Ijara financing by zubair
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Transcript of Ijara financing by zubair
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IJARAH( Islamic Lease )
Zubair MughalChief Executive OfficerAlHuda : Centre of Is lamic Banking & Econom icsEditor in Chief.Islamic Banking and Finance News , True Bankin g.
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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 leasedassets 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 ofthe lessor and only its usufruct is transferred to thelessee.
Any thing which cannot be used withoutconsuming the same cannot be leased out likemoney, edibles, fuel, etc.
Only such assets which are owned by the lessorcan be leased out except that a sub-lease is
effected by the lessee with the express permissionof the lessor.
Until such time that assets to be leased aredelivered to the lessee, lease rentals do not
become due and payable
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IJARAH (LEASING)
During the entire term of the lease, thelessor 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 negligenceof 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 andconsequences in relation to third party liability,arising from or incidental to operation or use of theleased assets.
The insurance of the leased asset should be in thename of lessor and the cost of such insuranceborne by him.
A lease can be terminated before expiry of theterm of the lease but only with the mutual consentof the parties.
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IJARAH (LEASING)
Either party can make a unilateral promise to buy/sell theassets upon expiry of the term of lease.
Alternatively, the lessor may make a promise to gift the assetto 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 leasedassets at a future date.
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IJARAH (LEASING)
The amount of rental must be agreed inadvance
Contract of lease will be consideredterminated if the leased asset ceases to
give the service for which it was rented.However, if the leased asset is damagedduring the period of the contract but iscapable of being repaired, the contract will
remain valid.
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IJARAH (LEASING)
Late Payment Plenty
The banks can also approach competent courtsfor award of damages.
Also, security or collateral can be sold by thebank (purchaser) without intervention of the court.
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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)
Entrepreneur
(Lessee)Vendor
Transfer of assetBeneficial use
of asset
Payment ofpurchase price
Lease rentals
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Ijarah Operating Lease
The customer approaches the Bank with therequest for financing
The Bank purchases the item required for
leasing and receives title of ownership fromthe vendor
The Bank makes payment to the vendor
GENERAL MECHANICS
CUSTOMERISLAMIC BANKVENDOR
. .Agreement
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Ijarah 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
GENERAL MECHANICS
CUSTOMERISLAMIC BANK AgreementVENDOR
. .
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USAGE OF IJARAH
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IJARAH (LEASING)
Ijarah (Operating Lease) Examples:
Houses
Rent-A-Car
Agricultural DurablesAircrafts, etc.
Issues
Asset Price RiskRepair and Maintenance
Running 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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Risks
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 o f Secu ri ty deposits received
f rom customers.
Treatment of Advance rentals.
Account ing ru le/po l icy regard ing 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 contractscontain conditions that arecontravenes 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 Ribaby
Sharia'h
The Ijarah contract does not
contain any condition that makes
the contract void under Sharia'hperspective.
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Rights & Liabilities of Lessor and Lessee
Conventional Leasing Car Ijarah
In Conventional Leasing Products,the Customer is responsible for all
kinds of losses or damages to theLeased asset, irrespective of the
circumstances.
If the insurance company does notcompensate the entire outstanding
amount in case of total loss, thecustomer is liable to pay the
balance.
All risks pertaining to ownershipare borne by Lessor.Customer
only bears usage-related risks
Lessor bears the risk ofInsurance claim settlement.
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Rentals recovery in case of theft andloss
Conventional Leasing Car Ijarah
If the Leased Asset is stolen orcompletely destroyed, the
conventional leasing company orBank would continue charging
the lease rent till the settlementof the Insurance claim
Under the Islamic Ijarah, rent isconsideration for usage of the
leased asset, and if the asset hasbeen stolen, destroyed or
temporarily out of order and notin use of Customer, the concept
of rental becomes void. In such
situations rental is not chargedfrom the lessee.
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Penalty for late payment
Conventional Leasing Car Ijarah
In most contemporary financialleases, an extra monetary
amount is charged if rent is notpaid on time. This extra amountis the considered Riba and isHaram.
This amount is taken by theleasing institution into theirincome.
Under Ijarah, the Lessee may beasked to undertake that if he
fails to pay rent on its due date,he will pay a certain amount to acharity Fund, which will beadministered through the
Islamic Bank.For this purpose the bankmaintains a charity fund wheresuch amounts may be creditedand disbursed for charitable
purposes.
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Insurance premium
Conventional Leasing Car Ijarah
Insurance is independent of thelease contract. The insurance
expense of the asset is directlyborne by the lessee
Takaful / Insuranceshould be atthe expense of the Lessor and
not at the expense of the lessee.The Lessor may increase the
lease rent to recover any costsincurred by him in connection
with the asset. However, as a
matter of principal, the costshould be paid for by the Lessor.
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Registration Charges
Conventional Leasing Car Ijarah
Lessee is responsible for theRegistration of Leased Vehicle.
The Leased Asset(vehicle) isregistered in the name of the
Bank and registration charges arepaid by the Bank (Lessor).
The Lessor may increase the
lease rent to recover any costsincurred by him in connection
with the asset
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Purchase of asset
Conventional Leasing Car Ijarah
Under conventional leasingcontracts, the vehicle is
automatically transferred in thename of the customer upon
completion of the lease period,whether or not he wants to
purchase it.
There is not such clause in theIjarah Agreement that Leased
Asset will automatically transfer toLessee.
Separate sale agreement is required
to execute sale transaction at theend of lease term.
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Commencement of Rentals
Conventional Leasing Car Ijarah
In case of Booking of LeasedAsset, recovery of Lease
installment commence after thepayment of cost of Asset to
manufacturer/dealer.
In case of Car Ijarah, therecovery of rentals is associated
with delivery of Leased Asset.
Rental recovery should not becommenced before the delivery
of Asset.
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Signing of Lease Contract
Conventional Leasing Car Ijarah
Lease Agreement can be signed bythe Lessee and Lessee any time
even if the Leased Asset is notowned by the Customer.
In case of Ijarah, the IjarahAgreement can not be signed by
the Lessor and Lessee unless:
Asset has come in to existence
Assets is in the ownership of
the Lessor
Lessor has taken possession of
the Asset
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Termination before delivery
Conventional Leasing Car Ijarah
The customer will suffer loss ofinterest paid during the booking
period because installmentcommence immediately after
payment of cost of asset to theManufacturer/Dealer.
The loss of customer is onlylimited to actual loss, if any,
suffered by the Lessor on sale ofasset 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.