Al huda presentation on ijarah mazhar ali bokhari latest

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IJARAH( Islamic Lease )

Zubair MughalChief Executive OfficerAlHuda : Centre of Islamic Banking & Economics

Editor in Chief.Islamic Banking and Finance News , True Banking.

Regional HeadTakaful Pakistan Limited.

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IJARAH (LEASING)

IJARAH AL ASHKAAS

IJARAH AL AAyyan

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IJARAH (LEASING)

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.

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ESSENTIALS OF IJARAH

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IJARAH (LEASING)

The 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

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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.

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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 of the leased asset should be in the name of lessor and the cost of such insurance 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.

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IJARAH (LEASING)

Either party can make a unilateral promise to buy/sell the assets upon expiry of the term of lease.

Alternatively, the lessor may make a promise to gift the asset to the lessee upon termination of the lease.

However, there shall not be any stipulation in the lease agreement purporting to transfer of ownership of the leased assets at a future date.

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IJARAH (LEASING)

The amount of rental must be agreed in advance

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.

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IJARAH (LEASING)

Late Payment Plenty

The banks can also approach competent courts for award of damages.

Also, security or collateral can be sold by the bank (purchaser) without intervention of the court.

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MECHANISM

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Leasing (Operating Lease)

Another popular instrument – 15% of the transactions

Right available to lessee to purchase

Asset ownership risk with owner; operational risks with lessee

Features close to a financial lease

Used for machinery, equipment, property, vehicles, aircraft etc.

Ownership usually transferred at the end

Financier(Lessor)Financier(Lessor)

Entrepreneur(Lessee)

Entrepreneur(Lessee)VendorVendor

Transfer of assetTransfer of assetBeneficial useBeneficial use

of assetof asset

Payment ofPayment ofpurchase pricepurchase price

Lease rentalsLease rentals

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Ijarah Operating LeaseIjarah Operating Lease

The customer approaches the Bank with the request for financing

The Bank purchases the item required for leasing and receives title of ownership from the vendor

The Bank makes payment to the vendor

The customer approaches the Bank with the request for financing

The Bank purchases the item required for leasing and receives title of ownership from the vendor

The Bank makes payment to the vendor

GENERAL MECHANICS

CUSTOMERISLAMIC

BANK

VENDOR

. .Agreement

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Ijarah Operating LeaseIjarah Operating Lease

The Bank leases the asset to the customer

The customer makes periodic payments as per the contract

The asset title transfers to the customer based on the method disclosed in the agreement

The Bank leases the asset to the customer

The customer makes periodic payments as per the contract

The asset title transfers to the customer based on the method disclosed in the agreement

GENERAL MECHANICS

CUSTOMERISLAMIC

BANK

AgreementVENDOR

. .

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USAGE OF IJARAH

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IJARAH (LEASING)

Ijarah (Operating Lease) Examples:HousesRent-A-CarAgricultural DurablesAircrafts, etc.

IssuesAsset Price RiskRepair and MaintenanceRunning Expenses (depending upon contract)Credit Risk (Default in rental payment)

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IJARAH (LEASING)

Ijarah Muntahia Bittamleek Examples:

Vehicles Ijarah Financing

Plant and Machinery

Consumer Durables

House Financing

Project Finance, etc.

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RISKS AND ISSUES

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RisksRisks

Credit Risk Rate of Return Risk Customer may decline to enter into Ijarah. Damage to Asset Overdue Rentals Non-Compliance/Violation of contract. Early Termination Asset Price Risk

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Risks and Practical Issues

How to treat insurance cost paid by the Lessor?

Treatment of Security deposits received from customers.

Treatment of Advance rentals. Accounting rule/policy regarding repairs

of Leased assets.

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Leasing/Ijarah Contract

Conventional Leasing Car Ijarah

There are two types of contracts, Financial lease and loan for car financing. Both these contracts contain conditions that are contravenes with the Islamic Sharia'h. Financing lease contains conditions of hire purchase, which is not permissible by Sharia'h. Car financing or loan agreement contains conditions of interest. Interest is considered Riba by Sharia'h

The Ijarah contract does not contain any condition that makes the contract void under Sharia'h perspective.

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Rights & Liabilities of Lessor and Lessee


In Conventional Leasing Products, the Customer is responsible for all kinds of losses or damages to the Leased asset, irrespective of the circumstances.

If the insurance company does not compensate the entire outstanding amount in case of total loss, the customer is liable to pay the balance.

All risks pertaining to ownership are borne by Lessor.Customer only bears usage-related risks

Lessor bears the risk of Insurance claim settlement.

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Rentals recovery in case of theft and loss


If the Leased Asset is stolen or completely destroyed, the conventional leasing company or Bank would continue charging the lease rent till the settlement of the Insurance claim

Under the Islamic Ijarah, rent is consideration for usage of the leased asset, and if the asset has been stolen, destroyed or temporarily out of order and not in use of Customer, the concept of rental becomes void. In such situations rental is not charged from the lessee.

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Penalty for late payment


In most contemporary financial leases, an extra monetary amount is charged if rent is not paid on time. This extra amount is the considered Riba and is Haram.

This amount is taken by the leasing institution into their income.

Under Ijarah, the Lessee may be asked to undertake that if he fails to pay rent on its due date, he will pay a certain amount to a charity Fund, which will be administered through the Islamic Bank. For this purpose the bank maintains a charity fund where such amounts may be credited and disbursed for charitable purposes.

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Insurance premium


Insurance is independent of the lease contract. The insurance expense of the asset is directly borne by the lessee

Takaful / Insurance should be at the expense of the Lessor and not at the expense of the lessee. The Lessor may increase the lease rent to recover any costs incurred by him in connection with the asset. However, as a matter of principal, the cost should be paid for by the Lessor.

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Registration Charges


Lessee is responsible for the Registration of Leased Vehicle.

The Leased Asset(vehicle) is registered in the name of the Bank and registration charges are paid by the Bank (Lessor).

The Lessor may increase the lease rent to recover any costs incurred by him in connection with the asset

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Purchase of asset


Under conventional leasing contracts, the vehicle is automatically transferred in the name of the customer upon completion of the lease period, whether or not he wants to purchase it.

There is not such clause in the Ijarah Agreement that Leased Asset will automatically transfer to Lessee.

Separate sale agreement is required to execute sale transaction at the end of lease term.

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Commencement of Rentals


In case of Booking of Leased Asset, recovery of Lease installment commence after the payment of cost of Asset to manufacturer/dealer.

In case of Car Ijarah, the recovery of rentals is associated with delivery of Leased Asset.

Rental recovery should not be commenced before the delivery of Asset.

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Signing of Lease Contract


Lease Agreement can be signed by the Lessee and Lessee any time even if the Leased Asset is not owned by the Customer.

In case of Ijarah, the Ijarah Agreement can not be signed by the Lessor and Lessee unless:

Asset has come in to existenceAssets is in the ownership of the LessorLessor has taken possession of the Asset

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Termination before delivery


The customer will suffer loss of interest paid during the booking period because installment commence immediately after payment of cost of asset to the Manufacturer/Dealer.

The loss of customer is only limited to actual loss, if any, suffered by the Lessor on sale of asset in the open market.

Since the customer has not paid any rental during the booking period, no other cash loss is expected under Ijarah.

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OTHER DOCUMENTS

Undertaking for Personal use of Ijarah Asset

Trust Receipt

Authorization to Take possession of Leased Asset

Sale Deed

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Thank You.

Al huda presentation on ijarah mazhar ali bokhari latest

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