Ijarah

Ijarah means lease, rent or wage. Generally, Ijarah concept means selling the benefit of use
or service for a fixed price or wage. Under this concept, the Bank makes available to the
customer the use of service of assets / equipments such as plant, office automation, motor
vehicle for a fixed period and price.

Basic Rules of Ijarah/Leasing

1. Ijarah/Leasing is a contract whereby the owner of something transfers its usufruct to

another person for an agreed period, at an agreed consideration.
2. The subject of Ijarah must have a valuable use. Therefore, things having no usufruct
at all cannot be given on Ijarah.
3. It is necessary for a valid contract of Ijarah that the corpus of the Ijarah 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 given on
Ijarah basis. Therefore, the Ijarah facility cannot be affected 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 given on Ijarahd basis , 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 Ijarah transaction shall be an interest charged on a
loan.
4. As the corpus of the Ijarah Assets remains in 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 the property shall be borne by the lessee.
5. The period of Ijarah must be determined in clear terms.
6. Lessees cannot use the Ijarahd asset for any purpose other than the purpose
specified in the Ijarah 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 so unless the lessor allows
him in express terms.
7. The lessee is liable to compensate the lessor for every harm to the Ijarah asset
caused by any misuse or negligence on the part of the lessee.
 8. The Ijarah asset shall remain in the risk of the lessor throughout the Ijarah 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.
9. A property jointly owned by two or more persons can be given on Ijarah basis, and
the rental shall be distributed between all the joint owners according to the
proportion of their respective shares in the property.
10. A joint owner of an Asset can given on Ijarah basis his proportionate share to his co-
sharer only, and not to any other person.
11. It is necessary for a valid Ijarah that the Ijarah asset is fully identified by the parties.

Advantages of Ijarah
Ijarah provides the following advantages to the Lessee: Ijarah conserves the Lessee' capital
since it allows up to 100% financing. Ijarah gives the Lessee the right to access the
equipmenton payment of the first installment. This is important as itis the access and use
(and not ownership) of equipmentthat generates income. Ijarah arrangements aid corporate
planning and budgeting by allowing the negotiation of flexible terms Ijarah is not considered
Debt Financing so it does not appear on the Lessee' Balance Sheet as a Liability. This method
of "off-balance-sheet" financing means that it is not included in the Debt Ratios used by
bankers to determine financing limits. This allows the Lessee to enter into other lease
financing arrangements without impacting his overall debt rating. All payments towards
Ijarah contracts are treated as operating expenses and are therefore fully tax-deductible.
Leasing thus offers tax-advantages to for-profit operations many types of equipment (i.e
computers) become obsolete before the end of their actual economic life. Ijarah
contracts allow the transfer of risk from the Lesse to the Lessor in exchange for a higher
lease rate. This higher rate can be viewed as insurance against obsolescence. If the
equipment is used for a relatively short period of time, it may be more profitable to lease
than to buy If the equipment is used for a long period but has a very poor resale value,
leasing avoids having to account for and depreciate the equipment under normal accounting
principles.
 Ijarah thumma al bai' (hire purchase)
Parties enter into contracts that come into effect serially, to form a complete lease/ buyback
transaction. The first contract is an Ijarah that outlines the terms for leasing or renting over
a fixed period, and the second contract is a Bai that triggers a sale or purchase once the
term of the Ijarah is complete. For example, in a car financing facility, a customer enters into
the first contract and leases the car from the owner (bank) at an agreed amount over a
specific period. When the lease period expires, the second contract comes into effect, which
enables the customer to purchase the car at an agreed to price. The bank generates a profit
by determining in advance the cost of the item, its residual value at the end of the term and
the time value or profit margin for the money being invested in purchasing the product to
be leased for the intended term. The combining of these three figures becomes the basis for
the contract between the Bank and the client for the initial lease contract. This type of
transaction is similar to the contractum trinius, a legal maneuver used by European bankers
and merchants during the Middle Ages to sidestep the Church's prohibition on interest
bearing loans. In a contractum, two parties would enter into three concurrent and
interrelated legal contracts, the net effect being the paying of a fee for the use of money for
the term of the loan. The use of concurrent interrelated contracts is also prohibited under
Shariah Law.

Ijarah-wal-iqtina
A contract under which an FHM bank provides equipment, building, or other assets to the
client against an agreed rental together with a unilateral undertaking by the bank or the
client that at the end of the lease period, the ownership in the asset would be transferred to
the lessee. The undertaking or the promise does not become an integral part of the lease
contract to make it conditional. The rentals as well as the purchase price are fixed in such
manner that the bank gets back its principal sum along with profit over the period of lease.

FHM will provides customers with short to medium term financing by way of Ijarah/leasing
and finally acquiring items such as:

• Plant and machinery

• Property
• Computers and information technology equipment
• Motor vehicles and heavy machinery
• other fixed assets
 Salam

salam means a contract in which advance payment is made for goods to be delivered later
on. The seller undertakes to supply some specific goods to the buyer at a future date in
exchange of an advance price fully paid at the time of contract. It is necessary that the
quality of the commodity intended to be purchased is fully specified leaving no ambiguity
leading to dispute. The objects of this sale are goods and cannot be gold, silver, or
currencies based on these metals. Barring this, Bai Salam covers almost everything that is
capable of being definitely described as to quantity, quality, and workmanship.

The followings are the conditions governing the conduct of an Al-Salam contract:

(a) The price for the commodity that will be delivered as a repayment must be identified
and known.

(b) The sold commodity must be known by detailed specifications of quantity and
quality.

(c) Repayments must be in commodity and not in cash. The cash repayment is
prohibited except for the exact original loan without any added profit.

(d) The repayment must be postponed to a specified future date and a known place of
delivery.

(e) The borrower is free with regard to the source of the commodity for repayment,
whether from his own farm production or bought from the market as long as it is
typical to the specified descriptions.

This method of financing is found to be more flexible and preferred by the farmers
because it enables them to get cash lending and be free to do what they like with regard
to the finance allocation. It is also observed that the commodity repayments are usually
done from the harvest of the crops financed.
 Istasna

Istisna’a is a sale contract between the FHM as Al-Sani (the seller) and the customer as Al-
Mustasni (the ultimate purchaser) whereby the FHM.

It is defined as “a contract with a manufacturer to make something “ or “ a contract on a

commodity on liability with the provision of work.” A more complete and precise definition
by Mustafa Ahmed Zarqa” a contract of selling a manufacturable thing with an undertaking
by the seller to present it manufactured from his own material with specified description at
a determined price.”

The person who manufactured the thing is called “Soni” and the person who ordered its
manufacture

Steps of Istisna’a Transaction:

 based on the order from the customer

 undertakes to have manufactured or otherwise acquire the subject matter (Al-
Masnoo) of the contract
 according to specifications stipulated by the customer and
 sells it to the customer for an agreed upon price and method of settlement whether
that be in advance, by installments or deferred to a specific future date.

Parallel Istisna’a

Parallel istisna’a is the second sale contract entered into by the FHM with the subcontractor
in order to fulfill its contractual obligations in the first contract to the customer. It is
assumed that the FHM will always enter into a parallel istisna’a contract in order to satisfy
its contractual obligations towards the Istisna’a agreement with the customer. The
subcontractor (seller or Al-Sani) in the parallel Istisna’a contract has no direct legal
relationship with the FHM’s customer in the Istisna’a contract. Parallel Istisna’a is not a
contingent transaction on the first Istisna’a contract.