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THE CONCEPT OF IJARA

BASIC RULES OF IJARA

• Transferring of usufruct not ownership

To another person for an agreed price, at an agreed consideration .

• Subject of lease

Valuable, Identified and Quantified

• Consumable things cannot be leased out

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

All Liabilities of ownership are borne by lessor

Corpus of leased property remains in the ownership of the seller.

• Period of lease
Must be determined in clear terms at the time of contract

• Lease for specific purpose only

If no specific purpose is identified in the agreement, then it can be used for any
purpose for which it is used in normal course

Lessee as Ameen
The lessee is liable to compensate the lessor for every harm to the leased asset caused
by any misuse or negligence. The leased asset shall remain in the risk of the lessor
throughout the lease period.

• Lease of jointly owned property

 Is permitted and rentals shall be distributed between all the joint owners according
to the proportion of their respective shares in the property.

Determination of Rental
The rental must be determined at the time of contract for the whole period of lease.
It is permissible that different amounts of rent are fixed for different phases during the
lease period, provided that the amount of rent for each phase is specifically agreed upon
at the time of affecting a lease.
The determination of rental on the basis of the aggregate cost incurred in the
purchase of the asset by the lessor, as normally done in financial leases, is not against
the rules of Shariah.
The lessor cannot increase the rent unilaterally, and any agreement to this effect is void.
The lease period shall commence from the date on which the leased asset has been
delivered to the lessee.
Rental will be charged when the Leased asset is handed over to the lessee.

IJARA AS A MODE OF FINANCING

• Leasing should not be interest-based loan or replacing interest with rent,

rather it should comply with all of the following conditions of Islamic leasing:
1. The commencement of lease
Unlike the contract of sale, the agreement of Ijarah can be effected for a future date.
Hence, it is different from Murabaha.
2. Rent should be charged after the delivery of the leased asset to the lessee
and not from the day the price has been paid. If the supplier has delayed the delivery
after receiving the full price, the lessee should not be liable for the rent of the period of
delay.
3. Different relations of the parties
There are two separate relations between the institution and the client: one of an
agent and the other of a lessee.
4. Difference between Murabahah and leasing

• A Murabahah attributed to a future date is invalid in Shariah. But leasing can be

attributed to a future date.
• A Murabaha can not be transacted on a future date as the sale would be executed
simultaneously after taking delivery from the supplier and seller would never
bear its risk which Shariah does not permit . But in leasing it is permissible,
because in leasing the asset remains under the risk and ownership of the lessor
throughout the leasing period.
5. Expenses consequent to ownership to the lessor
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 for example
expenses of freight and customs duty etc.

6. Lessee as Ameen

The lessee is responsible for any loss caused to the asset by his
misuse or negligence. He can also be made liable to any normally
occurring wear and tear.

7. Variable Rentals in Long Term Leases

In this case the lessor has two options:

• 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).
• He can contract lease for a shorter period after which the parties can renew the
lease at new terms and by mutual consent

8. Penalty for late payment of Rent

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

9. Termination of Lease
If the lessee contravenes any term of the agreement, the lessor has a right to terminate
the lease contract unilaterally. If not then it can be terminated through mutual consent
only. However, in such a case he cannot charge rentals of remaining period. Further
more, the destruction of the asset also terminates the lease. In the event of lessee’s death
the lease will also be terminated

10. Insurance of the assets

If the leased property is insured under the Islamic mode of Takaful, it should be at the
expense of the lessor and not at the expense of the lessee

11. The residual value of the leased asset

Through a mutual agreement of Lease, after the expiry of the lease period, the corpus
of the leased asset cannot be transferred to the lessee, otherwise it becomes hire
purchase.
It is a well-settled rule of Islamic jurisprudence that one transaction cannot be tied up
with another transaction so as to make the former a pre-condition for the other.
However, the lessor may enter into a unilateral undertaking to sell the leased asset to
the lessee at the end of the lease period. This undertaking will be binding on the lessor
only.
12. Ijarah Wa Iqtina
The lessor may sign a separate promise to gift/Sale the leased asset to the lessee at
the end of the lease period, subject to his payment of all amounts of rent. The validity of
this arrangement is subject to two basic conditions:
Firstly, the agreement of Ijarah itself should not be subjected to signing this promise
of sale or gift.
Secondly, the promise should be unilateral and binding on the promisor only.

13. Sub-Lease

If the leased asset is used differently by different users, the lessee cannot sub-lease the
leased asset except with the express permission of the lessor.
When the client sells the asset to the bank the entire risk and rewards are transferred to
the bank who is then is responsible for the ownership related expenses
In this case the bank is allowed to lease the asset to the client but there are conditions
which have to be followed to make the entire transaction Sharia compliant.

• There should be at least one year lease period

• There should be separate contracts for sale and lease
• The agreement to sell at the end of the lease must be separate
• The intention of the client is to avoid interest related transactions