IJARAH & ISSUES IJARAH & ISSUES RELATEED TO IJARAH – RELATEED TO IJARAH –

DM & ISSUES RELATED TO DM & ISSUES RELATED TO DMDM

By: Abdul SamadAlHuda Centre of Islamic Banking &

Economics (CIBE)

What is Ijarah?

Transferring of usufruct of an asset to Transferring of usufruct of an asset to another person for an agreed period, another person for an agreed period, at an agreed consideration.at an agreed consideration.

Basic Rules of Ijarah

Anything, which cannot be used without consuming, cannot be leased out. e.g. Money, wheat etc.

Leasing is not originally a mode of financing but it is a sale transaction. So all basic elements of lawful sale transaction must be present.

It is necessary for valid lease that the leased asset is fully identified by the parties.

Basic Rules of Ijarah

It is necessary for valid lease that the corpus of the leases property remains in the ownership of the lessor.

The period of lease must be determined in clear terms.

The lease period shall start from the date on which the leased asset has been delivered.

Liabilities of Parties

Lessor’s Responsibilities: Since corpus of leased property remains in

the ownership of the lessor therefore all liabilities of ownership are borne by lessor.

Expenses: As the lessor is the owner of the asset he is

liable to pay all the expenses incurred in the process of its purchase and its import to the country of the lessor example expenses of shipment and customs duty etc.

Lessee Responsibilities

Being user of the lease asset lessee can be made liable to any normally occurring wear and tear.

The lessee cannot use the leased asset for any purpose other then the purpose specified in the lease agreement.

If no such purpose is not specified in the agreement, the lessee can use it for whatever purpose it is use in normal course.

Lessee as Ameen

The lessee is liable to compensate the lessor for every harm caused to the leased asset by his misuse or negligence.

Rental

The rental must be determined at the time of contract for the whole period of lease.

It is permissible that different amount of rent are fixed for different phases provided that the amount of rent for each phase is specifically agreed upon at the time of affecting a lease.

The lessor cannot increase the rent unilaterally and any agreement to this effect is vied.

Rental

A lease contract can have a condition that the rent shall be increased according to a specified proportion (e.g. 5%) after a specified period (like one year).

The rent or any part thereof may be payable in advance before the delivery of the asset to the lessee, but that amount so collected by the lessor shall remain with him as Amana and shall be adjusted towards the rent after its being due.

In Case of Late Payment

The lessor cannot charge an additional amount in case the lessee delays payment of the rent.

Penalty of late payment is given to charity by lessee.

Insurance of the Assets

Legally, it is required for all leasing companies to insure the leased asset. Presently IMFI insure its leased assets. However our BoK Ijara policy clearly stated that BoK will use Conventional Insurance as long as Takaful is not available.

Termination : contractual

Lease is binding contract. It can be terminated by mutual consent. The lessor may terminate it when the

lessee doesn’t pay the rent or fails to pay it on time or because of violation of any other term and condition of the agreement. Ø With total destruction of the leased asset

Upon the expiry of term. Two parties may terminate it before it

begins to run.

Difference Between Murabaha and Ijarah

Procedure of IMFI IjarahProcedure of IMFI Ijarah

Undertaking to IjarahUndertaking to Ijarah

Agency AgreementAgency Agreement

PurchasePurchase

Payment of Purchase PricePayment of Purchase Price

Lease AgreementLease Agreement

Expenses Related To Expenses Related To Ownership Ownership

IssueIssue

In certain transaction of In certain transaction of Ijarah, all expenses Ijarah, all expenses related to the ownership related to the ownership is borne by the is borne by the customer.customer.

SolutionSolution

All expenses other than All expenses other than expense related to expense related to normal wear and tear of normal wear and tear of the Ijarah asset should the Ijarah asset should be borne by the IMFI and be borne by the IMFI and may be included into the may be included into the list price of Ijarah assets.list price of Ijarah assets.

Recovery of RentalRecovery of Rental

IssueIssue

The IMFI start recovering The IMFI start recovering the rental as soon as he the rental as soon as he disburses the amount to disburses the amount to the supplier and before the supplier and before actually receiving the actually receiving the Ijarah asset by the Ijarah asset by the customer. customer.

SolutionSolution

The IMFI should recover The IMFI should recover rentals only after the rentals only after the delivery of vehicle. It is delivery of vehicle. It is an unanimous opinion of an unanimous opinion of all the Sharaih Scholars all the Sharaih Scholars that it is not allowed to that it is not allowed to recover rentals before recover rentals before delivery.delivery.

Increase in Price of Ijarah Increase in Price of Ijarah AssetAsset

IssueIssue

When the price increases When the price increases before Ijarah Agreement, before Ijarah Agreement, customer pays the short customer pays the short fall without getting joint fall without getting joint ownership.ownership.

SolutionSolution

In all such cases, IMFI In all such cases, IMFI should give the should give the proportionate owner in proportionate owner in the Ijarah asset.the Ijarah asset.

Covering Risks Under Covering Risks Under Takaful Takaful

IssueIssue

In Ijarah risks of the In Ijarah risks of the leased assets should be leased assets should be covered under Takaful covered under Takaful arrangement rather than arrangement rather than under conventional under conventional insurance policies. insurance policies.

SolutionSolution

As an Islamic financial As an Islamic financial Institution, the IMFI Institution, the IMFI should obtain Takaful for should obtain Takaful for its leased assets under its leased assets under Ijarah.Ijarah.

Proportionate TakafulProportionate Takaful

IssueIssue

Incase of combined Incase of combined ownership model, ownership model, customer solely pays the customer solely pays the cost of Takaful. cost of Takaful.

SolutionSolution

Takaful cost should be Takaful cost should be borne by the partners in borne by the partners in proportionate to their proportionate to their interest in the asset and interest in the asset and not be solely borne by not be solely borne by the customer. the customer.

Sale and Lease BackSale and Lease Back

IssueIssue

We have noted that IMFI We have noted that IMFI enter into the sale and enter into the sale and lease back transaction lease back transaction for just fulfilling the for just fulfilling the liquidity requirement of liquidity requirement of the client.the client.

SolutionSolution

1.1. For just liquidity For just liquidity requirement this requirement this transaction should transaction should not be allowed.not be allowed.

2.2. Therefore, IMFI Therefore, IMFI should consult should consult Shariah Advisor in Shariah Advisor in every case.every case.

3.3. This transaction This transaction should be allowed should be allowed only for paying only for paying conventional debts.conventional debts.

Sale and Lease BackSale and Lease Back

IssueIssue

The sale and lease back The sale and lease back transaction without transaction without signing proper sale signing proper sale agreement with the agreement with the customer before the customer before the execution of Ijarah execution of Ijarah agreement.agreement.

SolutionSolution

The IMFI should execute The IMFI should execute the proper sale the proper sale agreement with the agreement with the customer before entering customer before entering into lease agreement. into lease agreement. Otherwise the Otherwise the transaction becomes transaction becomes questionable in the eyes questionable in the eyes of Shariah. of Shariah.

Sale and Lease BackSale and Lease Back

IssueIssue

The IMFI executes the The IMFI executes the sale agreement with the sale agreement with the customer and makes customer and makes payment to other payment to other conventional IMFI which conventional IMFI which makes Islamic finance makes Islamic finance doubtful in the eyes of doubtful in the eyes of public.public.

SolutionSolution

The IMFI should make a The IMFI should make a payment to the party payment to the party with home it executes with home it executes sale agreement.sale agreement.

Diminishing Diminishing MusharakahMusharakah

Diminishing MusharakahDiminishing Musharakah

It is a form of partnership in which one of the partners promises to buy the equity share of the other partner gradually until the title to the equity is completed transferred to him.

According to this concept a financer and his client participate either in a joint property or an equipment or in joint commercial enterprises.

FEATURES OF DIMINISHING MUSHARAKAH

IN SHIRKAT-UL-MILK (JOINT OWNERSHIP)

Two partners purchase any asset (machinery/property) and their intention is that one or both partners will use this asset or they rent out their share and one Shareek undertakes to purchase the share of other gradually.

Rules of Diminishing Musharakah

in Shirkat-ul-Milk (Joint Ownership)

1. There will be an agreement of Shirkat ul Milk and it will be decided How much investment will be made by each partner?

2. Asset will be purchased and all partners will be owner of this asset as per ratio of his investment and all other rules of Shirkat-ul-Milk will be applicable.

Rules of Diminishing Musharakah

in Shirkat-ul-Milk (Joint Ownership)

3. One Shareek can rent out his share to other partner or to a third party and Ijarah Agreement will be signed.

4. Within period of Ijarah, Shariah Ahkaam relating to Ijarah will be applicable.

Uses of Diminishing Musharakah in IMFI

Diminishing Musharakah usually being used in House Financing for these purposes:

Purchase of House Construction of House Renovation of House

Procedure of DM

D M Agreement (IMFI +Client)

Undertaking to Ijarah (from the client)

Sale Agreement (Client + owner of the house)

Payment of Purchase Price (to the client)

Lease Agreement (IMFI + client)

Procedure of Sale and Lease Back

D M Agreement (IMFI +Client)

Undertaking to Ijarah (from the client)

Sale Agreement (IMFI + client)

Payment of Purchase Price (to the client)

Lease Agreement (IMFI + client)

Value of Units at Face Value of Units at Face ValueValue

IssueIssue

In case of Diminishing In case of Diminishing Musharakah IMFI agrees Musharakah IMFI agrees to sell the units to the to sell the units to the client at face value. client at face value.

SolutionSolution

It is preferred that in all It is preferred that in all such transactions such transactions valuation should be done valuation should be done either on market value or either on market value or any value agreed at the any value agreed at the time of sale of unit.time of sale of unit.

Covering Risks Under Covering Risks Under Takaful Takaful

IssueIssue

In DM risks of the leased In DM risks of the leased assets should be covered assets should be covered under Takaful under Takaful arrangement rather than arrangement rather than under conventional under conventional insurance policies. insurance policies.

SolutionSolution

As an Islamic financial As an Islamic financial Institution, the MFI Institution, the MFI should obtain Takaful for should obtain Takaful for its assets under DM.its assets under DM.

Proportionate TakafulProportionate Takaful

IssueIssue

Incase of combined Incase of combined ownership model, ownership model, customer solely pays the customer solely pays the cost of Takaful. cost of Takaful.

SolutionSolution

Takaful cost should be Takaful cost should be borne by the partners in borne by the partners in proportionate to their proportionate to their interest in the asset and interest in the asset and not be solely borne by not be solely borne by the customer. the customer.

Repair & MaintenanceRepair & Maintenance

IssueIssue

In certain cases repair In certain cases repair and maintenance cost is and maintenance cost is borne by the customer. borne by the customer.

SolutionSolution

The IMFI should pay the The IMFI should pay the charges of maintenance charges of maintenance as per his share in DM as per his share in DM assts.assts.

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