ‫المنتهية‬ ‫اإلجارة‬( , the method of transferring
the title to the lessee can be one of the following:
• A promise to sell for a certain amount.
• A promise to give it as a gift.
– The transfer of title must be evidenced in a separate document independent of the
contract of Ijarah Muntahia Bittamleek and cannot be taken as an integral part of
Ijarah contract.

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Committed to you
Process Description of Ijarah
• Transfer of ownership:
– A promise to transfer the ownership is a binding promise by the lessor. Such
promise is binding on the lessor only, while the lessee has the option not to
proceed.
– In cases of transfer of ownership by way of gift or sale, it is necessary that a new
contract be drawn up to affect the transfer of ownership.
– Transfer of the ownership in the leased property cannot be made by executing,
along with Ijarah, a sale contract that will become effective on a future date.

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Committed to you
Process Description of Ijarah
• Transfer of ownership:
– If the leased asset was purchased from the lessee (Sale and Lease Back) before it
was leased back to the lessee on the basis of Ijarah Muntahia Bittamleek, a
(reasonable) period of time, between the lease contract and the time of the sale of
the asset to the lessee, must have expired, to avoid Bai e Einah.
– This period must be long enough (one year as given by the institution’s SSB) so
that the leased property or its value could have changed.

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Committed to you
Application
• Ijarah may be applied:
– For long and medium term fixed asset financing like plant, equipment, generators
etc.
– Retail products like Car financing, Durable financing, Home Financing
– For Financing Assets Imported via Sight LC
– For Financing Assets Imported via Usance LC

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Committed to you
Application
• Ijarah Financing for Assets Imported via Sight LC
– The Importer opens the LC as an agent of the Bank.
– The Importer places order with the foreign supplier on behalf of the Bank.
– Upon receipt of documents the Bank makes payment to the foreign supplier.
– The bank will enter into an Ijarah agreement with the customer.
– A specified rental will be agreed at this point in time. However, rental would be
charged once the asset becomes workable in nature.
– After the term of Ijarah agreement is completed, the bank may sell the asset to the
importer at an agreed price.

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Committed to you
Legal Documentation
• Letter of undertaking to lease
• Agency Agreement
• Lease agreement
• Undertaking to purchase leased asset
• Sale Agreement

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Committed to you
JazakAllah o Khair