Professional Documents
Culture Documents
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.
ii.
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.
ii.
$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
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
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
What is su#ject
+efect is defined as compromise or diminishment of usufruct Lessor underta#es repair of defect regardless of timing
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
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
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
)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
'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=%
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