Professional Documents
Culture Documents
ISLAMIC BANKS
ACCOUNTING ISSUES ON IJARAH
FINANCING
TYPES OF CONTRACTS
ISLAMIC COMMERCIAL TRANSACTIONS
Gratuitous
Contracts
Gift
Trading
Contracts
Leasing
Sale
Waqf
Loan
Operational
Lease
Operating
Lease +
Transfer of
Ownership
Investment
Contracts
BBA
Musharakah
Mudharabah
Murabahah
Salam
Istisna etc.
Nature of Leases
A lease is classified as a finance lease if it
transfers substantially all the risks and
rewards incident to ownership.
Otherwise it is an operating lease.
Substance rather than form of the contract
that distinguishes finance from operating
leases.
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Recognition, Measurement
& Disclosure of Finance Leases
Lessors recognize assets held under finance lease
as receivables at an amount equal to the net
investment in the lease.
Recognition of finance income should be based on a
pattern reflecting a constant periodic rate of return
on the lessors net investment outstanding in respect
of the finance lease.
Ijarah
The
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Duties of Lessor/Lessee
Lessors Obligations
Making the leased asset available
Guarantee in respect of defects
Maintenance of the Leased Asset
Lessees obligations
Utilization of leased asset according to
contractual conditions
Rental payment and safeguard asset
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Classification of Ijarah
IJARAH FINANCING
OPERATING IJARAH
No transfer of title to lessee
IJARAH MUNTAHIA
BILTAMLEEK
Ownership is transferred to
lessee
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Types of Ijarah
a) Operating Ijarah
Ijarah where the title of assets are not transferred to the lessee.
Ijarah contracts that do not end up with the transfer of ownership
of leased assets to the lessee.
GIFT
At End of Period
TOKEN PRICE
End Of Period Price
EQUIVALENT
Within Lease Period
GRADUAL TRANSFER
During the lease period
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Gift
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Gift (cont.)
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Token price
Ijarah Muntahia Bittamleek that gives the lessee the
right of ownership of leased assets at the end of the
lease term on the basis of a new contract for a specified
price, which may be a token price.
Sale for a token consideration at the end of the ijarah
contract.
In this case, initially there is a ijarah contract and a
promise to sell by the lessor if the lessee wishes at a
token consideration.
The consideration can be any agreed amount between
the parties.
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Ethical issues
In
In
2.
3.
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Useful
1.
2.
Residual value
Residual
Residual
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Ijarah Muntahia
Bittamleek
Asset reported in the
lessors books &
depreciated
Maintenance costs
borne by the lessor
Ijarah Revenue is not
divisible
Finance Lease
Finance lease is
reported as
receivable
No depreciation &
maintenance costs is
borne by the lessee.
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Conclusions
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Definition
Al-Ijarah
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Operation of AITAB
Islamic
Financing
Interest Rate
Profit Rate
Hiring Charges
Mark-up
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Others
Late payment fee of 1% p.a. of the
installment due charity accounts
Minimum period of financing is 1 year (12
months) & a maximum financing is 7 years
(84 months)
However, period of financing & margin of
financing (normally 90%) used by finance
companies is determined based on various
factors such as: type of cars (new or second
hand), age of vehicle, customer profiles,
income exposure, market condition
Ibra for early settlements
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Under
MASB Tr i-2
In
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MASB Tr i-2
In
Effective
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Illustrative Example 1
Illustrative Example 2
Illustrative Example 3
Private
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Illustrative Example 4