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IJARAH

• Transferring of usufruct of an asset to anotherperson for an agreed period, at an agreedconsideration.

• It is used to express the sale (bay’) of a knownbenefit in return for its known equivalent.

• The Asset should be valuable and identifiedand has a usufruct.

• Anything which cannot be used withoutconsuming cannot be leased out. e.g.. Money,Wheat etc.

• Quran:

IJARAH

LEGITIMACY

4

IJA

RA

H

BASED ON SUBJECT MATTER

TANGIBLE ASSET

LABOUR

DESCRIPTION OF ASSET

BASED ON CONTRACTUAL RELATIONSHIP

OPERATING IJARAH

FINANCIAL IJARAH

TYPES OF IJARAH

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TYPES OF IJARAH

1. Operating Ijarah

Operating Ijarah is a lease that does not include apromise that the legal title in the leased asset willpass to the lessee at the end of the lease.

BANK

CUSTOMER

BANK

2. Financial Ijarah (Ijarah Muntahia Bittamleek )

It is a contract that concludes with the legal title in theasset passing to the lessee after Ijarah.

IT MAY CONCLUDE:

Through Hiba (Gift). Through Salvage Value. Through Pre Decided Price if,

During the Lease Period.

TYPES OF IJARAH

TYPES OF IJARAH

3. IJARAH TUL MUSHA OR JOINT OWNERSHIP IJARAH

It is a lease where Bank & Customer jointly owned theleased asset. Bank gives its share to the customer onlease.

After the term of Ijarah, the treatment is similar toIjarah Muntahia Bittamleek.

TYPES OF IJARAH

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BASIC RULES OF IJARA

• Ownership Expenses• All Liabilities of ownership e.g. Takaful, Registration

cost etc are borne by Lessor because corpus of leasedproperty remains in the ownership of the seller.

• Period of LeaseMust be determined in clear terms at the time ofcontract.

• Lease for Specific Purpose OnlyIf no specific purpose is identified in the agreement,then it can be used for any purpose for which it isused in normal course.

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BASIC RULES OF IJARA

• Lessee as AmeenThe lessee is liable to compensate the Lessor for everyharm to the leased asset caused by any misuse ornegligence. The leased asset shall remain in the risk ofthe Lessor throughout the lease period.

• Lease Of Jointly Owned PropertyIt is permitted and rentals shall be distributedbetween all the joint owners according to theproportion of their respective shares in the property.

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Determination of Rental

• The rentals must be determined at the time of contract forthe whole period of lease.

It is permissible that different amounts of rent are fixed fordifferent phases during the lease period, provided that:

1. The amount of rent for each phase is specificallyagreed upon.

2. Floor & Cap is decided to eliminate Gharar.

The determination of rental on the basis of the aggregatecost incurred in the purchase of the asset by the Lessor, asnormally done in financial leases, is not against the rulesof Shariah

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Determination of Rental

The Lessor cannot increase the rent unilaterally,and any agreement to this effect is void.

The rent or any part thereof may be payable inadvance after execution of lease agreement.

The lease period shall commence from the dateon which the leased asset has been delivered tothe lessee.

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Rent Charging

Rent should be charged after the delivery ofthe leased asset to the lessee

and not from the day the price has beenpaid. If the supplier has delayed the deliveryafter receiving the full price, the lesseeshould not be liable for the rent of the periodof delay.

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Charity For Late Payment Of Rent

The Lessor cannot charge an additional amountin case the lessee delays payment of the rent butan amount on account of charity can becharged.

Charity received on late payments is given to charitable institutions by the bank on behalf of the customer.

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Termination of Lease

. If the lessee contravenes any term of the agreement,the Lessor has a right to terminate the lease contractunilaterally.

In normal scenarios Ijarah can be terminated throughmutual consent only. However, in such a case theLessor cannot charge rentals of remaining period.

Ijarah is also terminated on maturity of the leaseperiod.

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Transfer of Ownership

It is a well-settled rule of Islamic jurisprudence thatone transaction cannot be tied up with anothertransaction so as to make the former a pre-conditionfor the other.However, the Lessor may enter into a unilateralundertaking to sell the leased asset to the lessee at theend of the lease period. This undertaking will bebinding on the Lessor only.The Lessor can also take “undertaking to purchase”from the customer binding him to purchase the assetduring facility period or at maturity.

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Transfer of Ownership. Ijarah Wa Iqtina

The Lessor may sign a separate promise to gift theleased asset to the lessee at the end of the leaseperiod, subject to his payment of all amounts of rent.

. Sub-Lease

If the leased asset is used differently by differentusers, the lessee cannot sub-lease the leased assetexcept with the express permission of the Lessor.

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• The customer approaches the Bank with the requestfor financing

• The Bank purchases the item required for leasing andreceives title of ownership from the vendor

• The Bank makes payment to the vendor

GENERAL MECHANICS

CUSTOMERISLAMIC BANKVENDOR

. .Agreement

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• 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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Ijarah VS Conventional Lease.

• Rent can only be chargedafter delivery of leasedassets.

• Charity of late payment ofrental is given to charity.

• Transfer of asset at the endof lease period to lessee isnot included in the leaseagreement.

• All risks and rewards ofassets will be held withbank.

• Rent charged from the daysthe price has been paid even ifdelivery is delayed.

• Penalty of Late payment ofrental is taken into Income.

• Transfer of asset at the end oflease period to lessee is a partof the lease agreement.

• All risks and rewards of assetstransferred to lessee.

Ijarah Conventional Lease

APPLICATION OF ACCOUNTING STANDARD

The Islamic Financial Accounting Standard (IFAS)-2 “IJARAH” was issued by the Institute of CharteredAccountants of Pakistan (ICAP) and was adopted by theSecurities and Exchange Commission of Pakistan (SECP)vide its notification S.R.O 431 (i)/2007 dated May22,2007.

Effective Date

IFAS-2 has become operative for financial statementscovering periods beginning on or after July 01, 2007.

Sale & Lease Back• Sale & Lease back is such a transaction in which a customer sells

his already possessed asset to a financier and then enters into aseparate lease agreement to get the right of use over a certainperiod.

• Ideally SLB transactions should be avoided. It should be used inexceptional cases and care should be taken to ensure that thetransaction is genuine and not merely a source of liquidity/overdraft facility or a substitute of personal financing.

• Sale and Lease Back may be allowed in following cases:

A. Financing of Newly Imported Asset ( machinery, equipment etc)

B. Replacement from Conventional to Islamic Financing23

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Ijarah Risks & Its Mitigates

• Theft or Damage of • Leased Assets

• Delayed in Rental Payment

• Doubtful Customers

• Through TakafulArrangement

• Charity for LatePayment

• Through Know YourCustomer Analysis

RISKS MITIGATES

DIMINISHING MUSHARAKAH

MUSHARAKAH

“Shirkah” means “Sharing” and in theterminology of Islamic Fiqh;Musharakah is basically a kind of partnershipin which the partners join together withdifferent contributions for the commonobjective of joint ownership or undertakingbusiness and trade in accordance with theprinciples of Shariah.

What is Diminishing Musharakah?

Diminishing Musharakah is justMusharakah with an additional feature ofdecreasing ownership of one partner.

In this type of Musharakah the ratio ofownership keeps changing.

The closest term in conventional financefor DM is Redeemable Capital.

Types of Diminishing Musharakah

Like the normal Musharakah, this isalso distributed into two categories:

I. Shirkat ul AqdFor the purpose of Business

II. Shirkat ul MilkFor the Purpose of Joint Ownership

Basic features of Diminishing Musharakah

●● Creation of partnership.●● Implementing the relevant Rules of

Musharakah.●● Renting one Partner’s Share to the

Other.●● Redemption of one partner’s share

by purchasing from another.

BASIC OPERATION

BANK CUSTOMER

JOINT

OWNERS

HIP

RENT

•The customer approaches the Bank with the request for project /machinery / house finance.•The Bank enters into a Musharakah (Joint Ownership Agreement)

with the Customer and both of them pay their respective shares tothe seller of asset.•The Bank gives its share to the client on rent and client pays the rent

to the bank against use of the bank’s Share.• The Client promises to purchase Bank’s share (Units) over thetenure of the transaction with the help of Undertaking to Purchase.

BASIC OPERATION

»» There should be a real partnership.»» Every partner should enjoy the benefits and bear the

responsibilities.»» The promise of sell / buy should be obtained through

a separate document.»» In case of Shirkat ul Aqd, redemption will be on

market price or negotiated price or on N.A.V bases,not on any pre decided price.

»» Proper documentation should be made.

Conditions To Be Fulfilled

Diminishing of Shirkat ul Aqd

A and B invest their capital and create a joint venture.

A separate Musharakah agreement is executed.

B promises to sell his shares to A gradually or Apromises to buy B’s shares.

A and B enjoy their rights as partners as they share therevenue in agreed ratio and bear the loss according to theirshares in capital.

A will keep buying B’s shares until he acquires the completeownership.

Diminishing of Shirkat ul Aqd

Diminishing of Shirkat ul MilkA joint ownership is created between A and Bin any property or any asset which is not asubject matter of any business.A promises to buy B’s shares gradually on anagreed price.A may take B’s shares on rent.A will purchase the shares of B at differentstages.The rental will be adjusted according theremaining shares of B.

DIMINISHING MUSHARAKAH

Accruing Rentals

Share in

capital

Share in

capital

Partner Bank

2

3Sell its

share in

equity

Pays price of

the units of

bank’s equity

1 1

4

Uses of Diminishing Musharakah

Project financing of fixed assets

Agriculture Finance

Plant and Machinery Finance

House finance

Car / Transport finance

Shariah Principles• To create joint ownership in property is called

Shirkat-ul-Milk and is expressly allowed by allschools of Islamic Jurisprudence.

• All Muslim Jurists agree on the permissibility of theFinancier leasing his share in property to client andcharging him rent i.e. the permissibility of leasingone’s share to his partner.

• There is difference of opinion among leasing one’sshare to a third party But there is no difference onpermissibility on leasing to a the co owner.

Shariah Principles• Promise of client to purchase units of share of

financier is also allowed.

• The Transactions cannot be combined in a singlearrangements and they have to be executedindependently. This is because it is a well settledrule of Islamic Jurisprudence that one transactioncannot be made a condition for another.

• Instead of making the transactions a pre-conditionfor one another there can be one-sided promisesfrom one party to another.

CASE STUDY• MEEZAN EASY HOME

Features:• Flexible Financing Tenure 3 to 20 years.• Highest financing amounts up to PKR 40 Mln.• BIR up to 85% of property value.• Flexibility to make additional unit purchase.• Minimal processing charges.• Very affordable and competitive monthly payment

plan with a regularly reducing rental amount.

Product Range• Easy Home Offers a Comprehensive solution with:

• Easy Buyer - Buying a home is Easy & Halal

• Easy Builder - Building a home is Easy & Halal

• Easy Renovate - Renovating a home is Easy & Halal

• Easy Replacement - Replacing your existingmortgage is Easy & Halal

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