Documenti di Didattica
Documenti di Professioni
Documenti di Cultura
Ijarah
THE APPLICATION of Ijarah
Ijarah
The Application of Ijarah
Introduction
Sources of Law
The Conditions toIjarah
Types of Ijarah
Mechanism of Ijarah
Documentation of Ijarah
INTRODUCTION
Ijarah or leasing:
is a form of contract allowed by Islam based on the fact that 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.
Like any other contract, the Ijarah contract has to fulfil all the
conditions of a valid contract stipulated by the Shariah.
Ijarah is emerging as a popular technique of financing among
Islamic banks. Some of the products that utilise the Ijarah
concepts include house financing, car financing, project
financing and structured products.
INTRODUCTION
According to The Majallah:
Ijarah as: The sale of usufruct for a known return. This definition was
criticised because it only covered one type of Ijarah.
According to N. J. Coulson:
Ijarah is The transfer of usufruct (the use of an object or the services of a
person) for a consideration rent, or ujrah, in the case of hire, and wages,
or ajr, in the case of hire for employment.
This definition is more precise than the definition advanced by the
Majallah because it covers both types of Ijarah.
A. Ijarah means to employ the services of a person on ujrah given to him as
consideration for his hired services. It is termed as IIjarah al-ashkhas.
B. Ijarah means the sale of usufruct of a particular property to another
in exchange for ajr claimed from him. It is termed as Ijarah al-ayan.
Ijaraht al-ayan
The discourse on the practice of Ijaraht al-ayan in classical writings of fiqh
concentrated only on simple leasing activities, which is termed these days as
operating lease. In this practice:
The owner of the asset, the lessor, will allow the lessee to derive manfaat
(usufruct) from the leased asset for a certain period of time in return for
compensation (ajr) agreed upon by both of them.
At the end of the leasing period (unless renewed), the asset would be
returned to the lessor and the contract of leasing terminated.
INTRODUCTION
Leasing transactions done by Islamic financial institutions
Most leasing transactions done by Islamic financial institutions
are in the form of finance leases with various terminologies such
as al-Ijarah thumma al-bay, al-Ijarah wa aliqtina, al-Ijarah al-
muntahiyah bi al-tamlik, but have almost the same structures
and features.
Contrary to previous practice, a mechanism is created for the
transfer of the asset to the lessee at the end of the leasing
period.
The transfer of asset will normally be done via another contract
implicated at the end of the tenure. It can be done by various
ways. Among others:
A. The bank unilaterally promises to make a gift of the asset to
the client at the end of the period, provided that all
installments have been fully paid.
B. A promise to sell the asset to the client at an agreed price,
upon the payment of the remaining installments.
C. The client is allowed to purchase the asset, and the final
installment is considered to be the price for purchasing the
asset.
Definition of Ijarah
Ijarah is a word that conveys the sense of both hire and lease.
Generally, Ijarah is of two types, namely:
1. Use of Corporeal Property (Ijarah or manfaat al-ayn)
Corporeal property includes immovable property (such as land
or premises), merchandise (such as furniture, machinery) and
animals.
This type of Ijarah is the leasing of the above assets for a
specific purpose with particular amount of rental for a
specific duration of time.
2. Personal Service (Ijarah or manfaat al-amal)
This type of Ijarah is the hiring of services or labour such as
hiring of an engineer, a carpenter or a tailor to undertake a
specific task.
Classification of Ijarah according to the number of lessee
In addition to the above classification, Ijarah can also be
classified according to the number of lessee, i.e. into individual
Ijarah (Ijarah al-fard) and collective Ijarah (Ijarah al-musha).
Individual Ijarah is the leasing of assets or services done by
an individual
Collective Ijarah occurs when a group of persons jointly hire a
good or service.
In this respect, Imam Abu Hanifah, maintains the view that
collective Ijarah is invalid because its collectivity may create
disputes amongst the group of lessees regarding the
ownership of the usufruct.
However, in contemporary application, the concern with
regard to the ownership of the usufruct can be regulated by
having an agreement amongst the group of lessees to
determine the ownership of the usufruct. Therefore,
collective Ijarah can be implemented where there is need to
do so.
MECHANISM of Ijarah
Islamic financial institutions at present usually use two modes of Ijarah
which are operating lease and Ijarah muntahia bi al-tamlik. The details
of these two forms of Ijarah are as follows:
A. 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 to any party who wishes to
utilise it for a term agreed upon between them.
After the termination of the lease period the assets would return
to the bank and on its part, the bank will look for a new lessee.
The distinguishing feature of this mode is that the assets remain
the property of the Islamic bank to put them up for rent every
time the lease period terminates so as not to be unutilised for
long periods of time.
Under this mode, the bank bears the risk of recession or
diminishing demand for these assets
OPERATING LEASE CONT.
A. The first step would require the bank to purchase the equipment.
After studying and evaluating the market:
The bank purchases the equipment and pays the seller
immediately or defers the payment.
The seller agrees on the sale and delivers the equipment to the
bank.
The contract at this stage involves the equipment purchase
contract between the bank and the supplier of the equipment.
B. After purchasing the equipment:
The bank looks for a lessee and leases out the equipment in exchange
for compensation.
The lessee pays the agreed rental on the specified period.
When the contract period comes to an end, the lessee either:
Returns the equipment to the bank
Renews the lease contract for another agreed period of time.
C. 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.
OPERATING LEASE CONT.
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.
In addition, the banks can carry on business in the line of operating lease in many
assets such as industrial equipment and agricultural machinery as well as
transportation means. All these can satisfy the immediate needs of different parties.
How the Bank and the leassee benefits from this Mode
The bank benefits from this mode by retaining the assets in its possession and at
the same time receives returns from leasing.
The lessee also benefits by covering his immediate demand and achieving his
objectives at the appropriate time without bearing large capital cost.
Popularity of this mode
It should be noted that at present, this mode of financing is unpopular with banks as:
it involves owning and maintaining the rented equipment which gives
additional cost and is a burden to the bank.
Therefore, the bank prefers to embank on another mode of Ijarah financing
called Ijarah muntahiah bi tamlik orIjarah thumma al-bay (leasing ending with
ownership).
Ijarah Muntahiah Bittamlik (Leasing EndingWith Ownership )
There are many types of Ijarah muntahiyah bi al-tamlik, which
can be categorised into major and secondary types.
It should be noted that all of these types aim at
transferring the legal title of the leased asset to the lessee.
Otherwise they would be considered an operating lease
contract.
The mode of financing using different types of Ijarah
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
Ijarah muntahiyah bittamlik and their related juristic
characterisation according to the conditions stipulated in
the contract:
A. Ijarah Muntahia Bittamlik through Gift (Transfer of Legal Title
for no Consideration)
it is a form of lease whereby the legal title is transferred to
the lessee for no consideration:
by entering into a gift contract in fulfillment of a prior
promise upon the settlement of the last lease
installment.
by means of issuing a gift deed made conditional upon
the settlement of all Ijarah installments. The legal title is
then automatically transferred without the need to
enter into a new contract and without any extra
payment other than the amounts paid by the lessee in
the settlement of Ijarah installments.
The wording in the contract can be:
If the installments agreed upon are settled within
the (agreed upon) period, I will give you this asset as
a gift. If the other party accepts the offer, then the
gift deed will be conditional.
Juristic Views on making the gift conditional
Jurists have two different opinions on the validity of making the
gift conditional.
Hanafis, Shafiis, Hanbalis, Zaidis and Imamiyah: it is not valid
to make the gift conditional
Al-Harithi, a Hanbali scholar and some Hanafis: it is
permissible to make the gift conditional upon something
suitable or acceptable.
It is also considered permissible for the lessor to promise to
give the lessee the leased asset as a gift at the end of the
period specified in the Ijarah contract after the settlement of
all agreed upon lease installments for the period of the
contract.
In this case, the promise is considered to be binding,
according to the opinion of the Malikis and those who agree
with them. A gift contract must then be effected.
B. Ijarah Muntahia Bittamlik through Transfer of Legal Title (Sale
at the End of Lease Period for a Token Consideration)
This agreement includes:
a) An executable Ijarah contract whereby the rent and
Ijarah period are determined. If the Ijarah period
expires, then the Ijarah contract will be nullified.
b) A promise to enter into a sale contract to be concluded
at the end of the Ijarah period, if the lessee wishes so
and has paid the agreed consideration.
This type of Ijarah is permitted as there is no limit to the
consideration to be paid in a bargained sale. The
consideration may be equal to the value of the asset or
otherwise, and it would be sufficient if a mutual
agreement is reached on the consideration.
C. Ijarah Muntahia Bittamlik through Transfer of Legal Title (Sale at
the End of Lease Period for an Amount Specified in the Lease)
This agreement, like the earlier one, is also a contract that includes
an Ijarah contract and a promise to enter into a sale contract.
The sale contract, includes an amount for the sold asset to
be paid by the lessee (the buyer) after the expiry of the
Ijarah period.
Upon the payment of the agreed consideration by the
lessee the leased asset becomes sold and its title
transferred to the lessee (the buyer) who will be entitled to
the right of benefit and disposal of the asset in any of the
legitimate forms of disposal.
Juristic Compliance of this contract
There is no doubt that when the agreement becomes
effective, it is treated as an Ijarah contract which entails all the
Shariah rulings and effects of an Ijarah contract.
The sale contract will become effective only after the expiry of
the Ijarah contract due to the consideration paid by the lessee
to the lessor to own the leased asset.
D. Ijarah Muntahia Bittamlik through Transfer of Legal Title(Sale) Prior to End
of Lease Term for a Price Equivalent to Remaining Ijarah Installments
This agreement is an Ijarah contract:
All the Shariah rules relating to Ijarah are applicable to it.
The agreement also includes a promise made by the lessor that
he will transfer the title of the leased asset to the lessee at any
time the lessee wishes to do so during the Ijarah period and at a
price equivalent to the remaining installment of Ijarah, when
there is a desire to purchase.
The juristic Compliance of this form of Ijarah
when the agreement becomes effective it is treated as an Ijarah
contract and remains so until the legal title is transferred to the
lessee. At that time, the Ijarah contract lapses for the remaining
period because both the benefit and the leased asset become
the lessees asset.
This type of sale should be executed by a sale contract to be
concluded at the time of sale.
E. Ijarah Muntahia Bittamlik through Gradual Transfer of Legal Title of Leased
Asset
This agreement includes:
An Ijarah contract with a promise made by the lessor that he will
gradually transfer the legal title of the leased asset to the lessee
until the lessee has full legal title of the leased asset.
This would involve determining the price of the leased asset which
is to be divided over the period of the Ijarah contract so that the
lessee is able to acquire a share of the leased asset for a
proportionate consideration of the total price until the full title of
the leased asset is transferred to the lessee.
It should be noted that, in this arrangement, there should be a sale
contract for each share sold to the lessee.
In addition, the amount of rent should decrease as the lessee
acquires a greater share of the leased asset.
If, for any reason, the Ijarah contract is revoked prior to the transfer
of title to the lessee, then the title of the leased asset will be
shared by both the lessor and the lessee to whom partial title of
the leased asset has been transferred.
This gives justice to the lessee whose aim is to acquire title of the
leased asset through payment of a rent in excess of the fair rental
amount.
Sale and Leaseback
One of the common forms of Ijarah is the case where an
individual sells his own asset to another party and then leases it
back from him.
It is a juristic rule that the execution of the sale transaction must
not be made conditional on the execution of the lease
transaction in order not to violate the juristic rule that the
execution of a contract must not be made contingent on the
execution of another contract. However:
it is permissible for the parties to the contract to reach an
understanding between them.
It is also permissible that one party promises the other party
to lease to/ from him the asset.
In this arrangement the lessor and lessee have to abide by all
the conditions and obligations stipulated in the Ijarah
contract. In fact this type of Ijarah is commonly used in
securitisation which is known as sukuk al-Ijarah.