Ijara

Provides benefits of asset or service to lessee Lease of specific asset or service For the benefits received, lessee pays agreed upon price or rent Ownership may be transferred to lessee at the end of lease period

Types of Ijara
i.

Ijara tul Aamaal

Lease contract providing services in exchange for agree upon rental Leasing service lawyers Leasing services of teachers Lease services of physicians

ii.

Ijara tul Mannfay

Lease contract for transfer of benefits of asset in exchange for agree upon price Leasing apartments Only usufruct of asset transferred to lessee and not title of ownership Usufruct is benefit received from asset in lease contract

Lease of Usufruct
i. Lease of specific asset 4 cylinder Sunroof !spead manual transmission "lloy wheel Leather interiors Side curtain airbag "nti!loc# bra#ing $"%S& 'hassis number( ")*L)+,-./00 Lease based on specifications 1ot specifically identified by lessee $)e2uired to meet certain conditions $3xample( blac# sedan

ii.

Transfer of Ownership to Lessee

i. Operating (Standard) Ijara Lessee benefits from asset Specific period 1o transfer of ownership Ijara waIqtina 45ara conducts for transferring ownership to lessee (6wo contracts 45ara !7 6ransfer of ownership !,

ii.

How Does An Ijara Work?

" lessor and a lessee enter into a promise to execute an 45ara of a particular asset or a services Lessor underta#es to provide asset or service Lessee underta#es to enter into lease contract 8aamish 9iddiah is ta#en by the lessor 3arnest money received from client as security, serves as compensation if lessee bac#s out from entering into or continuing an 45ara Lessor ma#es up for actual loss and returns remainder to client "sset or service must be owned by lessor 45ara period commences once the sub5ect matter of the lease is made available to the lessee "sset should be made available to lessee prior to commencement of 45ara 'lient enters into lease contract to benefit from usufruct %enefits must be accessible before client begins paying rent Usufruct rather than asset is sub5ect matter of 45ara Utili:ation of asset is main purpose "sset not being transacted for, right to use asset

Key Ele ents an! Issues of Ijara

Sub5ect matter of lease Forms or rental and remuneration +efault in 45ara )ights and obligations of lessors and lessee Subleasing ;ranting extensions and renewals 6ransfer of ownership 1egligence 6ermination of 45ara

"u#ject $atter of Lease

"l Sharia <compliant assets or services may be used as sub5ect matter in 45ara Legal title Possession =aintenance 3arnest money 4nsurance

Le%al Title of "u#ject $atter

4n general, leased asset generally in lessor>s name 4n some cases, asset may be registered in name of lessee For regulatory reasons 6o ma#e use of available exemptions 4n such cases, counter!bond will be ta#en by the lessor

&ossession of "u#ject $atter

45ara only executed for sub5ect matter owned and possessed 4f lessor does not own sub5ect matter, he must ac2uire it from third party

$aintenance
Periodic and operating maintenance? )egular maintenance ta#en care by the lessee =a5or and defects =aintenance to ensure continual used of leased asset, ta#en care by lessor @ear and )ear "ll liabilities and ris#s pertaining to the leased asset are to be borne by the ban# including obligations to restore any impairment and damage to the leased asset arising from wear and tear and natural causes which are not due to the lessee<s misconduct or negligenceA

Insurance of "u#ject $atter

Sharia>a!compliant 6a#aful insurance 6o safeguard lessor>s right 4nsurance paid by lessor

o 'an an increase in insurance costs be ad5usted in installments yet to be paid after being fixed for a termB 1o, )ent for next term may be ad5usted by mutual agreement between lessor and lessee, to include increased cost of insurance 'onventional insurance is not permissible

4n the absence of ta#aful, when there is legal re2uirement, one ta#ing out conventional insurance is not culpable for sin, authority enacting the law is

Un!i'i!e! shares in Leasin%

Proportionate ownership of undivided share can be leased )ent earned must be distributed among co!owners based on shares of ownership

(or s of )ental an! )e uneration

)ental amount must be clearly defined )ent may be cash, #ind, usufruct +ifferent rentals may be established for different rental periods 1o maximum or minimum term "ny period mutually decided by lessor and lessee )ent for initial period must be established and received in advance )ent for remaining period may be lin#ed to well defined benchmar#

Default in Ijara
+efault( failure on lessees part to meet rental 4n an event of default Lessor may reclaim leased asset %etter for lessor to grant respite to lessee until financial position improves

*asis for !eter inin% )ental

Ongoing mar#et rate 'ost of ac2uiring leased asset "mount mutually agreed by parties

)i%hts an! O#li%ations of Lessor

)is# associated with asset borne by lessor =a5or maintenance and insurance costs( Lessor may include cost of insurance Once rentals established may not accommodate insurance Lessor may appoint client as agent for insurance Lessor delivers asset and necessary leased items to transfer usufruct o 4tems at disposal of lessee until term end $"ccident $lessor responsible for maintaining usufruct o

What is su#ject

atter of lease is !efecti'e?

+efect is defined as compromise or diminishment of usufruct Lessor underta#es repair of defect regardless of timing

+efects #nown at execution, lessor not obliged

)i%hts an! O#li%ations of Lessor

Lessor>s right in default $=ay reclaim asset> better to grant respite& 3xcessive damage or theft( Lessor may rescind 45ara =ultiple lessees( =ay lease same asset at various durations

+ase, Unlawful utili-ation of asset

Lessor must immediately rescind contract )ental earned before rescission lawful, subse2uent rentals unlawful 'ore purpose lawful, not rendered unlawful by lessee>s actions

)i%hts an! O#li%ations of Lessee

Lessee must "sset utili:ation( customary practice Preserve asset from damage or defect Usufruct benefit as per contract Lessee reserve right to rescind 45ara 4n case of any defects in leased asset that occur either after contract date Or that exist on contract date out but are un#nown to him Lessee obliged to pay rentals Sub5ect matter accessible Lessee not obliged to pay rentals Usufruct not obliged to pay rentals

o 4s lessee obliged to pay rentals if usufruct does not meet expectationsB Usufruct( lessee obliged to pay lease rental 1on!compliance( =ay rescind contract

"u#lease
"sset subleased by lessee to third party with lessor consent )ent should be agreed between the lessee $lessor& and the third part

o 'an an asset be leased to multiple lessees for different time periodsB Single asset leased to multiple lessees 1o overlapping contracts

.rantin% E/tensions an! )enewals

"t maturity client re2uest extensions 1ew 45ara not needed 3xisting 45ara extended or renewed

Transfer of Ownership
6ransfer of ownership to lessee Separate document independent of 45ara Lessee underta#es to purchase at end of lease Price may be actual cost of asset or any other nominal value Lessor may gift asset at the end term Lessee may purchase asset
'omplete payment of remaining rentals =ar#et value of asset

;radual transfer of legal title $sale& of the leased asset "sset sold to client at period end to transfer ownership

Ijara (or "er'ices

45ara tul "sh#haas AjeerAl Khas 3mployee serving one beneficiary for specific term AjeerAl Aam 3mployee wor#ing for multiple employers

0e%li%ence in Ijara
1egligence refers to loss from violation of conditions Lessee responsible for maintenance Lessee>s negligence 'ompensate for repair expense Lessor may not charge for unusable asset

Ter ination of Ijara

45ara terminated based on 'ontractual terms )escission by either party 6ermination of usufruct through theft, destruction or the li#e 'ontracts not terminated unilaterally, only mutual consent Some conditions( automatic termination 'onditions for automatic termination by lessor Lessee>s non!compliance to contract terms Lessee loses sanity, inhibiting contract performance Lessee passes away 8eirs continue contract using representative =ay provide evidence for contract cancelation 'onditions for automatic termination by lessee Leased asset contains or develops defects )eturn asset, demand compensation for defect period 'onditions in which lessee may not rescind contract

)ulin% re%ar!in% re ainin% rent when Ijara ter inate! #efore en! of ter ?
Lessee not re2uired to pay the remaining rentals Lessor ta#es possession of leased asset Lessor relin2uishes to future rentals

"ALE A0D LEA"E *A+K

" financial transaction in which an owner sells property C properties to an investor, who then leases the propertyCproperties bac# to the original owner under prearranged termsA @hen the client sells the asset to the ban# the entire ris# and rewards are transferred to the ban# who is then is responsible for the ownership related expensesA 4n this case the ban# is allowed to lease the asset to the client but there are conditions which have to be followed to ma#e the entire transaction Sharia compliantA
6here should be at least one year lease period 6here should be separate contracts for sale and lease 6he agreement to sell at the end of the lease must be separate 6he intention of the client is to avoid interest related transactions

Why consi!er a "ale 1 Lease#ack ?

4t can free up the original owner>s capital by converting the asset value to cashA " company can then use the capital to(
;row their core business =a#e ac2uisitions )educe debt )eallocate capital into more productive assets

'onverting real estate assets to cash is a well!established and accepted financing techni2ue 4t is an excellent financing alternative when a company>s real estate assets are vital to the operationA " more s#illful deployment of capital can generate higher )eturn on 32uity $)O3& 'apital is then invested where it generates the highest returns Din the core business, not real estateA

(orwar! Ijarah
Ijarah Mousoofabilthima(Lease of specified item(s) which are to be delivered after manufacturing or construction) Ijarah in respect of an asset under construction takes the form of Ijarah Mousoofabilthima Lease of the underlying assets starts on the date of delivery of the asset to the lessee and the lessees obligation to pay rental triggers with the commencement of the lease. n investor receives return on its investment out of the amount received from the lessee on account of rental which is adjusted against the actual rental. lthough investment in assets under construction through Ijarah Mousoofabilthima may not be free from certain downsides! it still has potential to serve both the parties! i.e. customer and financier "addressing the #roject $inancing re%uirements. ( ppropriate structure for project financing. &'ample( )*&I+ ,ukuk ()atar

Inherent )isk
7A 'redit ris#
-he lessee may be unable to service the lease rental as and when it falls due

)epossess the leased asset +ifficulties to repossess the asset in case of 4=%

,A =ar#et )is# 1o mar#et ris# in case of binding promise to lease

+ustomer opts not to fulfill a non.binding agreement to lease! and the I$I has already ac%uired the asset

4n case of operating 45ara 4F4 will bear the potential loss due to the fair value of the asset falling below its residual value as estimated at lease inception $residual value ris#&

/A Operational ris# -he need to compensate the lessee if the asset is permanently impaired through no fault of the lessee 4A )esidual value ris# In the event that the lessee e'ercises its right to cancel the lease! the lessor is e'posed to the residual value of the leased asset being less than the refund of payments due to the lessee.
** Ref. Prof. Jassim Al-Ajmi slides for fin411