ijara financing by zubair

7/28/2019 Ijara financing by zubair

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IJARAH( Islamic Lease )

Zubair MughalChief Executive OfficerAlHuda : Centre of Is lamic Banking & Econom icsEditor in Chief.Islamic Banking and Finance News , True Bankin g.


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IJARAH (LEASING)

IJARAH AL ASHKAAS

IJARAH AL AAyyan


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IJARAH (LEASING)

Ijarah is to offer for a consideration the

usufruct of a thing of value from which

benefit can be derived without consumption,

while retaining the ownership of the leasedassets and assuming risks pertaining

thereto.


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ESSENTIALS OF IJARAH


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IJARAH (LEASING)

The leased commodity remains in the ownership ofthe lessor and only its usufruct is transferred to thelessee.

Any thing which cannot be used withoutconsuming the same cannot be leased out likemoney, edibles, fuel, etc.

Only such assets which are owned by the lessorcan be leased out except that a sub-lease is

effected by the lessee with the express permissionof the lessor.

Until such time that assets to be leased aredelivered to the lessee, lease rentals do not

become due and payable


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IJARAH (LEASING)

During the entire term of the lease, thelessor must retain title to the assets, and

bear all risks and rewards pertaining to

ownership.

If any damage or loss is caused to the

leased assets due to the fault or negligenceof the lessee, the consequences thereof

shall be borne by the lessee.


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IJARAH (LEASING)

The lessee is also responsible for all risks andconsequences in relation to third party liability,arising from or incidental to operation or use of theleased assets.

The insurance of the leased asset should be in thename of lessor and the cost of such insuranceborne by him.

A lease can be terminated before expiry of theterm of the lease but only with the mutual consentof the parties.


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IJARAH (LEASING)

Either party can make a unilateral promise to buy/sell theassets upon expiry of the term of lease.

Alternatively, the lessor may make a promise to gift the assetto the lessee upon termination of the lease.

However, there shall not be any stipulation in the lease

agreement purporting to transfer of ownership of the leasedassets at a future date.


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IJARAH (LEASING)

The amount of rental must be agreed inadvance

Contract of lease will be consideredterminated if the leased asset ceases to

give the service for which it was rented.However, if the leased asset is damagedduring the period of the contract but iscapable of being repaired, the contract will

remain valid.


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IJARAH (LEASING)

Late Payment Plenty

The banks can also approach competent courtsfor award of damages.

Also, security or collateral can be sold by thebank (purchaser) without intervention of the court.


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Leasing (Operating Lease)

Another popular instrument 15% of the transactions

Right available to lessee to purchase

Asset ownership risk with owner; operational risks with lessee

Features close to a financial lease

Used for machinery, equipment, property, vehicles, aircraft etc.

Ownership usually transferred at the end

Financier

(Lessor)

Entrepreneur

(Lessee)Vendor

Transfer of assetBeneficial use

of asset

Payment ofpurchase price

Lease rentals


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Ijarah Operating Lease

The customer approaches the Bank with therequest for financing

The Bank purchases the item required for

leasing and receives title of ownership fromthe vendor

The Bank makes payment to the vendor

GENERAL MECHANICS

CUSTOMERISLAMIC BANKVENDOR

. .Agreement


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Ijarah Operating Lease

The Bank leases the asset to the customer

The customer makes periodic payments as per the

contract The asset title transfers to the customer based on

the method disclosed in the agreement

GENERAL MECHANICS

CUSTOMERISLAMIC BANK AgreementVENDOR

. .


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USAGE OF IJARAH


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IJARAH (LEASING)

Ijarah (Operating Lease) Examples:

Houses

Rent-A-Car

Agricultural DurablesAircrafts, etc.

Issues

Asset Price RiskRepair and Maintenance

Running Expenses (depending upon contract)

Credit Risk (Default in rental payment)


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IJARAH (LEASING)

Ijarah Muntahia Bittamleek Examples:

Vehicles Ijarah Financing

Plant and Machinery

Consumer Durables

House Financing

Project Finance, etc.


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RISKS AND ISSUES


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Risks

Credit Risk

Rate of Return Risk

Customer may decline to enter into Ijarah. Damage to Asset

Overdue Rentals

Non-Compliance/Violation of contract. Early Termination

Asset Price Risk


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Risks and Practical Issues

How to treat insurance cost paid by the

Lessor?

Treatment o f Secu ri ty deposits received

f rom customers.

Treatment of Advance rentals.

Account ing ru le/po l icy regard ing repairs

of Leased assets.


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Leasing/Ijarah Contract

Conventional Leasing Car Ijarah

There are two types of contracts,

Financial lease and loan for car

financing. Both these contractscontain conditions that arecontravenes 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 Ribaby

Sharia'h

The Ijarah contract does not

contain any condition that makes

the contract void under Sharia'hperspective.


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Rights & Liabilities of Lessor and Lessee


In Conventional Leasing Products,the Customer is responsible for all

kinds of losses or damages to theLeased asset, irrespective of the

circumstances.

If the insurance company does notcompensate the entire outstanding

amount in case of total loss, thecustomer is liable to pay the

balance.

All risks pertaining to ownershipare borne by Lessor.Customer

only bears usage-related risks

Lessor bears the risk ofInsurance claim settlement.


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Rentals recovery in case of theft andloss


If the Leased Asset is stolen orcompletely destroyed, the

conventional leasing company orBank would continue charging

the lease rent till the settlementof the Insurance claim

Under the Islamic Ijarah, rent isconsideration for usage of the

leased asset, and if the asset hasbeen stolen, destroyed or

temporarily out of order and notin use of Customer, the concept

of rental becomes void. In such

situations rental is not chargedfrom the lessee.


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Penalty for late payment


In most contemporary financialleases, an extra monetary

amount is charged if rent is notpaid on time. This extra amountis the considered Riba and isHaram.

This amount is taken by theleasing institution into theirincome.

Under Ijarah, the Lessee may beasked to undertake that if he

fails to pay rent on its due date,he will pay a certain amount to acharity Fund, which will beadministered through the

Islamic Bank.For this purpose the bankmaintains a charity fund wheresuch amounts may be creditedand disbursed for charitable

purposes.


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Insurance premium


Insurance is independent of thelease contract. The insurance

expense of the asset is directlyborne by the lessee

Takaful / Insuranceshould be atthe expense of the Lessor and

not at the expense of the lessee.The Lessor may increase the

lease rent to recover any costsincurred by him in connection

with the asset. However, as a

matter of principal, the costshould be paid for by the Lessor.


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Registration Charges


Lessee is responsible for theRegistration of Leased Vehicle.

The Leased Asset(vehicle) isregistered in the name of the

Bank and registration charges arepaid by the Bank (Lessor).

The Lessor may increase the

lease rent to recover any costsincurred by him in connection

with the asset


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Purchase of asset


Under conventional leasingcontracts, the vehicle is

automatically transferred in thename of the customer upon

completion of the lease period,whether or not he wants to

purchase it.

There is not such clause in theIjarah Agreement that Leased

Asset will automatically transfer toLessee.

Separate sale agreement is required

to execute sale transaction at theend of lease term.


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Commencement of Rentals


In case of Booking of LeasedAsset, recovery of Lease

installment commence after thepayment of cost of Asset to

manufacturer/dealer.

In case of Car Ijarah, therecovery of rentals is associated

with delivery of Leased Asset.

Rental recovery should not becommenced before the delivery

of Asset.


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Signing of Lease Contract


Lease Agreement can be signed bythe Lessee and Lessee any time

even if the Leased Asset is notowned by the Customer.

In case of Ijarah, the IjarahAgreement can not be signed by

the Lessor and Lessee unless:

Asset has come in to existence

Assets is in the ownership of

the Lessor

Lessor has taken possession of

the Asset


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Termination before delivery


The customer will suffer loss ofinterest paid during the booking

period because installmentcommence immediately after

payment of cost of asset to theManufacturer/Dealer.

The loss of customer is onlylimited to actual loss, if any,

suffered by the Lessor on sale ofasset in the open market.

Since the customer has not paid any

rental during the booking period,

no other cash loss is expected

under Ijarah.


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OTHER DOCUMENTS

Undertaking for Personal use of

Ijarah Asset

Trust Receipt

Authorization to Take possession

of Leased Asset

Sale Deed


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Thank You.

ijara financing by zubair

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