IjarahIjarah

FORMAL DEFINITIONFORMAL DEFINITIONA contract whereby the owner transfers usufruct of a particular asset to another party for specified time period in consideration of an agreed upon rental

Essentials of Ijarah Essentials of Ijarah ContractContract

1. A Contract2. Transfer of Usufruct3. A Particular Asset4. Specified Time Period5. Agreed-upon Rentals

1. 1. ContractContract• Ijarah is a contract (AQD)

just like sale.

• All elements of a valid contract (e.g., offer and acceptance, qualification of parties etc.) must be present.

2. 2. Transfer of Transfer of UsufructUsufruct• Only the use of the asset is

transferred from the lessor to the Lessee

• Ownership of the leased asset remains with the Lessor

2. 2. Transfer of Transfer of UsufructUsufruct• All rights and liabilities

relating to ownership are borne by the Lessor.

• All rights and liabilities relating to use are borne by the Lessee.

2. 2. Transfer of Transfer of UsufructUsufruct

Lessee as “AmeenAmeen”:• is liable to use the asset only

for the purpose specified in the agreement.

• is liable for loss to the asset due to his negligence

• cannot be made liable for loss caused by factors beyond his control.

2. 2. Transfer of Transfer of UsufructUsufructOverall, the subject of the lease remains in the OWNERSHIP and the RISK of the Lessor.

3.3. Leased AssetLeased AssetSubject matter of Lease should be:

• Identified, and • Valuable

4. 4. Specified Time Specified Time PeriodPeriodFor the lease to be valid the period for which the usufruct is transferred should be clearly specified

5. 5. Agreed-upon Agreed-upon RentalsRentalsRental for either the entire period of lease should be fixed at the outset or should be fixed for a specific period, based on bench-mark acceptable to both the Parties.

• Different rent for different phases of lease.

• Lessor builds all the procurement expenses of the asset (e.g, freight, transportation etc.) into the cost of the assets and then determines the lease rentals.

5. 5. Agreed-upon Agreed-upon RentalsRentals

IJARAH :IJARAH : A FINANCING A FINANCING MODEMODE• Originally, not a mode of

financing.

• Can be used as a mode of financing provided that the terms and conditions of the contract conform to the rules of Shariah.

Steps in IjarahSteps in Ijarah1.The customer approaches the

Bank with the request for financing and provides a promise to lease the requested asset.

2.The bank makes payment to the vendor and purchases the requested asset for leasing.

3.The Bank acquires the ownership of the asset from the vendor and takes physical or constructive possession.

Steps in IjarahSteps in Ijarah1.The bank leases the asset to the

customer after execution of the Lease Agreement, and obtains (through a separate document) a unilateral promise to purchase the asset at maturity or earlier from the customer.

2.The customer makes regular payments of the lease rentals.

3.At maturity or earlier the title may be transferred to the customer in terms of the promise to purchase submitted by him and at the sole discretion of the bank.