Part 2- Elaboration of the Selected Shariah Contract

Ijarah is simply known as leasing in Islamic banking. Financing consumer goods,

equipment and vehicles, and home are some functions of Ijarah contract adopted by
Islamic banking. According to Khir, Gupta and Shanmugam (2008), Ijarah derives from
Islamic fiqh (jurisprudence), which means to give something on a rental basis or wages.
Originated from the root word ajara, it provides meaning of recompensing, compensating
or rewarding (ISRA, 2012). Under Ijarah contract, no sale of physical entity is incurred,
but usufruct (benefits) instead. Usufruct is transferred from owners of something to a
third party for an agreed period, at an agreed consideration.
In terms of subject matter, Ijarah contract can be divided into two types: Ijarah Ayn and
Ijarah Amal (Khir, Gupta and Shanmugam, 2008; ISRA, 2012; Deloitte, n.d.). In Ijarah
Ayn, tangible assets like properties, factories, transport facilities and others can be hired
to get the usufruct, but not ownership of assets. Ijarah Ayn is a contract between lessor
(mujir) and lessee (mustajir). Rent price is the consideration of this contact, which is
known as ujrah. This makes Ijarah contract to be distinctive from conventional lease,
which normally requires the client to return interest instead of rental fee. Lessee hires the
assets from lessor for an agreed period and agreed consideration, and would need to
return the assets upon expiry of contract. Lessor retains the ownership of assets, having
said that, the risk of ownership is also by the side of lessor. Therefore, Ijarah Ayn is a
true leasing. On the contrary, Ijarah Amal accentuates the services by employee, instead
of tangible assets. It is a contract between employer (mustajir) and employee (ajir).
Wages paid to employee are the consideration for this contract, which is known as ujrah.
Employer is required to pay employee wages at a fixed contractual period, for example,
monthly. Ijarah Amal is considered as employment.
In terms of contractual relationship, Ijarah contract can be classified into two types as
well: operational lease and financing lease (Khir, Gupta and Shanmugam, 2008). For
operational lease, it does not conclude in a transfer of the leased assets to the lessee, even
upon the expiry of the contract. It is more suitable for expensive assets like aircraft and
heavy-duty industrial equipment. For financing lease, it offers the lessee an option to own
the asset at the end of the lease period either by gift or a sale at a specified consideration.

It is widely used in real estate, machinery and equipment. The contract used in this Ijarah
is known as al-Ijarah Thumma al-Bay (AITAB).
Under Ijarah contract, there are several conditions need to be conformed, which are
agreed by most of the Muslim scholars (Deloitte, n.d.; The Contract of Ijarah, n.d.):
1) Contracting Parties

Two parties should involve in the Ijarah contract: lessor (lease offeror) and lessee
(lease accepter). Both parties must possess full legal capacity and sound mind to
enter this contract. Voluntary and free from coercion must be present at both
parties before entering the contract.

Lessor must have full legal ownership of the object before entering the contract.
He or she retains the ownership of assets after the conclusion of the Ijarah
contract. Lessor must respect lessees right to enjoy using the leased assets
throughout the leasing period. Lessor bears all liabilities incurred from the
ownership.

Lessee must take good care of the leased assets, and cannot use it in a harmful
way. Otherwise, lessee is in full responsibility for repairing the assets, or
indemnifying the lessor. The lessee can only use the leased assets according to the
prescribed purposes in contract.

2) Offer and Acceptance

Offer and acceptance must be displayed clearly by both parties, through oral,
written, gestures and others.

Offer and acceptance must be made in the same session.

Offer must be corresponded exactly with acceptance.

3) Subject Matter

Must be valuable, quantifiable and physically present.

Usufruct from using an object is the subject matter of Ijarah contract.

Only physically-present object could provide usufruct to parties involved.

4) Considerations

Rent is the main consideration in Ijarah contract.

Amount of the rent must be specified clearly in the contract.

It should be certain and known to both parties.

The rent money has to be legal in Shariah.

Both parties must agree on the methods of paying the rent, date of paying the rent,
and manner of paying the rent.