al ijarah

IJARAH – LEASING

(Sewa atau Pajak)

AL IJARAH

A contract is where the financier buys and leases equipment or other assets to the business owner for a fee or more often called rental income.

The duration of the lease as well as the fee must be set in advance and mutually agreed.

Jenis-jenis IJARAH

•Ijarah “Jasa” (Ijarah ‘ala al ‘amal) •Ijarah Muntahiyah bi alTamlik•Al-Ijarah wal-`Iqtina’

•To employ the services of a person on wages given to him as a consideration for his hired services.

• Someone else hires the services of a person.

(Example: a doctor, a lawyer, a teacher, a laborer, or any other person who can render some valuable services).

•The employer – ‘Mustajir’

•The employee – ‘Ajir’

1. Ijarah ‘ala al ‘amal - services

•It is not relate to the services of human beings.

•To transfer the asset or property to another person in exchanged for rent claimed. •Another word – Leasing

•Lessor – ‘Mujir’•Lessee – ‘Mustajir’•Rent payable to lessor – ‘Ujrah’

2. Ijarah Muntahiyah bi alTamlik – Assets and properties

3. Al-Ijarah wal-`Iqtina’ (Lease to Purchase or Hire Purchase)

A contract is just the same as that of the Al-Ijarah except that the business owner is committed to buying the equipment at the end of the lease period.

Fees previously paid constitute part of the purchase price.

This type of lease to purchase agreement is commonly used for home financing.

The leasing contract must meet the following conditions:

The service that the asset is supposed to provide and for which it is being rented should be definitely and clearly known to both parties.

The asset remains in the ownership of the lessor who is responsible for its maintenance so that it continues to give the service for which it was rented.

The leasing contract is terminated as soon as the asset ceases to give the service for which it was rented.

Continued……

If the asset becomes damaged during the period of the contract, the contract will remain valid.

The price of an asset that may be sold to the lessee at the expiry of the contract cannot be pre-determined.

It can be determined only at the time of the expiry of the contract.

Rules of Ijarah

Leasing is a contract whereby the owner of something transfers its asset/property to another person for an agreed period, at an agreed consideration.

The subject of lease must have a valuable use.

Therefore, things having no usufruct at all cannot be leased.

Rules of Ijarah

It is necessary for a valid contract of lease that the corpus (quantity / amount) of the leased 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 leased out.

Therefore, the lease cannot be affect in respect of money, eatables, fuel and ammunition etc. because their use is not possible unless they are consumed.

Rules of Ijarah

As the corpus of the leased property remains in the ownership of the lessor, all the liabilities emerging from 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 property shall be borne by the lessee.

Example:

A has leased his house to B. The taxes referable to the property shall be borne by A, while the water tax, electricity bills and all expenses referable to the use of the house shall be borne by B, the lessee.

Rules of Ijarah

The period of lease must be determined in clear terms.

The lessee cannot use the leased asset for any purpose other than the purpose specified in the lease 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 unless the lessor allows him in express terms.

Rules of Ijarah

The lessee is liable to compensate the lessor for every harm to the leased asset caused by any misuse or negligence on the part of the lessee.

The leased asset shall be remained in the risk of the lessor throughout the lease 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.

A property jointly owned by two or more persons can be leased out, and the rental shall be distributed between all the joint owners according to the proportion of their respective shares in the property.

A joint owner of a property can lease his proportionate share to his co-sharer only, and not to any other person.

Rules of Ijarah

Akad Ijarah Berakhir

Objek hilang/lenyap : terbakar, faktor alam

Habis masa waktunyaSalah satu pihak yang wafat dapat

dialihkan pada ahli warisnyaObjek disita.

Determination of Rental

Must be determined at the time of contract for the whole period of the lease.

It can be fix different amounts of rent for different phases during the lease period, depends as specified in the agreement.

EXAMPLE 1:

A leases his house for B for a total period of 5 years.

The rent for the first year is fixed RM2000 per month, and the rent of every subsequent year shall be 10% more than the previous one.

This lease is VALID.

EXAMPLE 2:

A now puts a condition in the agreement that the rent of RM2,000 per month is fixed for the first year only.

The rent for the subsequent years shall be fixed each year at the option of the lessor.

This lease is VOID- because it is uncertain.

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Differences between Leasing and Ijarah

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Leasing/Ijarah Contract

Conventional Leasing Conventional Leasing Islamic IjarahIslamic IjarahThere are two types of There are two types of contracts, contracts, Financial lease Financial lease and and loan for car loan for car financing. financing. Both these contracts contain Both these contracts contain conditions that are conditions that are contravenes with the Islamic contravenes with the Islamic Sharia'h. Sharia'h.

Financing lease Financing lease contains contains conditions of hire purchase, conditions of hire purchase, which is not permissible by which is not permissible by Sharia'h. Sharia'h.

Car financing Car financing or loan or loan agreement contains agreement contains conditions of interest. conditions of interest. Interest is considered Interest is considered RRibaiba by Sharia'hby Sharia'h

The Ijarah contract does The Ijarah contract does not contain any condition not contain any condition that makes the contract that makes the contract void under Sharia'h void under Sharia'h perspective.perspective.

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Rights & Liabilities of Lessor and Lessee

Conventional Leasing Conventional Leasing IjarahIjarah

In Conventional Leasing In Conventional Leasing Products, the Products, the Customer is Customer is responsible responsible for all kinds of for all kinds of losses or damages to the Leased losses or damages to the Leased asset, irrespective of the asset, irrespective of the circumstances.circumstances.

If the insurance company does If the insurance company does not compensate the entire not compensate the entire outstanding amount in case of outstanding amount in case of total loss, the customer is liable total loss, the customer is liable to pay the balance. to pay the balance.

All risks pertaining to All risks pertaining to ownership are borne by ownership are borne by Lessor. Customer only Lessor. Customer only bears usage-related risksbears usage-related risks

Lessor bears the risk of Lessor bears the risk of Insurance claim Insurance claim settlement.settlement.

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Rentals recovery in case of theft and loss


If the Leased Asset is If the Leased Asset is stolen or completely stolen or completely destroyed, the destroyed, the conventional leasing conventional leasing company or Bank would company or Bank would continue charging the continue charging the lease rent till the lease rent till the settlement of the settlement of the Insurance claim Insurance claim

Under the Islamic Under the Islamic Ijarah, rent is Ijarah, rent is consideration for consideration for usage of the leased usage of the leased asset,asset, and and if if the asset the asset has been stolen, has been stolen, destroyed or destroyed or temporarily out of temporarily out of order and not in use of order and not in use of Customer, the concept Customer, the concept of rental becomes void. of rental becomes void. In such situations In such situations rental is not charged rental is not charged from the lessee.from the lessee.

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Penalty for late payment


In most contemporary In most contemporary financial leases, an financial leases, an extra extra monetary amount is chargedmonetary amount is charged if rent is not paid on time. if rent is not paid on time. This extra amount is the This extra amount is the considered considered RibaRiba and is and is Haram. Haram.

This amount is taken by the This amount is taken by the leasing institution into their leasing institution into their income. income.

Under Ijarah, the Lessee Under Ijarah, the Lessee may be asked to undertake may be asked to undertake that if he fails to pay rent on that if he fails to pay rent on its due date, he will pay a its due date, he will pay a certain amount to a certain amount to a charity charity FundFund, which will be , which will be administered through the administered through the Islamic Bank. Islamic Bank.

For this purpose the bank For this purpose the bank maintains a charity fund maintains a charity fund where such amounts may be where such amounts may be credited and disbursed for credited and disbursed for charitable purposes.charitable purposes.

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Insurance premium


Insurance Insurance is independent is independent of the of the lease contract. The insurance lease contract. The insurance expense of the asset is directly expense of the asset is directly borne by the lesseeborne by the lessee

TakafulTakaful / / InsuranceInsurance should be at the expense should be at the expense of the Lessor and not at of the Lessor and not at the expense of the the expense of the lessee. The Lessor may lessee. The Lessor may increase the lease rent increase the lease rent to recover any costs to recover any costs incurred by him in incurred by him in connection with the connection with the asset. However, as a asset. However, as a matter of principal, the matter of principal, the cost should be paid for cost should be paid for by the Lessor.by the Lessor.

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Registration Charges


Lessee is responsible for Lessee is responsible for the Registration of the Registration of Leased Vehicle.Leased Vehicle.

The Leased The Leased Asset(vehicle) is Asset(vehicle) is registered in the name registered in the name of the Bank and of the Bank and registration charges registration charges are paid by the Bank are paid by the Bank (Lessor).(Lessor).

The Lessor may The Lessor may increase the lease rent increase the lease rent to recover any costs to recover any costs incurred by him in incurred by him in connection with the connection with the assetasset

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Purchase of asset


Under conventional Under conventional leasing contracts, the leasing contracts, the vehicle is automatically vehicle is automatically transferred in the name of transferred in the name of the customer upon the customer upon completion of the lease completion of the lease period, whether or not he period, whether or not he wants to purchase it. wants to purchase it.

There is not such clause There is not such clause in the Ijarah Agreement in the Ijarah Agreement that Leased Asset will that Leased Asset will automatically transfer automatically transfer to Lessee.to Lessee.

Separate sale Separate sale agreement is required agreement is required to execute sale to execute sale transaction at the end of transaction at the end of lease term. lease term.

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Commencement of Rentals


In case of Booking of In case of Booking of Leased Asset, recovery Leased Asset, recovery of Lease installment of Lease installment commence after the commence after the payment of cost of Asset payment of cost of Asset to manufacturer/dealer.to manufacturer/dealer.

In case of Car Ijarah, the In case of Car Ijarah, the recovery of rentals is recovery of rentals is associated with delivery associated with delivery of Leased Asset. of Leased Asset.

Rental recovery should Rental recovery should not be commenced not be commenced before the delivery of before the delivery of Asset.Asset.

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Signing of Lease Contract


Lease Agreement can be Lease Agreement can be signed by the Lessee signed by the Lessee and Lessee any time and Lessee any time even if the Leased Asset even if the Leased Asset is not owned by the is not owned by the Customer.Customer.

In case of Ijarah, the In case of Ijarah, the Ijarah Agreement can Ijarah Agreement can not be signed by the not be signed by the Lessor and Lessee Lessor and Lessee unless:unless:

Asset has come in to Asset has come in to existenceexistenceAssets is in the Assets is in the ownership of the ownership of the LessorLessorLessor has taken Lessor has taken possession of the possession of the Asset Asset

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Termination before delivery


The customer will suffer The customer will suffer loss of interest paid during loss of interest paid during the booking period the booking period because installment because installment commence immediately commence immediately after payment of cost of after payment of cost of asset to the asset to the Manufacturer/Dealer.Manufacturer/Dealer.

The loss of customer is The loss of customer is only limited to actual only limited to actual loss, if any, suffered by loss, if any, suffered by the Lessor on sale of the Lessor on sale of asset in the open asset in the open market.market.

Since the customer has Since the customer has not paid any rental not paid any rental during the booking during the booking period, no other cash period, no other cash loss is expected under loss is expected under Ijarah.Ijarah.

Documentation of IJARAH

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IJARAH AGREEMENT

Ijarah Agreement is the basic

document which contains all terms

and conditions pertinent of Ijarah of

particular Asset(s).

Ijarah Agreement shall invariably be

signed after the Lessor has taken the

possession the Asset and not earlier.

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ADDENDUMS TO IJARAH

AGREEMENT

Description of the Ijarah

Asset

Schedule of of Ijarah

Rentals

Receipt of Asset

Demand Promissory Note

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DESCRIPTION OF IJARAH ASSETThis document contains the detailed description about the Leased Asset agreed between the parties e.g Name, Make ,Model,Engine No., Chassis No., Registration No. etc etc.

This documents shall be signed signed after Delivery of asset to the Lessee and not earlier.

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SCHEDULE OF IJARAH RENTALS

This schedule contains a table which shows:

Amount of rental (Monthly/Quarterly/Half Yearly)

Date of Payment of each rental

This schedule will also contain the date on which first rental is due.

This documents shall be signed signed after Delivery of asset to the Lessee and not earlier.

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RECEIPT OF ASSETS

This document confirms that customer has taken the possession of Leased Asset as described in the earlier document “Description of Ijarah Asset”.

This document is only signed by the Lessee on receipt of Asset, as an acknowledgement of receipt of described asset under Ijarah Contact.

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PROMISSORY NOTE

After signing of Ijarah Agreement, the amount of rentals become Debt (Dyan) to the Lessee.

Promissory Note is Lessee’s acknowledgement to Debt amount and its promise to pay.

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UNDERTAKING TO PURCHASE LEASED ASSET

This documents contains undertaking from the Lessee that he/it will purchase the Leased asset on the purchase Price corresponding to the Purchase Date.

This document contains a schedule which shows Purchase Price(s) during the Ijarah term on which the Lessee can purchase the asset by making lump sum payment.

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OTHER DOCUMENTS

Undertaking for Personal use of Ijarah Asset

Trust Receipt

Authorization to Take possession of Leased Asset

Sale Deed

End of Lecture

al ijarah

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