AL-IJARAH

OUTLINE

• DEFINITION• TYPES OF IJARAH• CONDITIONS• EVIDENCE• PILLARS• COMPARISON• RELATED TERM• ISSUE• AITAB

EVIDENCE OF

AL-IJARAH

QuranSurah Al-Qasas : 26-27

One of the women said, "O my father, hire him. Indeed, the best one you can hire is the strong and the trustworthy."

He said, "Indeed, I wish to wed you one of these, my two daughters, on [the condition] that you serve me for eight years; but if you complete ten, it will be [as a favor] from you. And I do not wish to put you in difficulty. You will find me, if Allah wills, from among the righteous."

HADITH“Give a servant his fee before his sweat dries up”

Reported by Ibn Abbas to the effect that Prophet (s.a.w) had himself cupped and gave the person who cupped him his remuneration, if it is prohibited he would not have paid him in the first place.

PILLARS OF AL-IJARAH

PILLARS

Muajjir

Musta’jir

Ma’jur

Al-Manfaah

Ujrah

Sighah

FLOWS OF AL-IJARAH

MUAJJIR MUSTA’JIR

MA’JUR (THINGS/ ASSET)

MANFAAH

Use of Manfaah

IJAB (Offer)

QABUL (Acceptance)

Ujrah (Fees/ Rental)

CONDITIONS

OF AL-IJARAH

Property Usufruct Payment Sighah

PROPERTY1. The property must be belong to lessor

2. The property is known to both parties and is specified

3. The property can be acquired by the lessee for his use until the end of tenancy or lease

4. The property should be in a good condition possible for leasing

5. It is the liability of the lessor to repair damages of the property in order to make it possible for leasing

6. It is the liability of the lessee to ensure the cleanliness and safety of the property

7. The liability of the lessee over the property is under the concept of trust (wadiah yadd amanah). However, in the case of damages due to his negligence, the lessee is liable to pay the compensation (dhaman).

8. The lessee cannot lease the property to another tenant and the second contract is considered as illegitimate.

9. The sale of a lease property is legitimate. However, the lessee has a right to use the property until the lease contract has expired, where the property will then be submitted to the buyer.

10. The concept of al-Wadiah is applied when the lease contract has expired and the lessee is still holding the property.

USUFRUCT1. The use of the service (usufruct) can be valued with money.

2. The usufruct must be valid according to Islamic commercial law.

3. The lessee should be able to make use of the property on lease.

4. The usage of the property should be made clear in order to avoid any argument.

5. The usufruct does not entitled the lessee to own the property.

6. The lessee is not obliged to inform the lessor his intention for using the property, except in the case of possible destruction.

7. The usufruct of property beyond its normal usage is considered as an act of intention.

PAYMENT1. The amount of payment of rent must be known. If the payment is

not in form of cash money, the goods in return must be specified its quantity, types and its characteristics.

2. The payment of rent can be made in advance.

3. If the condition for payment does not prescribed to be paid in advance, the payment begins when usufruct started.

4. If the payment is made on daily, weekly or monthly basis, the payment should be made at the end of period unless otherwise stated on the agreement.

5. If the property cannot be used the payment is not obliged upon the user.

SIGHAH

• The contract of offer and acceptance should follow all the conditions of the contract of sale in Islam; i.e. it should be on mutual acceptance, cannot be made in form of promises or an order and the offer and acceptance should be the same.

COMPARISON

BETWEEN

CONVENTIONAL

LEASING AND

IJARAH

Leasing/Ijarah Contract

Conventional Leasing Islamic Ijarah

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

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

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

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

Rights & Liabilities of Lessor and Lessee

Conventional Leasing Ijarah

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

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

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

Lessor bears the risk of Insurance claim settlement.

Rentals recovery in case of theft and loss

Conventional Leasing Ijarah

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

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

Penalty for late payment

Conventional Leasing Ijarah

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

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

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

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

Insurance premiumConventional Leasing Ijarah

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

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

Registration ChargesConventional Leasing Ijarah

Lessee is responsible for the Registration of Leased Vehicle.

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

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

Purchase of assetConventional Leasing Ijarah

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

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

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

Commencement of Rentals

Conventional Leasing Ijarah

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

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

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

Signing of Lease Contract

Conventional Leasing Ijarah

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

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

Asset has come in to existenceAssets is in the ownership of the LessorLessor has taken possession of the Asset

Termination before delivery

Conventional Leasing Ijarah

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

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

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