IJARAH APPLICATION

APPLICATION

 For long and medium term fixed asset financing like plant,
equipment, generators etc.

 Retail products like Car financing, Durable financing, Home

Financing.
IJARAH FINANCING FOR ASSETS
IMPORTED VIA SIGHT LC
IMPORT IJARAH – SIGHT LC

1. The customer has approached bank for Ijarah Facility for asset
which has to be imported through opening of Sight LC.

2. After necessary Credit and Shariah approval bank will appoint

customer as its agent to import the assets and sign the ‘Ijarah
Agency Agreement’ with bank. Customer will establish Sight LC
under agency from bank counter.

3. The client will also give an ‘Undertaking to Lease’ to ensure that

the customer will get the asset leased via bank.
4. Upon arrival of import documents, the bank will deliver the documents
to the customer (acting as agent of bank) after normal checking.

5. Acting as bank’s agent, customer will get the Assets released from
the Port and pay the relevant duties, taxes, transportation and other
charges to port for release of assets from the port.

6. After the delivery of assets, bank will get the assets insured from
Takaful Companies. Bank can also appoint the client as its agent to
get the asset insured through Takaful.
7. Following points should be taken care of in deciding the usability of
Ijarah Asset and signing of Ijarah Agreement:

a) In case Ijarah is to be done for the whole Plant, the Client (acting as
bank’s agent) will carry out certain activities that are necessary to
bring the plant in workable state. Such costs that are directly related
to get the whole plant in commissioning state shall be pre-agreed
with bank. All Costs incurred by customer acting as Agent of bank
will be added up to Invoice Value/ Import Cost to determine the Total
Cost of the Asset. After the asset comes into a usable state, bank
and customer will enter into Ijarah Agreement.

b) In cases where Ijarah is to be done on an identified machinery of a

Plant (and not on the whole plant), Ijarah Agreement must be signed
right after the delivery of asset to the customer’s premises in usable
condition.
8. Cost incurred by customer acting as Agent of bank, mentioned in
points 5, 6 & 7(a) above, will be added up to Invoice Value / Import
Cost to determine the Total Cost of the Asset. This cost will be
used for determining the Lease rentals. The client would be
reimbursed for the cost incurred by them as bank’s Agent.

9. Lease rental will start from the next month/ quarter/ period.

10. The rental amount may be calculated with reference to a well

known benchmark (with a clearly defined balanced Floor & Cap)
agreed upon at the time of signing of Ijarah Agreement. However,
the amount of rental for the first period should be specified in
absolute currency Terms at the beginning of the First Period at the
time of signing of Ijarah Agreement.
11. After signing of Ijarah Agreement customer will undertake to
purchase the Ijarah Asset through ‘Undertaking to Purchase’ upon
the early termination / maturity of the lease period.

12. On completion of the tenor of the lease and upon receipt of all
rentals and other dues from the customer the Bank shall gift the
asset to the customer by executing the Gift Deed.

13. Upon early termination of the lease, the customer will purchase the
asset from bank at the relevant price as set out in the under the
Undertaking to Purchase via executing the Sale Deed.
Note:

In case initially the Customer has opened Sight LC under MMFA for
import of the Asset and later Customer decides to get the Imported
Asset Financed by Ijarah, customer should sign an ‘Undertaking to
Lease’ after receipt of documents at bank counter. In this case Ijarah
Agency Agreement will not be signed with the customer. After
signing of ‘Undertaking to Lease’ Steps 5 or 6 to 13 of the above-
mentioned Process Flow will be followed.

Important Guideline while raising Credit Approval for Ijarah

against Sight LC:

Related bank representative should ensure that the Credit Limit for
Ijarah against Sight LC should have a cushion for the duties and
taxes to be paid against the Import of Asset.
IJARAH FINANCING FOR ASSETS IMPORTED
VIA USANCE LC
 IMPORT IJARAH-USANCE LC

1. The Client approaches bank for an Ijarah Facility where the asset has
to be imported under Usance L/C.

2. After necessary Credit and Shariah approvals, bank will appoint the
client as its agent to import the assets and sign the Ijarah Agency
Agreement. The client will also give an Undertaking to Lease, so to
the asset once it is imported.

3. The customer will open Usance LC under Ijarah agency from Bank
counter.
4. Upon arrival of the import documents, the Bank will deliver the
documents to the customer (acting as Bank’s agent) after the normal
checking & acceptance process.

5. The customer will take the delivery of the asset as bank’s agent and
will pay relevant duties, taxes, transportation, and other charges to
port authorities for releasing the asset. All such payments made by
importer shall be reimbursed by Bank and will constitute part of total
cost of asset.

6. After the delivery, Bank will insure the asset in its name through
Takaful insurance. The Bank can also appoint the client as its agent
to get the asset insured through Takaful. All such expenses incurred
by the client in getting the insurance (premium) shall be reimbursed
by the Bank to the client.
7. After the arrival of import documents and before the signing of Ijarah
Agreement forward cover will be taken for the payments to be made
by bank against Usance L/C to fix the import cost of goods in local
currency.

8. Acting as the Bank’s agent the Client will carry out certain activities
that are necessary to bring the assets in a workable state. Such costs
that are directly related to the asset or as may be decided between
Bank and the Client as being directly related to the asset will be
reimbursed to the client.

9. Import cost, insurance costs, costs incurred for the release of assets
(duties), transportation costs and other costs directly related to the
ownership of the asset will be added up to determine the total cost of
the asset. This cost will be used for determining the Lease rentals.
The client would also be reimbursed for the cost incurred by them as
bank’s agent.
10. After the asset comes into a usable state bank and the Client will
enter into an Ijarah Agreement. Lease rentals will start from the next
month/quarter/period. The signing of the Ijarah Agreement shall not
be delayed till the maturity of the Usance period.

11. For determination of the rentals profit rate will be estimated based on
the respective Benchmark rate (like LIBOR)

12. The rentals for the first period (the Usance Period) would be decided
and fixed in absolute currency terms at the inception of the Ijarah
agreement along with the formula for charging the rentals after the
end of the first period.
13. In cases where the client is not willing to pay the rentals during the
Usance period; so as to allow the machinery sufficient time to
generate cash flows to service rentals; the rentals for the whole
Usance Period would be fixed & charged from Day 1 when the asset
is delivered in usable condition and the Ijarah Agreement is signed.
However the payment of the rental amount would be deferred until
the expiry of the credit period under the Usance L/c. Rentals fixed
for the Usance period should not be a nominal amount, for this
reason it should at least be equal to 50% of the subsequent periodic
rental (this may also include the Takaful expenses and as well as
other expenses like duties paid).
14. At the end of the first period, the lease rentals for the next period will
be decided based on the respective Benchmark rate (with a clearly
defined Cap and Floor) as mutually agreed at the time of Ijarah
Agreement.

15. The customer will also give an “Undertaking to Purchase” to

purchase the asset in case of the early termination/after maturity of
the lease period.

16. On the date of maturity of Usance L/C bank will execute payment of
the Usance L/c in Foreign currency to the foreign supplier.

17. Upon the maturity of the lease term the leased assets shall be sold to
the customer as per the Undertaking to Purchase.
THANK YOU