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Ijarah

‫اﻹﺟﺎرة‬

Khairuddin Zakaria
khairuddinzakaria@gmail.com

Concept of Ijarah
 Ijara or leasing is a form of contract allowed by Islam
based on the textual evidences of al-Qur’an and Sunnah.
 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.

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Concept of Ijarah
 Ijara literally means ‘to give something on rent’.
 In its technical sense term ‘ijara’ is used with two
different connotations.
 1: It means ‘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 ‘musta’jir’
‫ﻣﺴﺘﺄﺟﺮ‬while the employee is called ‘ajir’. ‫أﺟﯿﺮ‬
 This type of ijara includes every transaction where
the services of a person are hired by someone else.
(doctor, lawyer, teacher or any person who can
render some valuable services.

Concept of Ijarah
 2: ijara relates to the usufruct of assets and
properties and not to the services of human beings.
 Ijara 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 ‘ijara’ ‫ إﺟﺎرة‬has the same
meaning with the term ‘leasing’.
 In this instance, the lessor is called ‘mu’jir’, ‫ ﻣﺆﺟﺮ‬the
lessee is called ‘musta’jir’ and the rent
payable to the lessor is called ‘ujrah’. ‫أﺟﺮة‬

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Elements of Ijarah and the
conditions for its validity
 The elements of the Ijarah and the conditions for its validity as
follows:
 There are three elements of the ijara 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. (Statement)
 C. Subject matter of the contract which includes the
consideration (rent) and the benefits (manfa’ah )
the use of the assets.
 Each and every pillar has to fulfil certain conditions in order
for it to be valid.

Basic Rules of Leasing


 The subject of lease must have a valuable use.
Therefore, things having no usufruct at all cannot be
leased
 It is necessary for a valid contract of lease that the
corpus of the leased property remains in the ownership
of the seller, and only its usufruct is transferred to the
lessee.
 Thus, anything which cannot be used without consuming
cannot be leased out. Therefore, the lease cannot be
affect in respect of money, eatables, fuel and
ammunition etc. because their use is not possible unless
they are consumed.
 If anything of this nature is leased out, it will be deemed
to be a loan and all the rules concerning the transaction
of loan shall accordingly apply. Any rent charged on this
invalid lease shall be interest charged on a loan

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Basic Rules of Leasing
 As the corpus of the leased property remains in the ownership of
the lessor, all the liabilities emerging from the ownership of the
lessor, all the liabilities emerging from the ownership shall be
borne by the lessor, but the liabilities referable to the use of
property shall be borne by the lessee; tax, takaful/insurace,
maintenance, etc.
 The period of lease must be determined in clear terms
 The lessee cannot use the leased asset for any purpose other
than the purpose specified in the lease agreement. If no such
purpose is specified in the agreement, the lessee can use it for
whatever purpose it is used in the normal course. However, if he
wishes to use it for an abnormal purpose, he cannot do unless
the lessor allows him in express terms

Basic Rules of Leasing


 The lessee is liable to compensate the lessor for
every harm to the leased asset caused by any
misuse or negligence on the part of the lessee
 The leased asset shall be remained in the risk of
the lessor throughout the lease period in the sense
that any harm or loss caused by the factors
beyond the control of the lessee shall be borne by
the lessor
 It is necessary for a valid lease that the leased
asset is fully identified by the parties.
 Example: A said to B: “I lease you one of my two shops.”
The lease is void, unless the leased shop is clearly
determined and identified

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When ijarah can be effected?
 The contract of ijara 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 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 lessee’s liability for the rent starts
before the lessee takes delivery of the asset.
 If such an instance occurs, this is not allowed by the Shariah, because it
amounts to charging rent on the financing given to the customer which
tantamounts 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
 ijara contract shall be intact as long as all the
terms of agreement are honored 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.
 if there is no contravention on the part of the
lessee, the lease cannot be terminated without
mutual consent.

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Revocation of ijarah
 some have stated that in the case of termination
of lease, even at the option of the lessor, the
rent of the remaining lease period shall be paid
by the lessee.
 This condition is obviously against Shariah and
the principles of equity and justice.
 The logical consequence of the termination of
lease is that the asset should be taken back by
the lessor.

Revocation of ijarah
 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.

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Mechanism of ijarah and its
application
 1: 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
 A. Practical Steps in Operating Lease
 1. The first step would require the bank to purchase the equipment.
 2. After purchasing the equipment, the bank looks for a lessee and leases
out the equipment in exchange for compensation and the lessee pays the
agreed rental on the specified period.
 3: When the contract period comes to an end, the lessee either returns the
equipment to the bank or renews the lease contract for another agreed
period of time.
 4. 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.

Mechanism of ijarah and its


application
 B. 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.
 The bank benefits from this mode by retaining the assets
in its possession and at the same time receives returns
from leasing.

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Mechanism of ijarah and its
application
 2: financing lease:
 Ijara Muntahiah Bittamlik (Leasing Ending With
Ownership)
 The mode of financing using different types of ijara 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 ijara
muntahia bittamlik.
 1. Ijara Muntahia Bittamlik through Gift (Transfer of Legal Title
for No Consideration).
 2. Ijara Muntahia Bittamlik through Transfer of Legal Title (Sale
at the End of Lease Period for a Token Consideration).

Mechanism of ijarah and its


application
 3. Ijara Muntahia Bittamlik through Transfer of Legal
Title (Sale at the End of Lease Period for an
Amount Specified in the Lease).
 4. Ijara Muntahia Bittamlik through Transfer of
Legal Title (Sale) Prior to End of Lease Term for a
Price Equivalent to Remaining Ijara Installments.
 5. Ijara Muntahia Bittamlik through Gradual Transfer
of Legal Title of Leased Asset.
 All agreements for the exchange/transfer of
ownership at the end of leasing period should not be
made conditional in the contract

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The End

Thank You