SALIENT FEATURES OF ISLAMIC FINANCIAL LEASE

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1International Conference on Islamic Finance & Banking

SALIENT FEATURES OF ISLAMIC FINANCIAL LEASE

Dr. Muhammad Imran Usmani

Jamia Darululoom Karachi

Al Meezan Investment Bank Ltd.

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BASIC RULES OF LEASING

• Transferring of usufruct not ownershipTo another person for an agreed price, at an agreed consideration.

• Subject of leaseValuable, Identified and Quantified

• Consumable things cannot be leased outAnything which cannot be used without consuming cannot be leased out; e.g., money, wheat etc.

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BASIC RULES OF LEASING• All Liabilities of ownership are borne by

lessorSince corpus of leased property remains in the ownership of the seller.

• Period of leaseMust be determined in clear terms at the time of contract

• Lease for specific purpose onlyIf no specific purpose is identified in the agreement, then it can be used for any purpose for which it is used in normal course

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• Lessee as Ameen The lessee is liable to compensate the lessor for every harm to the

leased asset caused by any misuse or negligence. The leased asset shall remain in the risk of the lessor throughout the lease period.

• Lease of jointly owned propertyIs permitted and rentals shall be distributed between all the joint owners according to the proportion of their respective shares in the property.

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• Determination of Rental

The rental must be determined at the time of contract for the whole period of lease.

It is permissible that different amounts of rent are fixed for different phases during the lease period, provided that the amount of rent for each phase is specifically agreed upon at the time of affecting a lease.

The determination of rental on the basis of the aggregate cost incurred in the purchase of the asset by the lessor, as normally done in financial leases, is not against the rules of Shariah

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• Determination of Rental

The lessor cannot increase the rent unilaterally, and any agreement to this effect is void.

The rent or any part thereof may be payable in advance before the delivery of the asset to the lessee

The lease period shall commence from the date on which the leased asset has been delivered to the lessee.

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LEASE AS A MODE OF FINANCING

• Leasing is not originally a mode of financing

• Leasing should not be interest-based loan or replacing interest with rent, rather it should comply with all of the following conditions of Islamic leasing:

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1. The commencement of leaseUnlike the contract of sale, the agreement of Ijarah can be effected for a future date. Hence, it is different from Murabaha.

2. Rent should be charged after the delivery of the leased asset to the lesseeand not from the day the price has been paid. If the supplier has delayed the delivery after receiving the full price, the lessee should not be liable for the rent of the period of delay.

3. Different relations of the partiesThere are two separate relations between the institution and the client: one of an agent and the other of a lessee.

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4. Difference between Murabahah and leasing

• A Murabahah attributed to a future date is invalid in Shariah. But leasing can be attributed to a future date.

• A Murabaha can not be transacted on a future date as the sale would be executed simultaneously after taking delivery from the supplier and seller would never bear its risk which Shariah does not permit . But in leasing it is permissible, because in leasing the asset remains under the risk and ownership of the lessor throughout the leasing period.

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5. Expenses consequent to ownership to the lessorAs the lessor is the owner of the asset, he is liable to pay all the expenses incurred in the process of its purchase and its import to the country of the lessor for example expenses of freight and customs duty etc.

6. Lessee as AmeenThe lessee is responsible for any loss caused to the asset by his misuse or negligence. He can also be made liable to any normally occurring wear and tear.

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7. Variable Rentals in Long Term Leases

In this case the lessor has two options:

• A lease contract can have a condition that the rent shall be increased according to a specified proportion (e.g. 5%) after a specified period (like one year).

• He can contract lease for a shorter period after which the parties can renew the lease at new terms and by mutual consent

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8. Penalty for late payment of Rent

The lessor cannot charge an additional amount in case the lessee delays payment of the rent.

9. Penalty of late payment is given to charity by lessee

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10. Termination of LeaseIf the lessee contravenes any term of the agreement, the lessor has

a right to terminate the lease contract unilaterally. If not then it can be terminated through mutual consent only. However, in such a case he cannot charge rentals of remaining period.

11. Insurance of the assetsIf the leased property is insured under the Islamic mode of Takaful,

it should be at the expense of the lessor and not at the expense of the lessee

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12. The residual value of the leased assetThrough a mutual agreement of Lease, after the expiry of the lease

period, the corpus of the leased asset cannot be transferred to the lessee, otherwise it becomes hire purchase.

It is a well-settled rule of Islamic jurisprudence that one transaction cannot be tied up with another transaction so as to make the former a pre-condition for the other.

However, the lessor may enter into a unilateral undertaking to sell the leased asset to the lessee at the end of the lease period. This undertaking will be binding on the lessor only.

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13. Ijarah Wa IqtinaThe lessor may sign a separate promise to gift the leased asset to the lessee at the end of the lease period, subject to his payment of all amounts of rent. The validity of this arrangement is subject to two basic conditions:

Firstly, the agreement of Ijarah itself should not be subjected to signing this promise of sale or gift.

Secondly, the promise should be unilateral and binding on the

promisor only.

14. Sub-LeaseIf the leased asset is used differently by different users, the lessee cannot sub-lease the leased asset except with the express permission of the lessor.

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ConclusionConclusion

LEASING IS NOT VERY DIFFERENT FROM LEASING IS NOT VERY DIFFERENT FROM CONVENTIONAL LEASECONVENTIONAL LEASE

Islamic Financial lease is very similar to conventional lease, however, it has some differences which are:

1. the rental rate decided at the time of the agreement cannot fluctuate

2. expenses under Ijarah are as follows:

• Lessor-- expenses relating to the corpus of the asset i.e. insurance, accidental repairs etc. will be borne by the lessor

• Lessee- - actual operating/overhead expenses related to running the asset will be borne by the lessee

3. two contracts into one contract is not permissible in Shariah therefore, we cannot have the agreement of hire and purchase into one agreement, only we can undertake/promise to purchase the leased asset

SALIENT FEATURES OF ISLAMIC FINANCIAL LEASE

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