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LEASE-BASED PRINCIPLES

Ijarah
THE APPLICATION of Ijarah
Ijarah
The Application of Ijarah
Introduction
Sources of Law
The Conditions toIjarah
Types of Ijarah
Mechanism of Ijarah
Documentation of Ijarah
INTRODUCTION

Ijarah or leasing:
is a form of contract allowed by Islam based on the fact that not
everyone has the means to purchase or own certain assets which
he needs so as to utilise and benefit from them. Therefore:
Islam has permitted the contract of leasing in order to facilitate
public needs and to provide facilities in life.
Islamic law permits the leasing of certain assets whose benefit
can be obtained by the lessee against the payment of some
agreed rental.
Like any other contract, the Ijarah contract has to fulfil all the
conditions of a valid contract stipulated by the Shariah.
Ijarah is emerging as a popular technique of financing among
Islamic banks. Some of the products that utilise the Ijarah
concepts include house financing, car financing, project
financing and structured products.
INTRODUCTION
According to The Majallah:
Ijarah as: The sale of usufruct for a known return. This definition was
criticised because it only covered one type of Ijarah.
According to N. J. Coulson:
Ijarah is The transfer of usufruct (the use of an object or the services of a
person) for a consideration rent, or ujrah, in the case of hire, and wages,
or ajr, in the case of hire for employment.
This definition is more precise than the definition advanced by the
Majallah because it covers both types of Ijarah.
A. Ijarah means to employ the services of a person on ujrah given to him as
consideration for his hired services. It is termed as IIjarah al-ashkhas.
B. Ijarah means the sale of usufruct of a particular property to another
in exchange for ajr claimed from him. It is termed as Ijarah al-ayan.
Ijaraht al-ayan
The discourse on the practice of Ijaraht al-ayan in classical writings of fiqh
concentrated only on simple leasing activities, which is termed these days as
operating lease. In this practice:
The owner of the asset, the lessor, will allow the lessee to derive manfaat
(usufruct) from the leased asset for a certain period of time in return for
compensation (ajr) agreed upon by both of them.
At the end of the leasing period (unless renewed), the asset would be
returned to the lessor and the contract of leasing terminated.
INTRODUCTION
Leasing transactions done by Islamic financial institutions
Most leasing transactions done by Islamic financial institutions
are in the form of finance leases with various terminologies such
as al-Ijarah thumma al-bay, al-Ijarah wa aliqtina, al-Ijarah al-
muntahiyah bi al-tamlik, but have almost the same structures
and features.
Contrary to previous practice, a mechanism is created for the
transfer of the asset to the lessee at the end of the leasing
period.
The transfer of asset will normally be done via another contract
implicated at the end of the tenure. It can be done by various
ways. Among others:
A. The bank unilaterally promises to make a gift of the asset to
the client at the end of the period, provided that all
installments have been fully paid.
B. A promise to sell the asset to the client at an agreed price,
upon the payment of the remaining installments.
C. The client is allowed to purchase the asset, and the final
installment is considered to be the price for purchasing the
asset.
Definition of Ijarah

Ijarah literally means


To give something on rent.
Ijarah In its technical sense
The term Ijarah is used with two different connotations.
The first meaning is to employ the services of a person on wages given to
him as a consideration for his hired services.
The employer in this case is called mustajir while the employee is called ajir.
This type of Ijarah includes every transaction where the services of a
person are hired by someone else. He may be a doctor, a lawyer, a
teacher, a labourer or any person who can render some valuable services.
The second meaning of Ijarah relates to the usufruct of assets and properties,
and not to the services of human beings.
Ijarah in this sense means to transfer the usufruct of a particular property
to another person in exchange for a rent claimed from him.
In this case, the term Ijarah has the same meaning with the term leasing.
In this instance, the lessor is called mujir, the lessee is called mustajir
and the rent payable to the lessor is called ujrah.
Definition of Ijarah Cont .
The classical jurists definitions of Ijarah
The different definitions by the jurists on Ijarah can be observed as follows:
A. The Hanafis definition: A contract pertaining to usufruct with
compensation.
B. The Shafiis definition: A contract over a desirable, known, permissible, and
accessible usufruct, in exchange for a known compensation.
C. The Malikis and the Hanbalis definition: The transfer of ownership of a
permitted usufruct for a known period in exchange for compensation.
Ijarah and the rules of a sale
In fact, Ijarah is analogous to the rules of a sale, because in both cases
something is transferred to another person for a valuable consideration.
Difference between Ijarah and sale
The only difference between Ijarah and sale is that in the latter case the corpus
of the property is transferred to the purchaser, while in the case of Ijarah, the
corpus of the property remains in the ownership of the transferor, but only its
usufruct, i.e. the right to use it, is transferred to the lessee.
Definition of Ijarah Cont.
Ijarah as a viable tool of banking
In order for Ijarah to be a viable tool of banking, the jurists have
extended its application to include:
Ijarah and purchase or what is termed as Ijarah wa iqtina or
Ijarah muntahiah bi al-tamlik.
This concept allows the Ijarah contract to be extended so as
to serve as a hire purchase tool.
It has been referred to by the Islamic Financial Institutions as
lease-purchase financing.
It is a combination of leasing movable or immovable
properties with granting the lessee an option of eventually
acquiring the object of the lease by buying at a minimal
value.
With this application, Ijarah is an alternative to a hire
purchase contract in the conventional system as it allows the
bank to earn profits by charging rentals on the asset leased
to the customer instead of lending money and earning
interest.
The legality of Ijarah Cont.
SOURCES OF LAW
The legality of Ijarah is deduced from the Quran, Sunnah and the
consensus of the jurists.
Quranic Evidence of Ijarah
There are several versesin the al-Quran which are normally quoted as
evidence for al-Ijarah. Among these verses are:
A. The verse which describes the story of the Prophet Musa (a.s) being
hired by his father in-law for a certain period of time is normally
quoted to supportIjarah contract. Allah says: And said one of them
(the two women): O my father! Hire him! Verily, the best of men for
you to hire is the strong, the trustworthy. He said: I intend to wed
one of these two daughters of mine to you, on condition that you serve
me for eight years, but if you complete ten years, it will be (a favour)
from you. But I intend not to place you under a difficulty. If Allah will,
you will find me one of the righteous. (Al-Qasas: 26-27).
This verse is a clear indication of Ijarah as Musa (a.s.) washired for a
specific period of time with specific remuneration.
The legality of Ijarah Cont.

B. .Then if they give suck to the children for you, give


them their due payment, (Al-Talaq: 6)
The above verse indicates the obligation of the father
to provide adequate wages for the women who
breastfeed his child. This is clearly related to the
concept of Ijarah where wages are given as a
consideration for hired services.
According to al-Shafii, the above verses show clearly
that the contract of al-Ijarah is lawful in any
permissible transaction. These verses indicate that
the contract of Ijarah was commonly practised during
the time of Musa. This is because leasing or hire
contract in particular is a necessity in society of all
ages.
The legality of Ijarah Cont.
The Sunnah Evidence of al-Ijarah
The evidences from the Sunnah are derived from various
Hadith as follows:
1. The Prophet (pbuh) said: Pay the hired worker his wages
before his sweat dries off.
2. The Prophet (pbuh) is reported to have said: He who hires
a person should inform him of his fee.
3. Ibn Abbas reports that the Prophet (pbuh) had cupping
performed on him and gave the cupper his fee.
4. The Prophet (pbuh) said, Allah said, I will be an opponent
to three types of people on the Day of Resurrection: One
who makes a covenant in My Name, but proves
treacherous; One who sells a free person and eats his
price; and One who employs a labourer and takes full work
from him but does not pay him for his labour.
5. Abdullah ibn Umar narrates, Allahs Apostle gave the land of
Khaibar to the Jews to work on and cultivate and take half of its
yield. Ibn Umar added, The land used to be rented for a
certain portion (of its yield).
6. Saaid ibn al-Musaib narrates that Sad said, We used to hire
land in return for plants on water canals. The Prophet (pbuh)
interdicted this and commanded that we hire it for gold or
silver.
7. It was reported that the Prophet (pbuh) and Abu Bakr hired a
man from the tribe of Bani-Ad-Dil as an expert guide who was a
pagan. The Prophet (pbuh) and Abu Bakr gave him their two
riding camels and took a promise from him to bring their riding
camels in the morning of the third day to the Cave of Thaur.
All the above mentioned Hadiths provide clear evidence on the
legality of the Ijarah contract. By and large these tend to support
the hire contract which is part of the Ijarah contract.
The legality of Ijarah Cont.
Ijma
In addition, Ijarah has been unanimously approved by the
prominent jurists of the recognised schools of Fiqh
They held the view that the need to utilise the usufruct of
different articles (good and services) is like the need to utilise
the articles themselves.
When the contract of sale of such goods and services is
permitted, the leasing of its usufruct shall also be permitted on
the grounds of public interest (maslahah) and needs.
Imam Al-Sarakhsi when mentioning the lawfulness of Ijarah argued:
The contracts and dealings approved by the Shariah before
Islam are to be carried out by us if there is no any text against
any of them...The Noble Prophet (pbuh), was sent as the
Prophet (pbuh) and the people during his time used to lease
and hire and he approved the practice and constituted its
principles.
The Conditions of Ijarah Cont.
Elements and the conditions for the validity of the Ijarah contracts.
There are three elements of the Ijarah contract which are as follows:
A. The contracting parties which are the lessor or the owner of the
asset, and a lessee or the party who benefits from the use of the
asset.
B. Offer and acceptance.
C. Subject matter of the contract which includes the consideration
(rent) and the benefits (manfaah) from the use of the assets.
Conditions for the validity of Ijarah
in order for it to be valid, each and every pillar has to fulfil certain
conditions which are discussed as follows:
Contracting Parties
The contracting parties in every contract must be:
Eligible to perform the contract. In order to be eligible, both parties
must be of sound mind and judgment. They must be of legal age,
sane, and free from any legal restrictions.
Infants, insane individuals and those legally restricted from making
financial transactions, do not have the legal right to act or to
dispose of their property without the consent of their guardian.
The Conditions of Ijarah Cont.
Offer and Acceptance
Offer is the expression of the first party of the contract and acceptance is the
expression of the other party.
The expressions can be done either by word, action, in writing or by signs.
In the Ijarah contract, as well as in any other contracts, the important element
of offer and acceptance is the expression of the will of the contracting parties.
In modern day transactions, it can be done over the phone or by e-mail or other
means that serve the purpose of indicating the will of the parties involved.
It is advisable to have something written as the proof of the parties involved
in the contract. However, verbal expressions will be considered valid
A. Conditions of Expression
There are several conditions for the expression in whichever form they are
executed. These conditions are:
i. Clear and understandable wording which means that both parties understand
that they are entering into an Ijarah contract with specific purposes as
mentioned in the details of the contract.
ii. The offer and acceptance must be in the same subject matter. As an example
if the offer states the Ijarah contract is over a house with a rental of RM1,000
per month, the acceptance must also be accepted with regard to the same
subject matter and the said rental amount.
iii. The unity of time and place (majlis al-aqd). This is applicable if both
contracting parties are in the same place. If they are far from each other or
the transaction is done through different modes, e.g. by e-mail, then a
reasonable time frame can be given between the offer and acceptance time.
The Conditions of Ijarah Cont.
Subject Matter
The subject matter of Ijarah includes two elements namely the benefit and the rent.
Benefit
The benefit (the use of the asset) shall be the use of the usufruct of a specified asset,
for example, one person says to another: I hereby lease you this house.
The benefit must be something that has value and is possible to be utilised. Renting
of a demolished house or a house that is not fit for occupation is disallowed as it
does not serve the purpose of the contract.
In addition, the fulfilment of the benefit should be of a permissible nature in
accordance with the Shariah requirements, and it should be identified in such a way
as to remove the lack of knowledge (jahala) which leads to dispute. For instance,
renting an apartment without specifying the location or the exact number of the
apartment might lead to the lack of knowledge of the subject matter. Jurists are in
agreement that the lack of knowledge which leads to disputes nullifies the contract.
Rent
As for the rent, it is what the lessee is committed to paying as a consideration for the
benefit enjoyed by him. Everything that is suitable to be considered a price in a sale is
suitable to be considered as a rent in the Ijarah contract.
There are some issues relating to the rent that have to be clarified. The issues are:
A. The rent should be known by both parties as mentioned in a Hadith which
means: He who hires a worker should inform him of his wage. (Narrated by Al-
Baihaqi). In the instance where the service or the usufruct is satisfied and the
rental was not determined, the value equivalent to the rent for a similar benefit
should be due.
B. The majority of jurists have permitted the payment of rental in the form of a
benefit of the same kind as the subject of the contract. For instance, the rent is in
the form of service rendered to the lessor by the lessee.
The Conditions of Ijarah Cont.
C. Receipt of an advance payment
It is allowed in Shariah, but only on the basis that it is an
advance payment of the total actual amount of the rental. It
should not, however, be considered as a profit on the lease. This
is because:
From the Shariah point of view, the rent consideration is an
indivisible amount which should not be divided into a
principal and aprofit.
Profit is only viewed as the result of a transaction of
purchase and sale of a commodity for an amount in excess of
its cost.
In Ijarah, however, the whole consideration is a rent which
can be accelerated or deferred in whole or in part (provided
that it is a portion of the whole rent). It can also be paid in
installments or deferred until after consuming the benefit
from the leased asset.
Salient Features of the Ijarah Contract Cont.
The following summarises the salient features of the Ijarah contract:
A. The lessor must be the absolute owner of the rented item or the agent of the
owner or his natural or legal guardian.
B. The considerations given for rent and the amount of rent should be fully and
precisely known to both parties.
C. In a contract of hire, it is necessary to make known the use of the item hired,
so as to avoid later disputes between the contracting parties.
D. In all kinds of Ijarah, the period of lease must be fixed and the purpose for
which it is rented should be specified.
E. In the Ijarah of services, the benefit should be made known by a statement of
the nature and method of service offered.
F. It is the responsibility of the lessor to maintain the property leased in such a
way as to retain the benefit of the property.
G. If the lessee intentionally damages the property hired, the lessor has the
right to terminate the lease agreement and seek compensation.
H. The lessee is allowed to sub-let immovable property provided that there is no
restriction from doing so in the agreement of the contract.
I. The hired item should be treated as a trust in the hands of the user.
Salient Features of the Ijarah Contract Cont.
Lessors and Lessees Obligations in the Ijarah Contract
The lessor in an Ijarah contract has the following obligations:
A. Ensuring the Leased Asset is Available and Utilisable
The lessor is obliged to enable the lessee to benefit from
the leased asset by making it available throughout the
duration of the lease. This includes preparing the asset and
enabling the lessee to enjoy the benefit of the leased asset.
However.
If anything happens during the period of the lease that
prevents the lessee from enjoying the benefit of the leased
asset, for a reason not attributable to the lessee, then the
lessor is obliged to rectify the situation.
Repairing the leased house which is damaged or removing
all matters leading to inconvenient utilisation of the
usufruct are part of the obligations of the lessor.
B. Guarantee in Respect of Defects
In Ijarah, the option of defects is treated in the same way as a
sale contract.
The defect which entitles a lessee to an option is one which
causes an impairment in the benefits which are the subject
of the contract. The same applies if the defect occurs before
the fulfilment of the benefit but after the contract is
concluded.
In either case, the lessee shall have the option of revoking
the contract or accepting the impaired benefit while being
obliged to pay the full rent.
C. Maintenance of the Leased Asset
As mentioned earlier, the lessor is obliged to maintain the asset.
Based on that, it is not permissible to stipulate in the
contract that the maintenance of the leased asset is to be
carried out by the lessee because this would lead to the
lessee paying a charge that includes an unknown element.
However, the lessee can be requested to carry out the
following maintenance:
Salient Features of the Ijarah Contract
i. The operating maintenance which is required as a result of using
the leased asset and is essential in order to ensure its continuous
utilisation (for example, lubricants and petrol needed for
machines and equipment).
ii. Periodic maintenance which is required to enable the asset to
continue providing the benefit.
iii. Maintenance that is specified in description and amount in the
contract or according to the practice irrespective of whether such
maintenance is merely work or it involves the use of known
materials or spare parts.
The obligation of the lessee
He is required to utilise the leased asset according to the conditions
of the contract or according to normal acceptable practices.
The lessee is also responsible for keeping the leased asset intact and
for payment of the rental.
The jurists agree that the leased asset is a trust in the hands of the
lessee. Therefore, if the leased asset is impaired without omission,
violation of what is permitted, or negligence in keeping it intact on
the part of the lessee, then he is not to liable for such impairment
Commencement of Ijarah
The contract of Ijarah can be effected at a future date on the condition that the
rent will be payable only after the leased asset is delivered to the lessee.
In most cases of the financial lease, the lessor, that is, the financial
institution purchases the asset through the lessee himself.
The lessee purchases the asset on behalf of the lessor who pays its price
to the supplier, either directly or through the lessee.
In some lease agreements, the lease commences on the very day on which
the price is paid by the lessor, irrespective of whether the lessee has
effected payment to the supplier and taken delivery of the asset or not.
This might lead to the assumption that the lessees liability for the rent
starts before the lessee takes delivery of the asset which, if occurs is not
allowed by the Shariah; because:
it amounts to charging rent on the financing given to the customer which
tantamount to Riba.
The correct way, according to the Shariah, is that the rent be charged after
the lessee has taken delivery of the asset, 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.
Revocation of Ijarah
In principle, an Ijarah contract shall be intact as long as all the terms of agreement
are honoured by both parties. In this respect:
if the lessee contravenes any terms of the agreement, the lessor has a right to
terminate the lease contract unilaterally.
However, if there is no contravention on the part of the lessee, the lease
cannot be terminated without mutual consent.
In some Ijarah agreements, the lessor has been given unrestricted power to
terminate the lease unilaterally whenever he wishes, according to his sole judgment.
The logical consequence of the termination of lease is that the asset should be
taken back by the lessor.
The lessee should be asked to pay the rent as due up to the date of the
termination.
If the termination has been effected due to the misuse or negligence on the
part of the lessee, he can also be asked to compensate the lessor for the loss
caused by such misuse or negligence. But he cannot be compelled to pay the
rent for the remaining period.
However, the lessor can insert the put option clause to the lessee to enable
him (the lessor) to purchase the leased subject matter in the case of default
or breach of contract.
TYPES of Ijarah

Ijarah is a word that conveys the sense of both hire and lease.
Generally, Ijarah is of two types, namely:
1. Use of Corporeal Property (Ijarah or manfaat al-ayn)
Corporeal property includes immovable property (such as land
or premises), merchandise (such as furniture, machinery) and
animals.
This type of Ijarah is the leasing of the above assets for a
specific purpose with particular amount of rental for a
specific duration of time.
2. Personal Service (Ijarah or manfaat al-amal)
This type of Ijarah is the hiring of services or labour such as
hiring of an engineer, a carpenter or a tailor to undertake a
specific task.
Classification of Ijarah according to the number of lessee
In addition to the above classification, Ijarah can also be
classified according to the number of lessee, i.e. into individual
Ijarah (Ijarah al-fard) and collective Ijarah (Ijarah al-musha).
Individual Ijarah is the leasing of assets or services done by
an individual
Collective Ijarah occurs when a group of persons jointly hire a
good or service.
In this respect, Imam Abu Hanifah, maintains the view that
collective Ijarah is invalid because its collectivity may create
disputes amongst the group of lessees regarding the
ownership of the usufruct.
However, in contemporary application, the concern with
regard to the ownership of the usufruct can be regulated by
having an agreement amongst the group of lessees to
determine the ownership of the usufruct. Therefore,
collective Ijarah can be implemented where there is need to
do so.
MECHANISM of Ijarah
Islamic financial institutions at present usually use two modes of Ijarah
which are operating lease and Ijarah muntahia bi al-tamlik. The details
of these two forms of Ijarah are as follows:
A. Operating Lease
According to this mode of leasing, the Islamic bank maintains a
number of various assets to respond to the needs of different
customers. These assets usually have a high degree of marketability.
The bank leases out these assets to any party who wishes to
utilise it for a term agreed upon between them.
After the termination of the lease period the assets would return
to the bank and on its part, the bank will look for a new lessee.
The distinguishing feature of this mode is that the assets remain
the property of the Islamic bank to put them up for rent every
time the lease period terminates so as not to be unutilised for
long periods of time.
Under this mode, the bank bears the risk of recession or
diminishing demand for these assets
OPERATING LEASE CONT.

Practical Steps in Operating Lease

A. The first step would require the bank to purchase the equipment.
After studying and evaluating the market:
The bank purchases the equipment and pays the seller
immediately or defers the payment.
The seller agrees on the sale and delivers the equipment to the
bank.
The contract at this stage involves the equipment purchase
contract between the bank and the supplier of the equipment.
B. After purchasing the equipment:
The bank looks for a lessee and leases out the equipment in exchange
for compensation.
The lessee pays the agreed rental on the specified period.
When the contract period comes to an end, the lessee either:
Returns the equipment to the bank
Renews the lease contract for another agreed period of time.
C. If the bank recovers the asset at the end of the lease period:
it will look for a new lessee to let the equipment and this process will
continue until the bank chooses to scrap or dispose of the assets.
OPERATING LEASE CONT.
Areas of Application
The operating lease transactions are suitable for high cost expensive assets, that
demand large amounts of money in order to possess and a long duration for its
production. For example, aircrafts and ships for which the demand for operating
lease is increasing because of high cost and long period of production.
In addition, the banks can carry on business in the line of operating lease in many
assets such as industrial equipment and agricultural machinery as well as
transportation means. All these can satisfy the immediate needs of different parties.
How the Bank and the leassee benefits from this Mode
The bank benefits from this mode by retaining the assets in its possession and at
the same time receives returns from leasing.
The lessee also benefits by covering his immediate demand and achieving his
objectives at the appropriate time without bearing large capital cost.
Popularity of this mode
It should be noted that at present, this mode of financing is unpopular with banks as:
it involves owning and maintaining the rented equipment which gives
additional cost and is a burden to the bank.
Therefore, the bank prefers to embank on another mode of Ijarah financing
called Ijarah muntahiah bi tamlik orIjarah thumma al-bay (leasing ending with
ownership).
Ijarah Muntahiah Bittamlik (Leasing EndingWith Ownership )
There are many types of Ijarah muntahiyah bi al-tamlik, which
can be categorised into major and secondary types.
It should be noted that all of these types aim at
transferring the legal title of the leased asset to the lessee.
Otherwise they would be considered an operating lease
contract.
The mode of financing using different types of Ijarah
muntahiah bittamlik is becoming a popular financing tool
in many products offered by Islamic banks nowadays.
The following are the various forms of the contract of
Ijarah muntahiyah bittamlik and their related juristic
characterisation according to the conditions stipulated in
the contract:
A. Ijarah Muntahia Bittamlik through Gift (Transfer of Legal Title
for no Consideration)
it is a form of lease whereby the legal title is transferred to
the lessee for no consideration:
by entering into a gift contract in fulfillment of a prior
promise upon the settlement of the last lease
installment.
by means of issuing a gift deed made conditional upon
the settlement of all Ijarah installments. The legal title is
then automatically transferred without the need to
enter into a new contract and without any extra
payment other than the amounts paid by the lessee in
the settlement of Ijarah installments.
The wording in the contract can be:
If the installments agreed upon are settled within
the (agreed upon) period, I will give you this asset as
a gift. If the other party accepts the offer, then the
gift deed will be conditional.
Juristic Views on making the gift conditional
Jurists have two different opinions on the validity of making the
gift conditional.
Hanafis, Shafiis, Hanbalis, Zaidis and Imamiyah: it is not valid
to make the gift conditional
Al-Harithi, a Hanbali scholar and some Hanafis: it is
permissible to make the gift conditional upon something
suitable or acceptable.
It is also considered permissible for the lessor to promise to
give the lessee the leased asset as a gift at the end of the
period specified in the Ijarah contract after the settlement of
all agreed upon lease installments for the period of the
contract.
In this case, the promise is considered to be binding,
according to the opinion of the Malikis and those who agree
with them. A gift contract must then be effected.
B. Ijarah Muntahia Bittamlik through Transfer of Legal Title (Sale
at the End of Lease Period for a Token Consideration)
This agreement includes:
a) An executable Ijarah contract whereby the rent and
Ijarah period are determined. If the Ijarah period
expires, then the Ijarah contract will be nullified.
b) A promise to enter into a sale contract to be concluded
at the end of the Ijarah period, if the lessee wishes so
and has paid the agreed consideration.
This type of Ijarah is permitted as there is no limit to the
consideration to be paid in a bargained sale. The
consideration may be equal to the value of the asset or
otherwise, and it would be sufficient if a mutual
agreement is reached on the consideration.
C. Ijarah Muntahia Bittamlik through Transfer of Legal Title (Sale at
the End of Lease Period for an Amount Specified in the Lease)
This agreement, like the earlier one, is also a contract that includes
an Ijarah contract and a promise to enter into a sale contract.
The sale contract, includes an amount for the sold asset to
be paid by the lessee (the buyer) after the expiry of the
Ijarah period.
Upon the payment of the agreed consideration by the
lessee the leased asset becomes sold and its title
transferred to the lessee (the buyer) who will be entitled to
the right of benefit and disposal of the asset in any of the
legitimate forms of disposal.
Juristic Compliance of this contract
There is no doubt that when the agreement becomes
effective, it is treated as an Ijarah contract which entails all the
Shariah rulings and effects of an Ijarah contract.
The sale contract will become effective only after the expiry of
the Ijarah contract due to the consideration paid by the lessee
to the lessor to own the leased asset.
D. Ijarah Muntahia Bittamlik through Transfer of Legal Title(Sale) Prior to End
of Lease Term for a Price Equivalent to Remaining Ijarah Installments
This agreement is an Ijarah contract:
All the Shariah rules relating to Ijarah are applicable to it.
The agreement also includes a promise made by the lessor that
he will transfer the title of the leased asset to the lessee at any
time the lessee wishes to do so during the Ijarah period and at a
price equivalent to the remaining installment of Ijarah, when
there is a desire to purchase.
The juristic Compliance of this form of Ijarah
when the agreement becomes effective it is treated as an Ijarah
contract and remains so until the legal title is transferred to the
lessee. At that time, the Ijarah contract lapses for the remaining
period because both the benefit and the leased asset become
the lessees asset.
This type of sale should be executed by a sale contract to be
concluded at the time of sale.
E. Ijarah Muntahia Bittamlik through Gradual Transfer of Legal Title of Leased
Asset
This agreement includes:
An Ijarah contract with a promise made by the lessor that he will
gradually transfer the legal title of the leased asset to the lessee
until the lessee has full legal title of the leased asset.
This would involve determining the price of the leased asset which
is to be divided over the period of the Ijarah contract so that the
lessee is able to acquire a share of the leased asset for a
proportionate consideration of the total price until the full title of
the leased asset is transferred to the lessee.
It should be noted that, in this arrangement, there should be a sale
contract for each share sold to the lessee.
In addition, the amount of rent should decrease as the lessee
acquires a greater share of the leased asset.
If, for any reason, the Ijarah contract is revoked prior to the transfer
of title to the lessee, then the title of the leased asset will be
shared by both the lessor and the lessee to whom partial title of
the leased asset has been transferred.
This gives justice to the lessee whose aim is to acquire title of the
leased asset through payment of a rent in excess of the fair rental
amount.
Sale and Leaseback
One of the common forms of Ijarah is the case where an
individual sells his own asset to another party and then leases it
back from him.
It is a juristic rule that the execution of the sale transaction must
not be made conditional on the execution of the lease
transaction in order not to violate the juristic rule that the
execution of a contract must not be made contingent on the
execution of another contract. However:
it is permissible for the parties to the contract to reach an
understanding between them.
It is also permissible that one party promises the other party
to lease to/ from him the asset.
In this arrangement the lessor and lessee have to abide by all
the conditions and obligations stipulated in the Ijarah
contract. In fact this type of Ijarah is commonly used in
securitisation which is known as sukuk al-Ijarah.