Ijarah Financing

Presented to:
Miss Kalsoom Akhtar
Presented by:
Ayesha Saeed 357-R2
Iqra Zaheer 365-R2
Majid Ali 366-R2
Muhammad Umar Farooq 374-R2
Muhammad Umair Malik 377-R2
Umar Muslim 388-R2
Ijarah( Islamic Leasing) introduction:
 Definition of Ijarah
 Literally means:
 To give something on rent.
 It is defined as:
 To transfer the usage of a non-consumable asset by the owner (the lessor) to another person
(the lessee) for an agreed period, at an agreed price (rent).

 IFI (Islamic Financial Institution)

 Lessee
 Rights of Lessee
 Completion of Ijarah
Average share of ijarah in portfolios of IFIs working in Pakistan is 22% which is
Appreciable
Shari’a Rulings
 Ijarah Wa Iqtana:
1.Completion of Ijarah Contract
2. Sale of Asset
3. Lase Back
4. Both Sale & Lase Back cannot executed Same time.
5.If asset is destroyed without negligence of lessee.
Example:
Mr. A entered into contarct of ijarah with a Local Islamic bank to acquire a otor vehicle
costing Rs.1000,000 Lease term is 5 years. Contract ended into Transfer of ownership to
lessee for a token price of Rs:50,000
Shari’a Rulings
 Contract:
Ijarah can be executed piror to purchase & possession of asset by Mujeer (lesser).

Examples:
Mr B entered into contarct of ijarah with an embassy to provide 10 cars (as per agreed
specificatiions ) on lase and contarct finalize. It is a valid contarct even if Mr., b is not the
owner oof cars at the time of contaract. Likewise an Islamic bank can enter into contarct of
Ijarah with customer prior to Purchase of Asset.
Shari’a Rulings
 Commitment fee: ( Hamish Jiddiya)
Advance received as promise to acquire Asset on Rent.
Security is Invest in the Mudaraba basis.
Breach of Contract:
1.Difference b/w the cost of assets and the total rentals agreed with the third party to whom
the assets would be leased.
2. If sold the difference between the total cost of asset and selling price.

Leased asset is the responsibility of the lesser throughout the duration of Ijarah.
Shari’a Rulings
 Ijarah:
 Contract is binding contract which neither party may terminate or alter without the
consect of others.
 1. Mujeer sale asset to third party.
 2in case of of total destruction of leased asset.
 3 Asset is Partially Damaged
 4. Any of the parties hold option to terminate contract
 5. Force Mujeer
 6. Defaults in payments of rent
 7. In case of death of lessee.
Shari’a Rulings
 Sale:
 Sale and lease back is allowed provided that lease is not stipulated in sales
contract and both contracts are independent.

 Mustager:
 Is premitted to sublease whole or any part of asset to third party.

 Mustager:
 Lessee can be appointed as agent of IFI to acquire the asset as per his desire
and specifications.
Shari’a Rulings
 Urboun:
 Earned money is permitted
 If Ijarah contract is not executed.
 Chager up actual loss.
 Subject:
 Should be valuable, identified and quantified
 All consumable things cannot be leased out.
(For example money, wheat etc.)
 Ijarah Contract with Non Muslims .
 Damage of an Assets during Lease tenure
 Negligence of lease & without Negligence.
During Reparing and overhauling phase , IFI cannot charge the rentals while
convebtial banks continously receive the installement and interest.
Shari’a Rulings
 Lessee:

 Use a asset in suitable manner

 Operating maintance is responsibility of lessee.

 Lesaed:

 Assets is Responsibility of the lesser throughout the duration of Ijarah.

 Responsible Major Repairs and maintance.
 Permissible Insurance is Responsibilty of Lesser.
Shari’a Rulings
 Lease:
 Rentals may be in Cash Goods or Benefits.
 Specific Lump Sum Installments.
 Fixed or Varaible on Designed Method.
 Rent start when Lessee use the asset.
 Rental value fixed or changed with Mutual Agreement.
 All Permissible Securities:
 Secure the right of lesser against the negligence of lessee,
 Defaults in payments
 Penalty on Default by lessee.
 Use Penalty as charity.
Shari’a Rulings:
 All liabilities of ownership is borne by lesser.

 Period of lease known to both parties

 Lease for specific purpose

 Ijarah payments cannot be assigned to third party.

Steps In Ijarah Financing:
 The customer approaches the Bank with the request for financing and enters into a
promise to lease agreement.
 The Bank purchases the item required for leasing and receives title of ownership from
the vendor.
 The Bank makes payment to the vendor
Steps In Ijarah Financing:
 The Bank leases the asset to the customer after performance of lease agreement.
 The customer makes periodic rental payments as per the contract.
 At the end of the tenure customer can purchase the asset from the bank with the help of
separate Sale agreement.
Comparative Study of Ijarah and Lease:
Leasing
 In Conventional Leasing Products, the
Customer is responsible for all kinds of
losses or damages to theLeased asset,
irrespective of the circumstances.
 Lessee bear the Risk of insurance.
 Interest and Installement is charged to
Lessee when he singed the contract and
assets is not use.
 During repairing charged installements.
Ijarah
 All risks pertaining to ownership are
borne by Lessor. Customer only bears
usage-related risks.
 Lessor bears the risk of Insurance claim
settlement.
 Rent is charged when asset is use by
Lessee.
 During repairing rent is not chaged to
lessee.
Comparative Study of Ijarah and Lease:
 But here in single contract both sale
and lease are done.
 In leasing the minimized by the
insurance which is prohibited mode of
sharing.
 But these all liabilities of ownership is
borne by lessee.
 But Interest and installement is charged
in leasring.
 Sales of assets and lease of asset is two
separate contracts.
 Under Ijarah risk of asset is migited by
Tkaful.
 All liabilities of ownership is borne by
lesser
 Rentals charges are stop due to any
reason Theft destruction.
Financial Impact of Ijarah.

 IRR Internal Rate of Return.

IRR formula is based on the concept of time value of money hence not recommended for
charging customers under islamic modes of Financing.
 Change in balance sheet:
Balance sheet of IFI is little different from the conventional banks.